Planning Around Existing Life Insurance

DE PERE, Wis. - May 16, 2013 - PRLog -- It's quite common for a family to bring in documentation for a handful of old life insurance policies during your planning meetings.  However, if the face valued of a policy is greater than $1,500 (in most states) the cash value will be considered available.  Alternatively, if the face value of a policy is less than $1,500, the cash value is considered exempt.  Most have policies with face values exceeding $1,500.  So where do you start?

One option is to simply cash the policy in and use the surrendered funds in another form of planning.  This is probably the quickest option, although the surrendered proceeds will be subject to income tax consequences.

Another option is to gift the policy by altering ownership to a child, or any intended heir.  This results in a divestment penalty period being applied to the Medicaid applicant.

A popular option is to proceed with a 1035 exchange to a Medicaid Compliant Annuity.  The 1035 exchange refers to the section of tax code that allows investors the flexibility to exchange one insurance product for another without incurring any immediate tax liabilities, provided certain requirements are met.

Update: A reader also suggested doing a 1035 exchange to fund a prepaid funeral policy.  This is an available option as well, for those that don't already have prepaid funeral plans.

This year Wisconsin Governor Scott Walker introduced Assembly Bill 40 ("AB40").  AB40 outlined a change to the parameters of which life insurance cash value is determined to be an exempt or countable resource.  The bill proposes that "applicants are eligible only if the combined cash surrender value of all life insurance policies with cash surrender values, including riders and other attachments, is $1,500 or less."

Wisconsin is the first state to outline such a change in parameters; could it be a new trend?