Life insurance is an important part of risk management in a financial plan, but it is not a product we typically like to think about. You may have bought a policy in the past and have not looked at it in years. It can be daunting to review your life insurance because there are a lot of moving parts, but here are four aspects to get you started.
1. Amount of Coverage:
Life insurance can have many living benefits, but its primary role should be to provide a benefit in the event of death. Because your needs and circumstances change over time, when reviewing your coverage, it is important to ask the question, “how much do I need and how long do I need it?” You can sit down with your financial advisor or use a life insurance calculator online to determine your need. If you find you have too much or too little coverage, speak with your advisor to help determine your best option.
2. Consider the Type of Policy:
Life insurance can generally be grouped into two categories: term and permanent. Term insurance does not accumulate cash value but pays out a death benefit as long as coverage is in force and premiums are paid. If you have term, you do not have to worry about getting an in force illustration on your policy – as long as you pay the premiums then the policy is in force during the term. Employers often offer group term coverage, but keep in mind this is not always portable and can even be more expensive than getting your own individual coverage.
Permanent insurance policies build cash value over time. Three common types of permanent coverage include universal life (interest rate sensitive), variable universal life (returns based on market performance), and whole life (returns based on dividends paid by the insurance company). Interest rates change, markets fluctuate, and dividend payouts can vary, so it is important to review the policy value periodically.
3. Running an In Force Illustration:
Because universal life insurance cash value returns are based on interest rates, and interest rates are significantly lower than they were 15 years ago, your policy may now be paying a lower current rate. Lower rates on your policy mean it could be underfunded and in danger of lapsing prior to endowment.
You can request an in force illustration to ensure that your policy is adequately funded to meet your goals. This updated illustration will tell you how long the policy will last if you continue to pay the same premium. This illustration can also give you an idea of how much premium is necessary to keep the policy in force until age 100. Knowing this information helps you to evaluate your options and choose what is best for you. You may decide not to change anything, you could continue to own the same policy but change the premium amount paid, or you might look at replacing it with a new policy.
4. Get your Beneficiaries right:
When reviewing your life insurance, you should also make sure your beneficiary designations are done right. Here are a few suggestions:
Keep them up to date – If you have updated your estate plan with trusts or if you have been through a significant life change like a divorce, it is important to ensure that your beneficiaries are up to date.
Not a minor – Do not have your minor child listed as a beneficiary. Instead, set up a trust and make that trust the beneficiary. You can name a trustee to manage the assets for the benefit of the child, which will avoid potential delays and legal issues with getting the funds paid to support them.
Name Contingent Beneficiaries – If your primary beneficiary dies before you (or at the same time), and if no contingent beneficiary is named, the death benefit will then go through the probate process before going to your heirs. Having contingent beneficiaries named will avoid the probate process, potentially saving your heirs from fees and delays in payout.