Shomari Hearn

At one-point, universal life insurance policies were one of the better deals out there but now things have changed. What can you do to deal with that change?

If you’re stuck with a failing universal life insurance policy, what should you do?  

People who bought these policies in the 1980s and ‘90s are now often stuck paying much higher premiums to keep the policy in force. Since many of them are retired, they find it hard to shell out more.   

If you’re in that situation, you do have choices, but they involve trade-offs. But before we discuss potential solutions let’s look at what caused the problem, in order to understand what options you have now.

Universal life is a form of permanent life insurance designed to be more affordable than traditional whole life insurance. Insurance companies in the 1980s thought that by unbundling the insurance and savings components of a permanent policy they could offer cheaper, better products.

Universal life insurance is more flexible and less expensive than whole life because policyholders have more control over the policy’s cash value. For instance, they can use the cash value to cover premiums if they need to suspend or reduce their premium payments.

Most policies also let you reduce the policy’s death benefit to cut costs. You can usually borrow against the savings account. However, these actions can slow the growth of the policy’s cash value.

Universal life worked great at first. But then it didn’t.

Insurers assumed that interest rates would stay at the 1980s’ abnormally high rates. They projected that the earliest universal life policies would earn interest rates of 10 percent to 13 percent annually. They also illustrated the much lower minimum guaranteed return, but agents assured customers that rates would never go that low.

 go that low, and for the last decade or so, policyholders have probably been getting the guaranteed minimum rate, perhaps 4 percent. And the policy’s cash value has grown far more slowly, often with disastrous effects.

Some insurers have told policyholders they’ll have to pay much higher premiums to keep their policies in force. But many retirees won’t be able to pay them easily.

So, if your policy is failing, what are your options?

Review your annual statements closely. Determine whether your policy’s cash value has increased or decreased. If it has decreased, how quickly has its value declined year over year?

If your policy is in danger of lapsing, your insurer should indicate how much additional premium payment is needed to keep the policy in force. It should also tell you how soon the policy will lapse without further payments. You’ll find this information either in the statement itself or in correspondence from your insurer.

Even if your policy isn’t in danger of lapsing, don’t wait for bad news. Request an updated policy illustration built on the following assumptions:

		You continue to pay your current monthly or annual premium.

		Your policy only earns the minimum guaranteed interest rate (typically between 4 and 5 percent).

		The maximum expense charges will be deducted annually from now on.

This serves as a “stress test” for your policy, showing the worst-case scenario. It should indicate the earliest point at which your policy is likely to implode if you do not increase premium payments, reduce your policy’s death benefit, or both.

You may feel uncomfortable performing this analysis yourself. If so, I recommend hiring a fee-only financial adviser, preferably one who holds the Certified Financial Planner designation. He or she can help you evaluate your policy’s performance and advise you on the best course of action for your particular circumstances.

Consider dropping or exchanging the policy if you no longer need insurance

The main purpose of life insurance is to provide protection for your loved ones in case you die early and deprive them of your income. If you’re retired and have finished paying for your children’s educations, the policy has likely served its purpose and you may not need it.

While it is frustrating to surrender a policy or let it lapse after paying years of premiums, don’t let the “sunk costs” affect your course of action.

One possibility is to surrender the policy and receive the cash value in it. Depending on how much remains, you may owe tax on the distribution.

If there’s still a lot of money in the policy, surrendering it could cause a substantial tax hit. But there’s a way around it. You can exchange a universal life insurance policy for a different life insurance policy, such as a whole life policy, or an annuity tax-free. This is called a Section 1035 exchange.

Another possibility is to let the policy lapse once the cash value has been exhausted—especially if paying higher premiums would break your budget.

Keep your policy; consider reducing the death benefit

If you are in poor health and it seems likely the policy will pay out soon, it may be worth maintaining your universal life policy. If your budget allows you to pay the higher premiums needed to maintain the full death benefit, this may not be a hard decision.

Many insurers will let you substantially reduce your death benefit, and thus your premiums. This can be a good way to maintain your policy and still get some benefit from it. While you may no longer need the original death benefit, a smaller benefit can be valuable to cover specific expenses, such as funeral costs.

Don’t let your potentially failing Universal life insurance policy become an issue. You brought it in the first place to provide peace of mind for you and your family, and if you tackle the issue right life insurance can still do just that. Make sure you understand your situation, and are proactive about it, and you’ll be able to determine whether or not you have to adjust your policy or exchange it for a new one altogether. Make your life insurance work for you, not against you. 

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Shomari Hearn is managing vice president of Palisades Hudson Financial Group in Fort Lauderdale, Florida.  He holds the Certified Financial Planner (CFP

®) and IRS Enrolled Agent (EA) designations.  

 is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.  The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at 

Articles

Universal life insurance policies used to be popular and looked to be beneficial for policy holders. However, times have changed and many of them are now failing. What should you do if your policy is one of the ones now failing?

Is Your Universal Life Insurance Policy about to Crash? What to Do If It Is

Universal policies unlink investment and insurance components of a policy in order to offer lower premiums.

	Permanent life insurance isn’t quite permanent. Many permanent policies mature at age 100, sometimes at 95, and then pay out the cash value to the policy owner. If you outlive your policy, you and your heirs can suffer adverse tax and financial consequences.

After years of paying premiums for a policy you expect to remain in place until your death, you may lose the benefit of passing wealth to your heirs tax-free. Sometimes you won’t even get full value from your policy. And you’ll usually get a hefty tax bill too.

It’s sometimes possible to extend a policy to age 120, and while this solution isn’t perfect, it’s often the best fix available.

While the issue is most salient for people in their 90s, anyone with permanent insurance should review their policy and take action if necessary.

Permanent life insurance generally comes in whole, universal and variable universal life variants. All three bundle an investment component with insurance. When such a policy matures, it causes two problems.

First, your beneficiaries will not receive the death benefit. Second, a portion of the payout — often, a significant amount &mdash; be will be taxed as ordinary income (the payout’s cost basis, which is the total amount of premiums paid, isn’t taxed).

When a whole life policy matures, the cash value will equal the death benefit plus accumulated interest, if any — but owners of a universal life or a variable universal life policy may get another rude shock.

Universal policies unlink investment and insurance components of a policy in order to offer lower premiums. If investment results are poor, the cash value at maturity may be considerably less than the promised death benefit.

The first step is to find the maturity age of your policy or the policy owned by the individual you’re helping. Age 100 is the default, but if you bought your policy within the past 15 years or so, it’s probably 120. Some older policies mature at 95 or 96.

The easiest fix is to ask the insurer for a maturity extension rider to extend the policy’s maturity age to 120. There may be a small fee for the rider, however, not all insurers offer it.

Generally, the death benefit of a policy with an extension rider is the cash value of the policy at the original maturity date plus accumulated interest, without any additional premiums.

If the insurer grants the rider, you may be able to avoid a taxable event, and your beneficiaries will receive the policy’s benefits upon your death as originally planned, but it’s not certain. 

The IRS may rule that you still owe tax at the policy’s original maturity date even if you forgo the lump-sum payout (the tax principle of constructive receipt comes into play here). Insurers are fighting the IRS on this, but it remains a gray area.

However, it’s still worthwhile because a maturity rider will secure the policy’s death benefit for your beneficiaries.

People with universal life policies may find it more difficult to secure the rider than those with whole life insurance, but even if you have a whole life policy, the insurer may not cooperate.

If your insurer won’t extend the policy, you may be able to buy a replacement policy with the now-standard age 120 maturity. For a relatively healthy individual in his or her 60s, swapping may be feasible, but may not be for those who are older or ill.

This is not a decision to make lightly, work with an independent financial adviser who doesn’t sell insurance to help you decide.

With a Section 1035 exchange you can swap an old policy for a new one without realizing a taxable gain, as long as the owner and insured are the same on the old and new contracts. Consult a tax pro to avoid problems. 

Make sure you obtain the replacement policy before surrendering your existing policy to avoid being left without coverage.

If you can’t or don’t want to make an exchange and the maturity date is imminent, you can instead convert the policy into an annuity. This spreads out the tax liability over a number of years instead of having all the income land in a taxable lump in one year. A portion of each annuity payment is taxable.

As more people live to celebrate their 100th birthdays, a firmer answer on how the IRS and insurers will handle policies with too-short maturation dates should eventually arrive. In the meantime, policyholders need to take proactive steps if they wish to capture the full value of their “permanent” insurance policies.

Shomari Hearn is managing vice president of Palisades Hudson Financial Group in Fort Lauderdale, Florida. He holds the Certified Financial Planner (CFP®) and IRS Enrolled Agent (EA) designations. 

 is a fee-only financial planning firm and investment manager based in Fort Lauderdale with $1.4 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas. The firm’s daily blog and monthly newsletter covering financial planning, taxes and investing are online at 

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To get the best out of your golden years abroad, be sure to cover all your bases concerning your finances and care

American citizens and permanent residents living abroad are subject to the same tax rules as everyone else. But living in a foreign country makes complying more complicated.

You are taxed on your worldwide income above a foreign earned-income exclusion, currently $102,100. Earned income includes salary, wages, commissions, bonuses, professional fees and gratuities earned abroad, but not Social Security benefits, pensions, annuities, interest, dividends, capital gains or alimony.

You can claim a tax credit or a deduction on your U.S. income taxes for foreign taxes you paid. Most taxpayers will come out ahead taking the credit, which reduces your federal income tax on a dollar-for-dollar basis, rather than only reducing your taxable income.

You can take the foreign tax credit even if you do not itemize deductions. However, you will want to consider both options to see which makes more sense given your circumstances each tax year. The U.S. has tax treaties with several countries that can affect your individual tax situation, whether you are a U.S. citizen or resident, so it is wise to investigate before you go.

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 Your state’s definitions of domicile and residency determine whether you will owe state income taxes while living abroad. If you take the proper steps to terminate domicile and residency in your previous home state, you’ll often be able to eliminate state income tax.

While some states make it relatively easy to terminate domicile, others require proof that you have established a new domicile elsewhere. Some assert that your domicile does not change until you demonstrate that you have no intention to return to the state. In most cases, you should file a part-year state tax return for the year you move to signal the end of your residency.

If you keep your home in the U.S., your state could consider this action proof that you intend to return. Some states require you to pay tax if you are physically present in the state for more than a certain number of days during the tax year.

Some states will not let you off the hook, even if you have been living abroad for decades.

These states say you can move your domicile only within the United States. Virginia, for example, says that Virginians living abroad retain their Virginia domicile. They thus owe Virginia income tax on worldwide income until they establish residency in another state — which they cannot do when living abroad.

If your state’s rules are similar, consider first shifting your domicile to a state that does not have a state income tax before moving abroad.

. It is usually best to keep the bulk of your assets in U.S. accounts and transfer funds to your local foreign bank as needed. Staggering transfers removes some of the risk of currency fluctuations and also protects you if your new country’s economy is unstable.

It also simplifies things if you split your time between your new residence and the U.S. Should want to return someday, that will be simpler too. If you keep less than $10,000 abroad, you will not have to file onerous disclosure forms annually.

Opening a local bank account and funding it with U.S. dollars can be simple or complicated. In some countries, it may entail obtaining identification documents, letters of credit and references from your U.S. bank.

Investment managers must follow certain rules regarding trading on behalf of clients living outside the U.S. If you plan to move abroad, ask your adviser if they can handle your accounts while you are overseas.

If your adviser has the ability and inclination to continue working with you, keep your adviser.

In theory, it should be easy to manage your own U.S.-based investments from overseas. However, some financial services companies restrict Americans’ ability to execute transactions while living abroad because they fear violating foreign regulations.

Restricted activities may include buying new mutual funds, switching holdings from one fund to another, and redistributing assets among funds already held. A possible workaround is to place investments in a revocable trust and appoint a U.S. resident as co-trustee. The investor living abroad could then ask the co-trustee to place the desired trades.

You can also switch to a firm that does not restrict investors living overseas.

Medicare generally does not cover any medical expenses outside the United States and its territories. In limited circumstances, the program provides emergency coverage in Canada and Mexico. Medicare Advantage plans usually provide coverage for travelers but not for people living abroad. You may stop paying Medicare premiums, but you’ll be penalized if you return to the U.S. and re-enroll.

Consider buying an international health plan that can travel with you.

Many countries have national health systems, but eligibility requirements vary, as do services and the quality of care. Even if your new home country will cover your basic medical care, you may wish to consider health insurance to cover private medical and dental care, as well as emergency medical evacuation to the U.S.

 Certain U.S. citizens and residents must file an annual Report of Foreign Bank and Financial Accounts (FinCEN Form 114), often referred to as an FBAR. You must file if you have a financial interest in or signature authority over at least one financial account outside the U.S. and the total value of your foreign financial accounts exceeded the equivalent of $10,000 at any time during the year.

Taxpayers with specified foreign financial assets above certain thresholds also must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. Reporting foreign accounts is complicated and is probably best done with the help of a qualified tax professional.

If you keep your foreign assets under the threshold, you’ll avoid the additional tax compliance.

. Ideally, you should consult a knowledgeable estate planning attorney who has experience in international tax and estate planning.  or she can help you navigate the particular concerns of structuring your estate when you live abroad.

These may include specifying that U.S. law will govern the execution of the estate and examining the structure of trusts to make sure they are not caught in a tax net by your country of residence.

Estate-planning concerns are not insurmountable, but they’re easier to handle if you deal with them prior to leaving the United States.

Shomari Hearn holds the Certified Financial Planner (CFP®) and IRS Enrolled Agent (EA) designations. He is managing vice president of Palisades Hudson Financial Group, based in its Fort Lauderdale, Florida, office.    

 is a fee-only financial planning firm and investment manager based Fort Lauderdale, Florida, with more than $1.3 billion under management. It offers financial planning, wealth management, and tax services. Its Entertainment and Sports Team serves entertainers and professional athletes. Branch offices are in Stamford, Connecticut; Atlanta, Georgia; Portland, Oregon; and Austin, Texas.

The firm’s monthly newsletter covering financial planning, taxes and investing is online at 

www.palisadeshudson.com/insights/sentinel

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People thinking of retiring abroad usually consider how health care, money and federal income taxes will work. But they often overlook issues such as state income taxes and estate plans. Retiring outside the U.S. involves more than researching the cost of living.  Without planning, you could be hit with surprises that cost time and money. Below are considerations you should look into before you take that leap of faith. 

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Many young grads will move back in with their parents after graduating this summer. It’s often not easy on either party.

“Boomerang” kids typically raise a host of financial and family issues. That’s why open communication and basic ground rules are important.

Boomerang kids can be adult children of any age who return home because of job loss, divorce, or various other difficulties.

Depending on your relationship with your child, how long they’ve been away, and the reason for the move, your child’s return to your home may be more or less bumpy. You and your child have both gotten used to some lev el of independence. You may be torn between feeling supportive and worrying about enabling bad behavior.

Discuss your rules and expectations with your child when he or she first returns to the nest. Better yet, do it during the planning stages ahead of the move back to minimize potential conflicts.

Your conditions for living at home might include maintaining or actively seeking employment, paying rent, or helping out with a certain amount of house or yard work. For a younger adult child, it may be necessary to establish guidelines about alcohol use, smoking, and overnight guests. Discuss how long your child expects to stay.

Reevaluate your own finances when your adult child moves back in. How will having an additional person eating groceries, consuming utilities, and perhaps driving your vehicle impact your cash flow?

Don’t let yourself get into financial trouble because you failed to reassess your own budget while helping your child. This holds true for all sorts of gifts, but it can be harder to say no when you share a living space and witness your child’s struggles firsthand.

If your child has a job, strongly consider charging rent. That will help them responsibly manage their money. If you don’t need the money, you can place it in an account that can be used for your child’s future needs.

When a child moves in, you have a unique opportunity to enforce good financial habits.

Encourage your kid to save, especially if you’re not charging rent because of student debt payments or other reasons. This will give them an emergency fund, a nest egg for when they eventually do move out, or a resource for paying down student debt sooner.

If your child is employed and his or her employer offers a 401(k) plan, talk to your child about why it’s a good idea to participate. If his or her employer doesn’t offer such a plan, mention and perhaps help your child to set up a traditional or Roth IRA.

Even if your children can only save a little, you can help them to establish good saving habits that will serve them well later in life.

Your adult children’s choices are largely their own, and while the home is yours, avoid trying to actively parent the way you did when they were minors or teenagers. Don’t demand to know where they are at all times or try to make them ask your permission to come and go. Ground rules that are reasonable will be much less likely to cause strife.

You will need to respect their independence and their choices, but they also need to respect your home. It will be easier for you both to have a conversation up front, calmly and in the abstract, rather than in a heated confrontation later, when competing expectations collide. Your child has changed since he or she moved out and so have you. It is a relationship you will both need to actively navigate.

Whatever rules you and your child agree on, be sure to treat him or her as an adult.

Shomari Hearn, Certified Financial Planner (CFP), is vice president of Palisades Hudson Financial Group, based in its Fort Lauderdale, FL, office. He co-wrote the chapter on managing relationships with adult children in Palisades Hudson’s recent book, “Looking Ahead: Life, Family, Wealth and Business After 55.”

 is a fee-only financial planning firm and investment manager based in Scarsdale, NY, with more than $1.1 billion under management. Branch offices are in Atlanta; Austin, TX; Fort Lauderdale, FL; and Portland, OR.

Read Palisades Hudson’s daily column on personal finance, economics and other topics at 

http://palisadeshudson.com/insights/current-commentary

If your adult children move back in, you owe it to them and to yourself to ensure you have clear rules and guidelines.

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There are several ways to get rich suddenly—and even more ways to squander your money and end up poor.

Almost anyone who gets a large windfall can fall prey to “sudden wealth syndrome.” The recipient can fall into the trap of believing their newfound wealth will never run out and they can buy everything and do anything.

Some people who get an inheritance, sign a big contract, get a stock payout or win a settlement buy huge houses and boats and go on spending sprees. Some invest heavily in risky ventures or faltering businesses owned by friends or family members.

But it’s not all recklessness. Buying a big house with the proceeds of, say, a large divorce settlement may seem like a reasonable choice. But property taxes, upkeep, and remodeling can tie up a lot of your income. This can be hard to undo later on if you don’t have enough cash to meet your day-to-day expenses or save for retirement.

How can you prevent a windfall from turning into a curse?

Have a plan and a budget so you’ll know what you can and can’t afford. And hire qualified advisors to help implement it. Plan before you make large purchases, not after.

First, assemble a team of professionals. One of these should be a fee-based Certified Financial Planner. Get a clear understanding about the fees you will be charged to ensure the planner is putting your best interests ahead of his own.

You may also want to consider adding an accountant or tax expert and a wealth manager, depending on what services your primary adviser offers. An estate-planning attorney will also be helpful.

Researching and vetting these professionals takes time, but it’s crucial.

Next, plan for taxes. While inheritances, life insurance proceeds, and divorce settlements typically are not taxable, most other windfalls are. Your financial adviser or accountant will be able to tell you how much tax you’ll owe and when it will be due.

Set aside any money you’ll need to cover state and federal taxes before doing anything else.

Next, pay off any outstanding bad debt right away. Bad debt, such as credit-card debt, is debt to buy something that immediately decreases in value. It usually carries a high interest rate.

Good debt creates value. Education loans, business loans and mortgages can produce long-term wealth and may also offer tax breaks. Work with your financial adviser to get a more complete picture of what repayment schedule makes the most sense for good debts.

Create a budget to ensure your annual expenses don’t exceed income unless you’re retired. Even if you’re retired, you’ll still want to avoid invading principal too quickly and running out of money.

Your budget should be flexible because that makes it more likely you will actually stick to it over time. Set a budget too rigidly, and you run the risk of abandoning it altogether. A budget you ignore is useless.

Your budget should allow for any large near-term purchases, such as a home, a vehicle or a vacation. By including such big-ticket items in your budget, you can evaluate the implications before you buy. This will allow you the confidence to move forward with an understanding of any adjustments or trade-offs the purchase may require.

Your budget will also help with your next planning step: creating a long-term investment strategy. Consider funding your retirement, paying for a child’s education or future support, perhaps starting your own business, and supporting charitable causes.

It’s tempting to use new money to invest in exotic investments, but a well-diversified portfolio adjusted for your risk tolerance is the best way to secure your financial goals.

Finally, your estate-planning professional will help you ensure that the wealth you worked hard to preserve and grow will pass to your intended beneficiaries upon your death.

At a minimum, you should update your will — or create one, if necessary. Depending on your situation, you may want to consider more complex planning techniques, such as creating trusts or reconfiguring insurance arrangements.

Shomari Hearn, Certified Financial Planner (CFP) and vice president, Palisades Hudson Financial Group, is based in its Fort Lauderdale, Florida, office. 

 is a fee-only financial planning firm and investment manager based in Scarsdale, NY, with $1.2 billion under management. Branch offices are in Atlanta, Fort Lauderdale, FL., and Portland, OR.

http://palisadeshudson.com/current-commentary

There are several ways to get rich suddenly-and even more ways to squander your money and end up poor.