Financial Planning 101: Review Your Life Insurance
The fact is, many existing policies could fail long before the people they insure die. Of course, it is possible for interest rates to rise sufficiently to reverse this pattern, but don’t count on it. Even with higher internal returns, many policies are saddled with high mortality costs and other expenses.
So what do you do? The first step always is to get an in-force illustration from your existing company. That should tell you if you are okay for now, or if you need to add money or reduce the death benefit. Other options would include doing a thorough analysis of your existing coverage and comparing that to taking out new coverage. Considerations of new policies should include the assessment of new surrender penalties, quality ratings of the new carrier, the health qualifications of the new coverage (you may not qualify for new coverage due to your health), new loan provisions and so on.
Still, there are situations where a Section 1035 exchange can make sense; that is, transferring into another life policy (with lower fees and better long-term guarantees, and maybe a long-term care rider). It is possible to pay less by purchasing a new life insurance contract with lifetime guarantees and long-term care riders.
By the way, do you know what a long-term care rider is? This rider may revolutionize the life insurance industry. The rider allows the insured to access the death benefit at a select percentage of face value per month (e.g., $500,000 policy @ 2 percent = $10,000 per month available for long-term care expenses).
Qualifications for coverage vary from company to company, but generally if you qualify for long-term care under the Social Security definition, you usually qualify to access this rider. This rider comes at an added cost and the monthly long-term care amount accessed through this rider will reduce the death benefit dollar for dollar until depleted. The rider is only available on new policies, so this may be a factor when listing the pros and cons of replacing existing coverage. If you simply are adding life coverage for yourself or your spouse, this rider can make a lot of sense, especially if you haven’t insured against long-term care expenses through any other means.
To smoke or not to smoke. If you are a smoker and plan to quit, you may be eligible for a nonsmoking rate if you promise to quit in the next two years. That’s right; some life insurers will give you a non-smoking rate now and up to two years to actually quit smoking. Typically, an exam will have to show test results that reveal there is no nicotine in your system, but you have two years to schedule that exam. This can be a great reason to acquire life insurance and quit smoking too.
Your homework. Have an in-force illustration done on every life insurance policy you own, even the term policies, and don’t forget the second-to-die policies owned by an irrevocable life insurance trust. Make sure you know what the future may hold for your policies and keep reviewing these policies every couple of years thereafter. Review your options with a life insurance consultant who has access to many different companies. And finally, congratulate yourself for taking good care of your family and your financial plan.
| ||Timothy J. Holsworth CFP®, CLU, ChFC is president of AHP Financial Services, a wholly owned subsidiary of Andrews Hooper Pavlik PLC. He also is a branch manager with Raymond James Financial Services, located in Bay City, Mich. AHP Financial Services and Andrews Hooper Pavlik PLC are not affiliated with Raymond James. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC.|