By Aaron Vickar and Dan Sullivan
It’s easy to think of life insurance planning as transactional in nature, and many times simply a commodity of necessity. You need to cover a financial risk, so you purchase life insurance to eliminate or mitigate that risk. That’s the end of the story, right?
Not so fast. Life insurance is a financial product and requires periodic care just like any other asset. Income, family structure, relationships, and health can all change over time. Naturally, your life insurance needs evolve with these life changes. It’s important to regularly review your life insurance plan and consult with a trusted risk management partner to ensure you have the most effective and efficient protection.
What should be reviewed?
There are numerous aspects of a well-maintained life insurance plan that are important to regularly review. The following are a few questions to address when it comes to assessing your life insurance plan.
1. Do you still need life insurance?
You may reach a point in your life when your family no longer has a death benefit need. If that’s the case, life insurance premiums could potentially be put to better use elsewhere in your financial plan. In cases where permanent insurance policies are no longer needed for their death benefit, you can look to repurpose cash value in these policies to meet other needs. For instance, cash value policies can be surrendered and consolidated with existing investments for retirement planning. Alternatively, the cash value can be utilized to fund long-term care planning via 1035 exchange into a hybrid life/long-term care insurance policy. Finally, a life settlement may be an option if selling the life insurance policy allows you to receive more for it than your policy’s cash surrender value.
2. Do you have the type of life insurance that best suits your needs?
It’s not uncommon to see someone paying premiums on a permanent life insurance policy to meet a temporary income replacement need that would be better solved by term life insurance. The unfortunate result in this scenario is that you pay too much for an insufficient death benefit. Conversely, using a sequence of term life insurance policies to address a permanent need is also problematic and could be the most expensive way to meet that need. If you own term life insurance, also review the type: level versus annual renewable. Annual renewable term, which features premiums that typically increase each year, can look appealing because premiums in early years are usually very inexpensive. However, premiums can skyrocket in later years when underwriting for a new policy is more challenging due to age and health changes. As a result, replacing annual renewable term with a level term policy while you are young and healthy can save substantial premium dollars over the long run.
3. Is the life insurance policy performing to your expectations?
If you own permanent life insurance policies, look beyond the premium. Many permanent life insurance policies (whole life, universal life, variable universal, indexed universal, etc.) are built based upon non-guaranteed assumptions, such as the credited interest rate, cost of insurance and other internal expenses, so they require regular monitoring to ensure they are meeting your original expectations. With historically low interest rates in the mix, the strain on these policies is very real. Review in-force ledgers periodically to ensure you can take appropriate action to address any underperformance, including payment of additional premium, reduction of death benefit, removal of riders, or smaller distributions.
4. Is the death benefit meeting your current needs?
In the years after purchasing life insurance, your life undoubtedly will change. Income increases, families grow, and death benefit needs increase, as well. In fact, among people who own life insurance, 20% believe they do not have enough. A simple needs analysis every year or two ensures that if there are gaps in coverage, you can take steps to address them.
5. Can you reduce your premium?
Those applying for life insurance too often receive only one carrier’s perspective and, as a result, leave underwriting opportunities on the table that could drastically reduce their life insurance premiums. For example, most carriers will apply more expensive smoker rates if there was any nicotine use within the past year, other than the occasional cigar. Some carriers, however, may offer far less expensive non-smoker rates if the nicotine use in the past year was not cigarettes or e-cigarettes. By surveying the top insurance carriers in the market and selecting one based on your individual circumstances, you can take advantage of these valuable underwriting opportunities.
6. Should you consider exercising conversion privileges?
What if you have a term policy that’s nearing the end of the level term period, but you still need life insurance? If your health has declined since purchasing the life insurance, it could be challenging, if not impossible, to obtain new coverage. Most term policies, however, have conversion privileges that allow holders to convert their policies to permanent policies with no additional underwriting, as long as the privilege is exercised within the conversion window. Some carriers even allow conversion to permanent policies with no-lapse guarantee death benefits. Conversion privileges may provide an especially attractive opportunity if you’ve had a significant change in health since purchasing a term policy.
7. Should you consider selling a life insurance policy?
Before making the final decision to surrender life insurance policies, make sure you’re receiving maximum value. Once a practice that had a certain “wild west” feel to it, life insurance settlements have become much more regulated and mainstream in recent years. If you are over age 65 and have had a significant change in health since purchasing your policies, you may consider exploring settlement instead of surrendering. Through life settlements, you can receive value in excess of the cash surrender value but less than the death benefit. Further, life settlements are not limited to permanent policies – even a term policy in the conversion period could have substantial value. Of course, if a financial institution is willing to purchase a policy, it believes it will derive a profit from the death benefit. It is therefore important to consider keeping that death benefit for beneficiaries.
The Bottom Line
In the end, it all comes down to need. Understanding how your needs match up with your current life insurance plan is the only way to ensure you, your loved ones, and your financial plan are adequately protected.
About the authors: Aaron Vickar and Dan Sullivan
As a Wealth Advisor with Buckingham Strategic Wealth, Aaron Vickar takes a comprehensive and customized approach to financial life planning. He works with clients to design and build a plan that incorporates investment management, retirement planning, estate planning, education saving, philanthropic giving, and tax strategies.
Dan Sullivan, JD, the Director of Business Development at First Element Insurance Planners, partners with fee-only planning firms to provide consistent, objective risk management resources, enabling them to address risk management in a process-driven, proactive manner.
Important Disclosure: The opinions expressed by featured authors are their own and may not accurately reflect those of the Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. IRN-20-1344