First, as a rule I generally do not advocate cancelling permanent cash value insurance, especially after paying in for years. However, in certain circumstances that may be warranted. If your cash vaue is dropping each statement – it is a warning sign that something is wrong and you need to address it immediately.
First, understand that permanent insurance generally works this way – you make a deposit amount each (month, in your case). The insurance company then takes out the “cost of insurance”- essentially the term insurance premium, the cost of insuring your potential death. Then, whatever is left over goes towards the “cash value.”
The problem lies in how these were sold. In 1992 the apparent interest rate that one insurer was paying was about 9%. At that rate a proposal you were shown would look great – it would have more than enough money to go forever, and give you lots of cash.
The Problem- we have two crossing lines on a chart – your “cost of insurance” goes up every year as you get older, and the interest rate shown has dropped more than 4%, meaning theres less left of your premium payment to go towards cash. In fact, if the insurance cost rises to more than your premium, they take the difference from your cash value – causing your cash to go down. If you are ready this, you may already be at this point.
In addition, if you have taken loans against the policy, your cash value is decreased even further.
Sooooo…. the policy may no longer accomplish your goals. What options do you have?
1) Pay more into the policy each month to prevent yourself from losing all the cash
2) Keep paying the premium, knowing that over time it will erode your cash value
3) Stop paying altogether, and let it run until it expires
4) Cancel the policy and take the Surrender Value (this could be taxable)
5) Cancel the policy and replace it with a new term policy to give you the same death benefit for 20 or 30 years at a lower price point.
a) This could be taxable, see comment in 4 above
b) You can apply some, or all of the cash from the current policy, to pay this one.
Alot has to be considered here – your underlying health, the fact that your cost of insurance was lower when you bought the policy, etc. You need to consult with a trusted insurance adviser before making any decisions. Just don’t ignore that warning sign!