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SHOULD YOU CASH IN LIFE INSURANCE?

Maybe you should cash in some of your life insurance.

Americans hold 500 million life-insurance policies -- two for every U.S. resident. Millions of policies are ripe to be discontinued.

The superfluous ones include a host of small or overpriced term issues, all the ancient non-dividend-paying whole life that credits cash values a flat 3 percent or 4 percent, and mortgage life and credit life sold by lenders.

Other candidates for the ash heap: insurance on children, term insurance purchased to cover debts that no longer exist, and funeral or burial insurance.

Or you may simply be past the need for life insurance -- your children may be grown, you feel you have adequate assets to leave to a spouse or other heir, or you don't need extra cash for estate taxes.

How do you drop your insurance?

If you have term coverage -- pure insurance, with a death benefit but no savings component -- it's easy. You cancel. There are no tax or investment implications to deal with.

But ending cash-value insurance is a pinball game. These policies are part investment, part tax shelter and part family asset.

Before you notify the insurance company that you want to cash out and get a check, you may want to consult an accountant, lawyer or experienced insurance agent.

Start by considering taxes. You're liable for income taxes on the difference between surrender value -- the cash you've accumulated -- and total premiums paid.

Keep the insurance going until you die and the death benefit will be free of income tax to your heirs.

Someone in declining health would be wise to keep such a policy current.

Instead of inheriting what's left of $100,000 after federal and state income taxes, heirs would receive more money -- death benefits must always exceed cash values -- and receive it tax-free.

Another option is to borrow the cash value on a regular schedule. Loans reduce both the surrender value and the death benefit.

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