What to Look for in your Annual Life Insurance Review

| September 5, 2022 | 0 Comments

Seriously, when is the last time you reviewed your life insurance? I don’t mean the letter you get (and probably throw away) from your insurance agent every year asking if you need more. I mean really sitting down and thinking about the life insurance you have, why you have it and what you are paying for it.

Questions to Ask

It’s a really good idea to take your insurance policies out, dust them off and review them annually. The starting point for your annual insurance review should be “Why do I have life insurance in the first place?” Is the insurance there to provide income replacement if you’re not around to provide for your family? Is it to pay for estate taxes when you pass away? These are valid reasons, but they also change over time. You need a lot more income replacement early in your working life than you do heading into retirement. Your next question should be “Can I afford the coverage I have?”

Here are some other basic questions you should consider.

Is the coverage still appropriate? If your family is still expanding, you might want to consider increasing your life insurance coverage, because each of those little mouths will need a lot of feeding, and the loss of a primary breadwinner will be especially hard on them and the survivors. On the other hand, if your kids are all out of college or working, you may be able to reduce your coverage.

How much insurance are you actually paying for? This isn’t as simple as it sounds. Your insurance is the death benefit minus the cash value (if your policy has one). If you have a big cash value relative to the death benefit, you may not actually have much insurance, so why keep paying premiums? Cash value in an insurance policy has many uses, but if you’re using it as a savings account for future non-insurance spending, there are much more efficient (and cheaper) ways to accomplish this.

How old is your policy? Every few years, insurance companies change how they price their life insurance policies. If you are still insurable and have an older policy, you might be able to find more or cheaper insurance. It definitely pays to shop around.

Are you considering retirement? If your retirement is fully funded, you may not need your life insurance anymore, since the main reason to have it is to replace your income in the event of a premature death.

The Answers You Need to Hear

Most of the time, you’ll probably decide that your insurance coverage is adequate for your needs. If you noted a change to any of the questions above, it might be a good idea to follow up with your financial advisor to see what, if any, changes need to be made. I would recommend an advisor who doesn’t earn a living by selling life insurance, since the only way they get paid is to sell you a new policy. It’s hard to be objective about life insurance when that’s your main source of income.

You might decide that you need the insurance for estate planning purposes, for example to pay the tax bill on a large asset like a home or business. Keep in mind that the current exemption for estate taxes is about $24 million for a married couple, dropping to about $12 million in 2026. Most people won’t need to worry about estate taxes, but life insurance can be an important tool if you’re fortunate enough to have a larger estate.

If you are getting close to retirement, you’ll definitely want to review your life insurance coverage and the premiums you’re paying for it. An objective, fee-only financial advisor can help you determine whether or not your coverage makes sense and whether you need to make a change.  

This column is prepared by Rick Brooks, CFA®, CFP®. Brooks is director/investment management with Blankinship & Foster, LLC, a financial coach specializing in financial health for physicians and people in or preparing for retirement. Brooks can be reached at (858) 755-5166, or by email at rbrooks@bfadvisors.com. Brooks and his family live in Mission Hills.

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