Because September is Life Insurance Awareness Month, we are utilizing this month’s Financial Planning newsletter to answer 5 frequently asked Life Insurance Questions.
Question #1: How often should I review my existing policies?
Answer: You should review your policy anytime you have a major life event such as marriage, addition of a child, new job (with different salary or change in benefits), starting a new business, death or divorce.
Question #2: If I’ve experienced one of these life events, what should I review?
Answer: First you should examine the amount of insurance coverage you have and determine if it still meets your needs. Next, you should review your beneficiaries to ensure they are up-to-date. Finally, determine if the purpose of your insurance has changed in any way. For example, maybe you originally purchased a policy to cover college expenses. Now that your child has finished school, this policy may be repurposed for something else.
Question #3: I’ve always considered life insurance as something that would help my family cover any final expense, paying off debt or replacing income should I die unexpectedly. What other uses should I consider?
- Providing liquidity:If you have been a good saver throughout your life, you might believe life insurance is an unnecessary expense. While that may be possible, much will depend on how your assets are invested. For example, if you’ve found a penchant for investing in real estate and have amassed a sizeable portfolio of properties, it’s important to consider what would happen to these properties in the event of your death. Could you easily convert these assets to cash to cover final expenses, pay-off debt, or pay potential income or estate tax if applicable? Life insurance may provide families with needed liquidity without requiring them to sell assets.
- Equalizing your estate: For business owner’s, farmers, or individuals that are assigning specific assets to certain beneficiaries, life insurance could provide you the opportunity to equalize as well as provide liquidity for illiquid estates.
- Charitable giving: For many philanthropic individuals, giving to charity at their death is important. Using life insurance to bequeath specific dollars to charities is as simple as naming the charity as a beneficiary. However, consider this in light of your overall situation…using assets instead of life insurance may actually be more to your advantage.
Question #4: As a business owner, how can life insurance help me?
Answer: Life insurance can help in unique ways. First, it can provide the business with capital to help cover the cost of replacing a key employee. Additionally, it can provide the remaining business owners the liquidity needed to buy-out the share of the business belonging to that key employee after their death.
Question #5: The reasons I originally purchased life insurance have changed, should I cancel my policy?
Answer: Perhaps, but you might also consider repurposing it. For example, let’s say you’ve accumulated a large retirement plan like an IRA or 401k. When these assets pass on to someone other than your spouse, income taxes will become due as that money is distributed. To avoid that ongoing tax burden, if you have an old life insurance policy, you might consider having some or all of those retirement assets go to a charity and passing along the life insurance proceeds to your loved ones. This will allow for more dollars to go to your favorite charity while also allowing for more dollars to be passed on to your loved ones.
Another consideration if this is a term policy is to check the conversion options. You may want to consider converting it to a permanent policy and adding a rider that would provide long-term care benefits. With long term care events impacting many families, these riders provide needed capital at a very crucial time.
With September being Life Insurance Awareness Month, please consider reviewing your policies with your Financial Advisor and think about the reasons they were purchased, who your beneficiaries are and who they should contact in the event of your death. Finally, consider storing copies of your active policies in a secure location.