Reviewing Your Life Insurance Policy
No matter how well you set up your life insurance policy when you first got it, your needs for life insurance coverage may have changed over time. This can happen as you age, your family develops, and as your estate evolves. As life is marked by its many changes, it’s not unusual for these life changes to render your life insurance policy “in need of review.”
Compare your existing needs with the following policy details every few years:
Amount of Coverage
If your income is greater now than when you opened your policy, if you’ve had more children, if your spouse’s income has decreased, if you’ve accumulated debts or liabilities, if you have future liabilities (such as college tuition), if you have a family farm, or if your lifestyle expectations have increased, you need to consider the benefits of increasing your coverage.
If your intention is to cover end-of-life expenses to replace your lost income upon death or your ability to pay future debts or liabilities, your policy coverage needs to reflect your current and projected income replacement needs. You may need to increase your coverage if you’re using permanent insurance for estate-planning purposes, your potential estate has grown in value, whenever estate tax rates rise, or if the excluded amount is decreased by changes in the estate tax code.
Type of Policy
Term life policies are common for young family breadwinners, since premiums can be considerably less for the same amount of coverage as a permanent, cash-value life policy. There are different benefits for permanent policies that increase savings inside of the policy’s value while providing a source for loans. Converting from a term to cash-value life policy can make good financial-planning sense as your income and assets grow.
Most life insurance policies are owned by the person they insure. There are a number of advantages to this, including the right to name and change beneficiaries, increase or decrease coverage, and cancel or convert the policy to a different type. But when it comes to estate taxes, there can be a disadvantage due to the three-year look-back on the policy. If the ownership of the policy changes, perhaps by gifting it to a child or life insurance trust, and you die within three years of the ownership change, the death benefit will get pulled back into your gross estate. If your estate is close to the exclusion amount ($5.49 million for 2017, with annual increases indexed for inflation), it could potentially increase the federal taxes the estate is obligated to pay.
It may make sense for your policy to be owned initially by your spouse, heirs, or a life insurance trust. This keeps the proceeds out of your estate and lowers its exposure to estate taxes. This usually means that you give up the rights to make all decisions regarding the policy, unless you are the trustee of the life insurance trust.
People die, couples divorce, and families grow larger. Your attitudes toward the people you once named as beneficiaries may change — their needs for support may also change. Reviewing your designated beneficiaries — both primary and contingent — is an important part of staying aware and confident in the choices you have made. When family members need to be added or removed from policies, we recommend contacting your agent or insurance company immediately.
Improvements in Your Health
If your health has improved, you’ve adopted a healthier lifestyle, stopped smoking, become more fit, lost considerable weight — you may qualify for a lower premium either from your current carrier or another.
Leveraging the incredible but complicated benefits of life insurance for you and your loved ones is most effectively accomplished when you review them every few years and discuss your needs with your qualified financial planner. Ensuring policies meet your existing needs and consolidating policies can often provide considerable value. We’re here to help.