Do You Still Need That Life Insurance Policy?By Joseph N. Filosa, CFP® | June 23, 2020
Life insurance is one of those things you pay for but hope to never actually use. It’s designed to financially protect your family should the unthinkable happen to you. This, of course, requires shelling out a premium—but would this money be put to better use in your investment accounts?
No two families are the same, so deciding whether to renew your life insurance policy really comes down to your unique financial situation. At the end of the day, no one likes paying for something they don’t really need. This is precisely why periodically reviewing your plan with your financial advisor goes hand in hand with effective wealth management.
The COVID-19 pandemic has brought life insurance into sharp focus. If disaster were to strike, would your family be adequately covered? The way you answer determines whether or not you need life insurance.
When to Revisit Your Life Insurance Policy
Your life insurance policy is one part of your overarching wealth management plan that will likely change over time to reflect your evolving financial needs. What matters most is that it continues to provide the coverage your family needs. The best way to know that is to take stock of your life every few years and measure it against your current plan.
If you’ve experienced any of the following, now is the time to take a closer look at your life insurance policy.
- The pandemic is hitting close to home. If shopping for life insurance now, some insurers may postpone your application if you’ve been in contact with someone who has the virus or you’ve traveled outside the U.S. within the past 30 days. If you end up testing positive, some may wait until you’ve recovered before processing your application.
- You’ve welcomed a child, or gotten married or divorced. These are situations that have a direct impact on your beneficiaries.
- You’ve purchased a new home. Loan-backed assets, especially large ones, could become a financial burden on your family.
- You’ve experienced a financial windfall, like an inheritance. Coming into unexpected money could provide the security you need to let go of life insurance.
- Your income has significantly changed. Are you still able to afford your premium? On the flip side, are you now in a position to increase your coverage?
- You’re curious about how your life insurance policy will figure into your retirement. You may be able to use a whole life insurance plan to supplement your income in retirement.
- You’ve crossed a major debt finish line, like paying off your mortgage or your child’s college expenses. In this case, the time might be right to scale back on your coverage.
When a Life Insurance Policy Makes Sense
The biggest draw of having life insurance is that it provides peace of mind. How much you’ll pay for that peace of mind varies dramatically based on your life expectancy—your age, health, and gender all come into play. If your cash flow plan can easily absorb the cost, and the policy provides the protection your family needs, investing in life insurance is a no-brainer (especially during these uncertain times).
Review your assets and consider all debts that you’re still paying down, from mortgages to car payments to student loans you may have assumed for your children. If something happened to you today, would your loved ones be able to comfortably take over those payments? If not, and those assets were repossessed, think about how that would affect their lifestyle. Similarly, would your family struggle to keep up with day-to-day expenses without your income?
Another thing to think about is whether your loved ones will be hit with a “death tax” once you’re gone. This is a federal estate tax—which could be up to 40%—that enters the equation if your assets exceed $11.58 million. Some states tack on estate tax, as well. High-net-worth folks can create a financial cushion for their families by opting for a whole life insurance policy that covers this amount. An experienced financial advisor can walk you through the details.
When to Consider Letting Your Policy Expire
There are some situations where life insurance may be an unnecessary expense. If you’ve paid off your major assets and don’t have any large loans to your name, your loved ones may be able to get by just fine without your income. The same can be said for families that have enough income of their own or cash savings to continue making payments on any outstanding loans.
An additional detail to consider is if your family will incur any big expenses sometime in the future, like college tuition or a wedding. If they’ll be able to meet these obligations on their own, your financial advisor may suggest not renewing your life insurance policy.
In terms of retirement planning, those who are close to hitting their savings target might not need life insurance as a cherry on top. (It’s a cherry that comes with a price, after all.) That money may be better invested or spent on experiences that will bring you joy in retirement.
Weighing the pros and cons of your life insurance policy requires looking at the big picture, taking the long view, and considering how different scenarios would play out if the unimaginable happened. A skilled financial advisor who understands your values can help you unpack the details. Book some time with Opal Wealth Advisors and take the first step.
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