Life insurance is an important, tax-efficient asset that can protect you, your family, and your business. It is crucial to review your needs for life insurance periodically, so you have the peace of mind knowing that your coverage is keeping pace with the changes in your life.
It is also prudent to audit any existing life insurance you have in place to make sure the policies are still competitive and continuing to further your planning goals. If your coverage is not reviewed or managed on a consistent basis, it could lapse, require additional unplanned premiums, or trigger unforeseen tax consequences.
There are two main reasons to review your life insurance coverage needs and audit your existing policies:
Changes in your life. Change is inevitable. From getting married to buying a home to raising children to running a business to retiring, life events will typically lead to adjustments in your goals and objectives and the resulting amount and type of life insurance coverage you need.
Changes in the life insurance industry. The life insurance marketplace changes over time, too. Just like with automobiles, newer models are typically more efficient and have more attractive features than older ones. It makes sense to review your existing coverage periodically to ensure it remains competitive and includes features that are important to you and your family.
CHANGES IN YOUR LIFE
Here are tips to better understand some of the changes in your life that should warrant a review of your life insurance coverage and an audit of your existing policies:
1.Addition of Children or Grandchildren
- If you have just added a little one to your family, you will want the peace of mind that comes knowing you have life insurance coverage in place to help ensure your family’s financial future. You may also be interested in helping your grandchildren with education, housing, or healthcare needs.
- If you have existing life insurance policies, you will want to make sure that they are still cost-competitive and that your beneficiaries, including new children, grandchildren, and trusts for their benefit, are listed correctly.
- In addition, if you have adult children who are moving out, going to college, or are financially independent, you may opt to decrease your life insurance coverage and explore your policy exit options, including a life settlement.
2.Personal or Business Debt
Knowing that you have life insurance in place to pay off your debts when you are no longer around will provide you and your family with important peace of mind. Having life insurance coverage and auditing what you already own is crucial if you have:
- Taken on debt to open a new business or expand an existing one.
- A buy-sell agreement with business partners that is, or should be, funded with life insurance.
- “Key person” life insurance to protect the business.
- Sold your company and contemplating what to do with corporate life insurance policies that are no longer needed.
- Purchased a new home with a mortgage or acquired a home equity line.
- Exposure to Federal or state estate tax at your passing.
3.Getting Married or Divorced
- Few changes in your life will be bigger than a shift in your marital status. If you have recently been engaged or married, you will probably want to be sure your partner is named as a beneficiary on your life insurance policy. If you or your spouse have children from a prior marriage, special care should be taken to make sure everyone’s goals are being addressed.
- If you were recently divorced, you may want to verify that your beneficiary designations are still correct. When this step is overlooked, previously named beneficiaries could be legally entitled to funds you may want others to now receive. In addition, there may be tax implications to changing your beneficiary designations so being careful and working with a knowledge professional is key.
4.Change in Your or Your Parent’s Health
- If you have quit smoking or your health has improved significantly, you may be able to qualify for the affordable life insurance coverage that you and your family needs. In addition, a policy audit is prudent because your premiums on your existing policy may be reduced.
- If your health has declined, you may consider converting an existing term life insurance policy to a permanent product that does not require additional underwriting or consider a life settlement, depending on your age, health, and other factors.
- In addition to your health, you may have an aging parent with a medical condition that requires them to move. When that results in assisted living or moving into your home, you may be taking on a greater financial load. If you and your family have experienced this kind of change, you may want to consider purchasing more insurance so your beneficiaries can better cover those increased costs if something were to happen to you.
CHANGES IN THE LIFE INSURANCE INDUSTRY
In addition to changes in your life, the following changes in the life insurance industry also present a unique opportunity to audit, update, and improve the life insurance policies that you already own.
5.Better Pricing and Additional Benefits
- Insurance companies have reduced policy expenses while life expectancies have increased, allowing them to price products more competitively.
- Modern polices now include additional “living benefit” features not offered in previously contracts, such critical illness, long-term care, and return of premium options.
- Depending on your age and health status, many carriers will issue several million dollars of coverage without requiring medical records or an insurance physical exam.
- Life insurance premium financing has become more common and can make sense to consider depending on your goals, net worth, asset composition, and cash flow.
6.Carrier Strength and Type
- Life insurance companies are highly regulated and required to maintain significant reserves to meet claims. Some are inevitably stronger than others and their financial strength can change over time, so it is important to audit your coverage to make sure your company is still of superior quality.
- Even the difference between using a stock life company versus a mutual life carrier for certain types of life insurance policies can have an impact on premiums and coverage over time and should be explored
7.Low Interest Rates and Market Fluctuations
- The performance of most existing permanent “cash value” life insurance policies, such as whole life and universal life, is driven by interest rates. Given that rates have stayed low for an extended period, the performance of your policy may be impacted. It might not be cost-competitive any longer, it could lapse earlier than desired, or it might require additional premiums to keep it in force. The results of a policy audit will provide clarity on these issues.
- If you own a variable life policy, its performance is tied to the market. Perhaps your risk tolerance has changed since you purchased it. It might be worth exploring new types of policies that offer downside protection with upside market potential, and without the loads and fees associated with variable policies.
- If it makes sense to decrease your life insurance coverage or your cash flow to support premiums has been reduced, there are many options to consider today other than simply surrendering the policy back to the carrier or letting it lapse. Policy reductions, life settlements, premium financing, and charitable bequests are options that might be available to you.
Having life insurance to protect you and your family is critical, but the amount and type of insurance you need will likely change over time. It is important to regularly review your life insurance needs, especially when changes in your life your life occur, and to audit your existing coverage to make sure it is still performing and meeting your planning goals.
Working with an experienced independent life insurance professional who has seen these life and industry changes occur over his or her career is vital to ensuring that you receive accurate information, are presented with all available options, and can articulate the anticipated results of your decisions to you.
Please refer to complete life insurance illustrations for details. Grant Hinkle & Jacobs, Inc. does not provide legal or tax advice; always consult your legal and tax professional.
Cory C. Grant, CA License #0B40568
Scott B. Hinkle, CA License #0B49665
David A. Jacobs, CA License #0C90752