Life Insurance: Adapting to Changing Needs

When Pat purchased her life insurance policy ten years ago, she assumed her life insurance planning was complete. She thought that if she paid her premiums on time, she could sit back and no longer worry about life insurance. Pat’s policy has provided her with peace of mind by helping protect her family’s finances. However, that does not mean she should let her insurance program run on autopilot. Life insurance is just like any other piece of your financial puzzle. It should be periodically monitored as your circumstances and needs change. This way, you can help ensure your life insurance program achieves its desired objective. Let us take a closer look at the things that Pat, like all policyholders, should review at least annually.
Is Coverage Current?
Pat must first determine if her original reasons for purchasing her policy are still current. She should also evaluate whether or not she has developed any additional needs. For instance, when Pat initially purchased her policy, she was newly married and owned a small, modest home. Pat and her husband, Ed, now have three children and a much larger home. Is Pat’s existing policy adequate for these additional responsibilities—covering a substantial mortgage, funding college for three, and contributing to protecting her family’s financial security? More than likely, Pat may require additional life insurance. And she will want to make sure she has enough coverage for Ed as well.
If Pat’s existing policy is term insurance, she may want to consider converting it to a permanent contract. Permanent insurance is unique in that it has a cash value component that offers the potential for tax-deferred accumulation, as well as the same death benefit features of term insurance. In later years, the cash value could come in handy to help supplement college costs or retirement income needs. It is important to note that access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, result in a tax liability if the policy terminates before the death of the insured.
Updating Beneficiaries
The primary beneficiary of Pat’s life insurance policy is her husband, Ed. If Ed were to predecease Pat, the policy currently names Pat’s nephew as a contingent beneficiary. Now that Pat has her own family, she will want to update her policy’s beneficiary arrangement to name her children as contingent beneficiaries instead of her nephew. In addition, if Pat and Ed eventually set up a living trust, their legal professional may suggest naming their trust as the policy’s beneficiary.
Planning for a Growing Estate
Regardless of the type of life insurance Pat owns and who is named as the beneficiary, the death benefit proceeds from the policy will be included in Pat’s estate. It is important that Pat and Ed recognize this. As their asset base increases over the years, they should consider ways to help reduce the effects of estate taxation and plan accordingly.
Life insurance can significantly strengthen the family finances of couples like Pat and Ed. However, like all financial matters, a qualified professional must regularly review life insurance policies. A qualified insurance professional can be valuable when evaluating your present situation and determining an appropriate course of action.
Dana