Hi! I believe I have a IUL account. It’s through Transamerica. Variable Universal Life. I’ve had it for 17 years. Total death benefit is $271,000. My son is now 24 y/o and I have a decent retirement account and Life Insurance through my employer. I’m thinking I should cash out and close account and use that money to pay off car, etc. and then invest in index funds once debt is paid off. Thoughts? Will I be taxed on money I cash out of this account?
Hi @Erica_K-S! A Variable Universal Life (VUL) policy is similar, but slightly different to an IUL (Index Universal Life). We are not fans of universal life insurance at PFC. If you haven’t already, PFC has an article on IULs, but the same principles apply to VUL’s as well. The link is below for reference.
To surrender your VUL, there are generally two routes you can take. 1) you can surrender the policy back to the insurance company. 2) you can sell the policy to a life settlement company.
For the first one, the insurance company gives you your cash value (assuming you have positive equity) and they take out surrender fees, which can be fairly high.
For the second one, you usually have to be 65+ years of age (with some exceptions). In this scenario, you would sell your policy to a third party firm that will maintain it. This is usually the best route to take if you qualify and they are willing to pay you more than the surrender value the insurance company will give you.
For taxes, it’s important to consult with a tax professional. Your cost basis is the total of the premiums you have paid into the policy over the years. If the cash value is worth less than that, it’s not taxable. If it is worth more than that, the difference is taxable.
I hope this is helpful. Please let us know if you have any other questions!
Shane
Thank you for the information! In looking at my policy it appears there are no surrender fees/charges after 10 years so I think that might be a good option for me to look into. I appreciate your financial help!
Erica
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@ShaneSideris Sorry to resurrect an old thread but I have this same question with one additional factor. In our case, my wife’s policy 9 years old, so I think in 1 year end it without the surrender fees. Several years ago we made a change to it - I don’t recall the details - but we have essentially been using the balance to pay the premiums, while maintaining the death benefit. I hope that’s accurate! So we haven’t made monthly or quarterly payments is several years, but as far as we understand it the death benefit is not affected by that until the premiums aren’t paid - at which point we will get her term life insurance if we think it is necessary. But on the other hand, whatever value there is left in the account, we can’t access without penalty for another year anyway. Given that extra layer - using the account’s balance to pay the premiums rather than making monthly or quarterly payments - would you still recommend surrendering the policy now? Or ride it out for another year and see if we can make it to 10 years?
Hey @Mike_G!
Hmm good questions. It’s hard to give an answer to that without a little more info and trying to understand the policy better. It might make sense for you and your wife to check out this new service we’re offering below. There is one advisor who has an insurance background and can help walk you through this.