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Life can change in an instant. Many families have learned that all too well by experiencing the unexpected death of a family member. If the deceased is the family breadwinner, the surviving spouse and children may be left to pick up the pieces and deal with an uncertain future.
The death of a parent can have long-lasting emotional consequences, but there can also be difficult financial challenges. After all, the bills don’t stop just because someone passes away. The mortgage still has to be paid, as do car payments, credit cards, and more. Unfortunately, the loss of the breadwinner also means the loss of future paychecks.
The surviving spouse may have to take another job or relaunch a career. That could create childcare issues. The family may be forced to sell the home and move to a different area. Children may have to make sacrifices by quitting costly activities or sports.
The death of a financial provider can create significant uncertainty and challenges, especially when the death is unexpected. There’s no way to prevent death or the resulting emotional toll for survivors. However, there are ways to minimize the financial fallout. Life insurance can be an effective tool for reducing financial stress and protecting your loved ones.
Unfortunately, many Americans don’t have sufficient coverage. According to a study from Life Happens and LIMRA, only 59 percent of Americans own some form of life insurance.1 Even if you’re part of that 59 percent, there’s no guarantee that you have enough coverage or even the right type of protection.
It’s helpful to periodically review your life insurance. As your life changes, so too do your needs. Insurance that was sufficient earlier in life may no longer be appropriate today. A life insurance review can help you identify gaps in your protection.
Below are 10 questions to ask about your life insurance. Do you know the answers to these questions? If not, now may be the time to meet with your financial professional. If you can answer these questions, consider whether your coverage is still right for your needs and goals.
1. Is it the right amount of coverage?
Life insurance can be used to achieve many different goals, but its most basic purpose is to provide a benefit after the insured’s death. The death benefit is usually paid as a tax-free lump sum. You choose the death benefit amount when you purchase your policy.
It can be difficult to know just how much coverage you need. Certainly you want enough protection to provide for your family or other beneficiaries after your death. However, you don’t want too much protection. Generally, a higher death benefit means higher premiums.
How do you know what amount of protection is right for you? There are a few different approaches you can take. One is to use a multiple of your income. For instance, some people will choose to a death benefit amount that is five times or ten times salary. That’s an easy calculation, but it may not be accurate.
A more precise process is to use a needs-based approach. Consider the specific financial needs your loved ones may face after you pass away. Will they need to pay off debt? How much money will they need to stay in the family home? What about final expenses? They may need money to replace your lost income. Perhaps you want to leave enough to fund a large goal, like retirement for your spouse or college for your children.
Itemize those goals and needs and estimate their cost. That should serve as a starting point for your death benefit. Also consider that your needs may change as you get older. Costs will likely increase due to inflation. As your income increases, your family’s needs could increase. It’s important revisit your death benefit need on a regular basis to make sure your coverage still aligns with your need.
2. Is it term or permanent? If term, what are your options at the end of the coverage period?
There are many different types of life insurance, but most types fall into one of two categories: term or permanent. As the name suggests, permanent insurance lasts as long as you do, assuming you pay the required premiums. There is no end date to the coverage.
Term coverage, on the other hand, lasts for limited period of time. You choose the duration when you purchase the policy. You can choose terms, 10, 20, or even 30 years. Term can be an effective option when you have a temporary need for coverage, such as to cover a mortgage or to provide protection when you have young children in the home. Term insurance is also usually less expensive than permanent insurance, everything else being equal.
3. Is your policy term or permanent?
And if it is term, what is your plan when the term expires. You usually have the option to renew for a new term, although the premium may increase to reflect your current age. You also may have the option to convert the policy to a permanent policy. Again though, the premium could increase.
4. Does it have cash value accumulation?
Permanent policies have a cash value account. When you pay your premium, a portion of the payment goes toward the cost of insurance. The remainder goes into the policy’s cash value account, which grows on a tax-deferred basis.
The method for growth depends on the type of policies. Whole life policies pay dividends. Universal life policies pay annual interest. In a variable universal life policy, you can invest your cash value in the financial markets. There are even fixed indexed universal life policies that pay interest based on the performance of a market index.
If it’s a variable policy, you’ll want to make sure the account’s allocation is consistent with your risk tolerance. In a universal or fixed indexed universal policy, you may have decisions to make regarding your interest rate. If you’re unsure of how your cash value account operates, contact your financial professional for a review.
5. How can you use your cash value?
Over time, your cash value should accumulate. Once it reaches a substantial amount, you may be able to use it in a few different ways. For example, you could use your cash value to purchase additional coverage or to pay down your premium.
You could also use your cash value to generate income. You can always withdraw your premiums tax-free. You can also take tax-free loan distributions from your life insurance policy. You have to repay the loan, plus interest. That repayment is usually made along with your premium payments. If you fail to repay the loan before you pass away, the balance is deducted from your death benefit.
Many people use their life insurance cash value as source of supplemental income in retirement. You can tap into the cash value to cover unplanned expenses or even to provide additional income.
6. Is your health rating still accurate?
Your premium amount is based on a few factors: your age, your death benefit amount, and your health at the time you purchase the policy. When you buy your policy, you’ll go through a process called underwriting. This can include a health questionnaire, a review of your medical records, and even a medical exam.
At the end of the underwriting process, you are assigned a health rating. The better your health rating, the lower your premiums. A worse health rating usually means higher premiums. Many insurers will also have separate health classifications for smokers.
It’s possible, though, that your health could improve over time. Maybe you lost a substantial amount of weight. Perhaps you quit smoking. Maybe you had a chronic condition that has since been cured. These kinds of changes can improve your health rating and reduce your premium. It may be worth checking with your insurance company to see if you can get a new rating.
7. Does the policy offer any additional riders or protection options?
Life insurance policies offer more than a death benefit and cash value. Many policies offer additional options called “riders.” These riders can be used to meet a wide range of needs.
For example, some riders offer continued protection even if you can’t pay the premiums because of disability. Some allow you to tap into your death benefit to pay for long-term care. Others allow you to get an advance benefit if you’re suffering from a terminal illness.
Does your policy offer riders? Could some of those riders be helpful for you? Talk to your financial professional and review your policy’s rider options. There could be riders that you want to add to your policy.
It’s important that you understand how your cash value accumulates.
8. If you have group coverage, what happens when you leave your employer?
Many employers offer group life insurance as part of their benefit menu. These plans can be valuable, helpful resources. In fact, your group life insurance protection could be pretty affordable.
However, there’s a risk to using your group plan as your primary source of protection. What happens when you leave your employer? Some plans allow you to convert the group protection to an individual policy, although the premiums could increase significantly.
If you have your own individual coverage, you don’t have to worry about what happens to your life insurance when you change employers. Your coverage is yours and yours alone. As long as you pay the premiums, you’re protected, no matter where you work.
9. Are your beneficiaries correct?
When you purchase your life insurance policy, you’re required to name someone as your beneficiary. The beneficiary is the person who will receive your death benefit after you pass away. You can even name multiple people as your beneficiaries and you can name entities, like a trust.
It’s important that you review your beneficiaries as your life changes. For example, if you get divorced you may want to remove your former spouse as a beneficiary. If you have children, you may want to add them to the policy.
Beneficiary designations are difficult to challenge in court. If you forget to change your beneficiary, it’s likely that the incorrect person could end up with the money. You can minimize that risk by regularly reviewing your beneficiaries and updating them as needed.
10. What about your contingent beneficiaries?
You can also name contingent beneficiaries on your life insurance policy. Your death benefit goes to your contingent beneficiaries if your primary beneficiaries are no longer alive.
For example, assume that you and your spouse have children. You may have your spouse designated as primary beneficiary. You could then name your children as contingent beneficiaries. If you and your spouse were to pass away at the same time, or if your spouse passes away before you, your death benefit would automatically go to your children.
What happens if you don’t have a contingent beneficiary? If your primary beneficiary has passed away and you don’t have a contingent beneficiary, the death benefit goes to your estate. This can be problematic. It opens your death benefit up to probate costs and possibly even taxation. You can avoid this risk by naming and updating your contingent beneficiaries.
Is it time to speak with a financial professional?
Life insurance is a basic component in any financial strategy as it addresses one of life’s biggest risks. If you don’t have life insurance, now may be the time to consider, especially if you have dependents who would face financial challenges after your death.
If you do have life insurance, it’s important to review regularly and make sure the coverage is aligned with your needs. Life changes. Your coverage should change with it. A financial professional can help you review your needs and coverage and make adjustments.
Ready to review your life insurance strategy? Let’s talk about it. Click on the banner below to schedule your free life insurance review. We can help you analyze your needs and develop a plan.
This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice and is not sponsored or endorsed by the Social Security Administration or any government agency.
19047 - 2019/7/16