Both when purchasing a new policy or reviewing an existing policy, it is important to focus on what it is you want to accomplish. Your goals five, 10 or even 20 years ago may have changed. A trusted, independent insurance adviser can review the in force illustrations to help you understand what is going on in your current policies.
As financial advisers, we generally recommend term life insurance. Most often, term life is used to replace the economic value of someone. Term life insurance provides life insurance coverage for a specified period of time. The beneficiary receives the death benefit if the insured dies while the policy is in force, while no benefit is paid if the insured survives to the end of the term. Generally, premiums are level throughout the specified term. This makes term life optimal for parents who may want to provide for their family should something happen to one of them.
Permanent life policies are not generally recommended to address temporary needs for clients, though in finance, the rule is never say never. There are instances when permanent life insurance can benefit a family. Permanent life insurance builds cash value, providing the insured with several options. The insured can usually borrow against the cash value of a policy. The insured can also choose to pay premiums from the cash value if the cash value grows to a sufficient level, instead of paying them out-of-pocket. However, beneficiaries only receive the death benefit should the insured die, not the cash value.
As most people get older, their need for life insurance either decreases or is eliminated completely, which compounds the reasons policies should be reviewed every few years. However, some may want to have life insurance for several reasons: philanthropic wishes, as a failsafe or backup plan, or equalizing estate plan. For example, consider a widow, 79 years old. Her children are grown and she can live comfortably on her invested assets throughout her retirement. She shouldn’t need life insurance, but she has policies that have been in place for more than 20 years that have accumulated a large cash value but offer a smaller death benefit.
The widow created an estate plan years ago with her late husband, leaving the family business to the eldest child while the younger two would receive the balance of the parents’ estate when they both passed. However, as life happens, the widow has tapped her assets, and the remaining estate is less than an equitable share for her children. With an insurance review, and a desired goal in mind—equalizing her estate plan—she was able to reposition her existing policy, taking advantage of the revised mortality tables and the current marketplace. She was able to find a new life insurance policy with the most death benefit, the least cash value and a premium that was economical, which increased the death benefit by nearly 30%.
While not everyone with an old life insurance policy needs to maximize equity and increase their estate, there are often situations that can be improved. With increased longevity, life insurance is rare product where costs have come down in the past 10 years. When you are at a point of change—be it a new business, retirement, death, etc.—these situations warrant a review of your current policies to make sure it is aligned with your current goals, and take a look at 10 years out to see if it is anticipated to perform as expected.
It is important to have a trusted insurance adviser who can explain these products to you. Insurance policies are highly technical documents, so it is extremely important to read fine print and understand what you’re buying.
You are more likely to run into problems when an insurance product is sold with a promise that it will offer more than one thing, whether that is a death benefit for your heirs, cash value for you to borrow against, or asset growth for a future expense. When there are competing goals, an insurance product may not be the answer, which is why it is important to define what it is you want to do. Your life insurance product should fit into the bigger picture of your overall financial plan.
If you have questions about how your life insurance products fit into your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
