Just like visiting your doctor for your annual physical, it is crucial that people systematically review all of their financial plans as well. This includes, but is not limited to, their health coverage, life insurance coverage, disability income protection and retirement plans.
For the purposes of this month’s article, we will only be focusing on life insurance protection and the circumstances surrounding why you should be seriously considering reviewing your coverage regularly. Here are a few potential life changing events:
1- Marriage and children – Can your spouse run the household without your income? Can your spouse raise your children the way you want them raised without your income? Can your spouse send your children to their college of choice without your income?
2- Purchase of a home and/or property –Will your spouse be able to remain in the home without your income? Will the family have to liquidate other properties at a fire sale without your income? Where will your family be forced to live without your income?
3- Start a new business/take on new partners/raise capital – Will your family be able to sell your business without you operating it? Is your business worth anything without you operating it? Are you contractually obligated to buy out all of your partner’s family interests and vice versa in case of death or disability? Are you obligated to repay loans and how can your family repay these loans if you are no longer operating the business?
4- Estate Taxes – Is your net worth significant today and if you live to retirement, will your interests continue to grow? Have you analyzed what your children’s potential tax liability will be in 20 or 30 years if you do nothing even at a simple rate of return of say 3-5%? Even more importantly, do you want your children to have to pay dollar for dollar on these tax obligations? Or is it smarter to plan now and have them only pay pennies on that same dollar using life insurance? Do you want to give a major portion of your financial legacy to your family or to the IRS?
Albeit, these are very simple questions, but the answers have very serious consequences on the people you care about the most. There is an old saying, “people don’t plan to fail, they fail to plan”… and unfortunately, we see this all the time. If you do not give these matters your attention while you are alive, it will be too late to address them when you are gone. Life insurance not only gives your beneficiaries the immediate cash they need, it also gives them the time and the opportunity to make the best choice(s) possible in the midst of a usually very emotional family upheaval.
All of these events require a fresh new review of your current coverage to determine if all your bases are covered in case of an untimely, premature death. Once you have determined the proper amounts of coverage for the family and the business, then you must decide on what are the best products or combination of products to fund the insurance. For example, is a guaranteed 30 year level term product adequate or do we need to purchase a permanent policy like whole or universal life.
Upon review, my office often examines older universal life policies which have not been funded properly from inception. These policies, if not periodically evaluated, can lapse just when you need the coverage the most. In other words, problems can arise because: 1) individuals do not make all of their scheduled payments, 2) individuals borrow large sums against the policy and never pay them back, 3) the original policy design assumes an unrealistically high interest rate over the entire life of the insured, or 4) poor investment returns over an extended period of time in equity sub accounts in a variable life contract.
This is why it is crucial that you review your policy values every couple of years with a trusted advisor to ensure the policy is performing as originally designed. Specifically, that scheduled premiums remain unchanged, that contract cash values are in line with the original policy illustrations and that the life insurance death benefit remains in force for as long as desired. It also gives you a chance to change your plans and strategies before the eleventh hour when astronomical premiums or potential health issues makes all potential choices cost prohibitive.