Four Keys to Reviewing Your Life Insurance
By Todd Youngdahl, CFP®
Life insurance is one of those financial products that often doesn’t get the attention it deserves. Most of us purchase a policy, then forget about it, thinking we have done our due diligence and crossed that off the financial responsibility to-do list.
But a life insurance review, as unexciting as it sounds, may be necessary and beneficial. If it’s been a few years since you’ve last reviewed your life insurance policy, it may be time to pull it out of the drawer. Here are four key things to keep in mind when reviewing your life insurance policy:
1. How Long Will Your Policy Last?
What would happen if you lived longer than your life insurance policy? If that happens, it could create a mess for your loved ones. There’s a chance your current policy may have an expiration date that you aren’t aware of. For example, many policies are set to endow at age 95 or 100, but when people are living longer than ever, you could enjoy life long past that age. In the past 30 years alone, the U.S. centenarian population has grown 65.8%.
If you outlive your policy, the repercussions could be disastrous. Make sure you understand and plan for this situation, especially if you purchased your life insurance policy at a young age.
2. What Type Of Policy Do You Have?
When you purchased your life insurance policy, were you given an overview of the types of insurance and how they differ? Each class of insurance has unique costs, features, and meets separate needs.
Term insurance provides coverage for a specified length of time, which could be anywhere from 10 to 35 years in some cases. If you pass away after the term is over, your beneficiary doesn’t receive anything. Depending on your situation, you may only need insurance for a specific term — until your kids are grown or you have enough money saved to avoid financial hardship. Because of its specified timespan, term insurance is usually the most inexpensive out-of-pocket option.
Whole Life Insurance
Whole Life is a permanent insurance that lasts longer than a term policy. It guarantees something will be paid to your beneficiary regardless of when you die, as long as you have kept up with the premium payments.This type of insurance is more expensive than term insurance.
Variable Universal Life Insurance
Variable Universal Life Insurance is a cash-value life insurance offering a death benefit as well as investment options. Multiple accounts are set up and the flexible premium payments are paid into the savings side of the policy. Every year, the life insurer takes what it needs to cover mortality and administrative costs and the remaining amounts stay in the separate accounts. The lure of this type of insurance is the opportunity to receive higher rates of returns.
If you aren’t sure what your policy is or you feel like the insurance you have is not right for your situation, you would benefit from a review of your policy. You don’t want to get to the end of your life and realize you were investing in the wrong product.
3. Is Your Policy Up-To-Date?
Your insurance needs are based on a variety of factors. Do you have dependent children? Have your kids finished their schooling? Are you still married? How is your health? What about your spouse’s health? Chances are, a few of these things have changed since you originally purchased your life insurance policy. Your policy may need to be adjusted.
Throughout the last few decades, life insurance has evolved into a more valuable and robust risk management tool, better suited to accommodate life’s changes. Today’s policies can cover more than just premature death. Options are available to cover chronic illness and long-term care, and they have the ability to direct policy cash values among multiple options — not just the insurer’s general account.
If it’s been a few years or decades since you first purchased your policy, you may need to add additional coverage, such as long-term care. You can add long-term care as a rider, which can be more cost-effective than a separate policy.
Even if you don’t need to add features, you may still need to check if your beneficiaries are up-to-date and if you have the right amount and type of coverage.
4. How Much Life Insurance Do I Need?
There isn’t a one-size-fits all answer to this question, so it’s essential that you look at your financial situation to determine how much coverage you would need to protect your family adequately. Two of the biggest factors that affect how much insurance you need are your marital status and your financial dependents.
If you’re single without anyone — child or parent — depending on you financially, you’ll want enough to cover funeral and burial costs. It’s also important to have enough to cover debts, because not all debts are discharged in death, such as private student loans.
If you do have dependents, you’ll need to add up debt and final expenses, income, mortgage, and education costs and apply an income replacement multiplier to find out how much life insurance you need to provide for your loved ones. The multiplier varies based on your age and the status of your home mortgage. For example, if you’re under 50 years old, you can likely use a multiplier of 20. Older couples may be able to use a multiplier of 10 or 15, depending on the number of years left on their mortgage.
Rely On A Professional
Life insurance can be confusing, and it’s difficult to know if your policy is doing what it’s intended and customized to your needs and circumstances. Through an insurance review, we can help you examine your policies in-depth so that you can feel more confident knowing your plans are on track and that you know what you’re paying for. If you are concerned about your life insurance policy or would like to schedule a review or discuss your options, call our office at 703.584.2700 or email firstname.lastname@example.org.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.