No matter how well you set up your life insurance policy when you first took it out, the policy may no longer fit your needs. After all, life is marked by changes, and it’s not unusual for those changes to render your life insurance policy unsuitable in one or more ways.
Here is a list of some of the most important aspects of your policy that you need to evaluate every few years:
Amount of coverage. You may need to increase your coverage if your income is higher than when you opened the policy, you’ve had more children, or your spouse’s earnings have decreased. You may also need to increase your coverage if you’re using permanent insurance for estate planning purposes and your potential estate has grown in value, whenever estate tax rates rise or the excluded amount is decreased by changes in the estate tax code.
Type of policy. It’s not uncommon for young family breadwinners to take out a term policy, since premiums are considerably less expensive for the same amount of coverage as they are for permanent, cash-value policies. But permanent policies provide different kinds of benefits, including savings that can increase the policy’s value and provide a source for loans. Converting from a term to a cash-value life policy can make good financial planning sense as your income and assets grow.
Policy ownership. Most life policies are owned by the person they insure. There are a number of advantages to this, including the right to name and change beneficiaries, increase or decrease coverage, and cancel or convert it to a different kind of policy. But when it comes to exposure to estate taxes, this ownership structure can be a disadvantage, because when benefits are paid out, they are considered part of the owner’s estate. If your estate is close to the exclusion limit ($5.25 million in 2013, with annual increases indexed for inflation), that could increase the federal taxes the estate is obligated to pay.
Instead of owning your policy, it may make sense for it to be owned by your spouse, your heirs, or a life insurance trust. This keeps the proceeds out of your estate and lowers its exposure to estate taxes. On the other hand, it usually means you give up the rights to make all decisions regarding the policy, unless you are a trustee of the life insurance trust.
If you own the policy that insures your life, here’s a cautionary note: if you die within three years of changing ownership, benefits will still be included in your estate. It’s best to make the change sooner rather than later, and while you’re still in good health.
Beneficiaries. People die, get divorced, their families grow larger. Your attitudes toward the people you once named as beneficiaries may change, and their needs for support may change as well. For all of these reasons, reviewing your designated beneficiaries ― both primary and contingent ― is important. In fact, it’s best if you contact your insurance company or agent to change your beneficiaries as soon as circumstances change.
Improvements in your health. If your health has improved, you’ve stopped smoking, become more fit or lost considerable weight, you may be qualified for lower premiums, either from your current insurer or another carrier. If these conditions apply to you, it may make sense to contact your insurer or insurance agent and shop around for a new policy.
The financial health of your insurer. Not all insurers are equally financially healthy. The vicissitudes of the investment markets and underwriting standards can also make a once-strong company relatively weak. Instead of taking an insurance company’s word it, check for yourself.
A number of independent organizations ― including A.M. Best, Fitch, Moody’s Investor Services, Standard & Poor’s, and Weiss Ratings, Inc. ― rate the financial strength of insurance companies. Learn the differences in their rating codes. Finally, search for ratings by underwriting company, not the overall brand name. The underwriting company is named in your policy. If you’re considering taking out your first policy with an insurer, visit their website for a complete list of their underwriting companies.
Fashioning a life insurance policy that meets your needs can be a complicated process that may be more effectively accomplished with the help of a professional. Please call if you’d like to discuss this in more detail.
Copyright © Integrated Concepts 2013. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.