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Whole Life vs. Term Insurance?

My husband has a long-standing whole life policy that cost him $200 per month. At age 61, it is no longer necessary and he'd like to switch to term insurance. He was told by his current insurance that he will have to pay huge Capital Gains taxes if he wishes to convert. We live on a fixed income and cannot possibly afford high tax penalties. What should we do?

Public Comments

1. if the insurance man has told you the truth, part of your husband's whole life premimum must have invested in shares or property that has gone up in values over the years. But, even with the capital gains taxes paid after conversion, you should still have most of the investment gain back. In general, term life is the way to go, as it is cheaper to buy.
2. You have a LOT of options here. Unfortunately, it's not possible to tell what is your best solution without running the numbers. Have a properly qualified financial advisor or planner review the policy with you. Your agent is probably not adequately qualified. It is VERY unlikely that replacing it with term is a cost-effective option. At 61, the current policy would probably remain in force (at least for a long, long time) if he never paid another cent in premium, and the tax issue would not exist.
3. If your husband has invested wisely and has more assets then the policy is worth, he is probably already self-insured. If he still feels that insurance is necessaly, he is healthy enough to buy a different policy, Term Life is cheaper and can be purchased for 20 years. This would take him to 81 if the policy allows. I would take it that it is only the two of you still responsible for yourselves. Insurance should be used to cover the lost of income until your assets take over. (self-Insured) Then drop it.
4. OK, you only pay capital gains tax, on the GAIN. The gain is, cash out value, minus the $200 a month he's been paying into this forever. So, if he's paid in, let's say, $48,000, and the cash out value is $88,000, he pays capital gains tax on the $40,000 difference. But, I'd strongly, strongly suggest, that on a straight whole life policy, THERE IS NO GAIN. I'd bet dollars to donuts, that if you add up his cost, his cash out value won't be even equal to his cost. That means, no gain, no tax. Run the numbers. Get the cash surrender value, compare the paid in amount. There are no "penalties" here. If he's actually made a profit of even $10,000, long term capital gains on that is what, 15%. You'd pay 15% of your GAIN, or $1500. You can take it out of the cash out check. Now. Second issue. WHY does he think he needs term life insurance? Has he gotten any quotes? At 61, it's NOT going to be cheap - and it's highly possible that the whole life is actually costing him LESS at this point, than the term would. If he truly needs life insurance - a substantial amount - at his age, he needs to determine how long a term he wants it for, get the term quote FIRST, and then see which policy best meets his GOALS.
5. You don't pay capital gains on life insurance. You pay regular income tax on it. You can take a 'paid-up' policy and they'll give you a fixed amount of death benefit that's higher than the cash value that he can keep forever and no tax would be due now or at death. It should also grow as well. OR, you can transfer the cash into an annuity and as long as the cash stays in the annuity you'll avoid the tax. You can also take an income stream from the annuity and spread the taxable income over a period as short as 5 years or over his entire life. Regardless, if he has a whole life policy that he's had for a long time. It doesn't sound like cancelling it and getting a term policy is well thought out. Ask your financial advisor. That question is well suited for them.