Five Considerations When Reviewing Your Life Insurance Portfolio
Purchasing life insurance is not a quick, one-time event that happens in a specific month or year. Your need for coverage is very likely to change several times over your lifetime, so, like other aspects of your financial health, you (and your business) should have regular insurance check-ups.
Here are five things to think about as you look at your insurance portfolio.
Determine why you need life insurance and how much
When we ask our clients, “Why did you purchase that life insurance policy?” the answer is often not readily available. But we know that individuals and businesses buy life insurance for many reasons: to cover a debt, secure a loan, provide funds for final expenses, replace income, fund a buy-sell agreement, or cover a key employee.
As a person gets older or a business matures, those reasons often evolve. For younger individuals or new business owners, it’s assumed that the need and purpose for insurance could change three to five times in the next 40 years. Older individuals looking at perhaps their last need and purpose might want to review their life insurance portfolio to ensure that they don’t outlive their coverage.
According to a 2018 study by the Life Insurance Management Research Association (LIMRA), 50 million households recognize the need for more life insurance. Among those who have coverage, about 1 in 5 say they do not have enough.
How do you know how much is enough? There is no simple formula, but the best way to find out is to complete a comprehensive financial plan and see how insurance ties into that plan. Current and future needs, resources, and goals — personal and professional — can be explored. Once it is all down on paper, you can formulate strategies to help get you where you want to be.
Find out what kind of insurance your employer offers
Employers continue to find creative ways to attract, retain, and reward employees by offering comprehensive benefits packages that include all types of insurance: health, dental, vison, and short and long-term disability. Employers often spend a lot of time focusing on the health insurance piece — and rightfully so — but many offer life insurance, too.
When it comes to life insurance, employer plans typically cover a multiple of your income, with higher amounts of supplemental coverage available. Be sure that you are looking at true life insurance and not just accidental death and dismemberment (AD&D) insurance. While there is nothing wrong with AD&D coverage, it’s inexpensive because there are thousands of “causes of death” that are not accidental, and therefore would not be covered. Some plans offer both, and in some instances, employer coverage might fulfill your life insurance needs for as long as you are employed.
It may be beneficial to have a qualified financial advisor review your employee benefits package with you to ensure that you understand the coverages for which you’ve enrolled. You’ll want to have sufficient coverage without overbuying supplemental coverage that you don’t need.
The person who sold you your current policy may no longer be in the business
You may have originally purchased a policy from an agent who has moved on to other career opportunities, and your insurance policy now has a “newly assigned” servicing agent. Chances are, that new agent does not know you or your current financial situation. In addition, that person is most likely not being compensated to service the policy, so he or she lacks incentive to be proactive.
So who is looking out for you now? While the insurance industry is getting much better at providing detailed information on their annual statements regarding costs, fees, and the projected longevity of your policy, you will need to spend time reviewing your insurance coverage just as often as you would your investment portfolio. Your insurance representative should be giving you the opportunity to make adjustments as your personal and business circumstances change.
The policy you bought 10 years ago might be in serious jeopardy
In 2008, dividend rates for participating whole life insurance policies were as high as 7.5 percent. Today, that number is 4.9 percent. Universal life plans have also seen rates decrease in the last 10 years from the 6 percent range to the 4 percent range.
Persistent low interest rates pose a threat to life insurance companies and their rate-sensitive products and investments. When you purchase a permanent life insurance policy, whether it be whole life, universal life, or indexed life, there are certain current assumptions made to calculate the planned premium you need to pay as the policy owner.
What this means to you is that the planned premium calculated when your policy was issued is no longer sustaining the policy as it was originally projected. If you have not requested or reviewed a current illustration on your existing life insurance policy in the last five years, consider doing so as soon as possible.
Need and purpose: two key areas of focus
As mentioned above, the most effective way to design a meaningful insurance portfolio is to engage in a comprehensive financial planning discussion. After all, the need and purpose for your life insurance should be yours, not the insurance company’s or anyone else’s.
At some point, the need for certain insurance coverage may disappear altogether; for example, when children are grown and independent, you sell your business, or an insured debt has been repaid. Even then, alternatives like a life settlement may be an approach worth exploring.
The good news about the life insurance industry is that there are some great companies out there that are committed to some fantastic products, are competitively priced, and offer long-term guarantees. Many have drastically improved their underwriting processes and made it easier for consumers to obtain the coverage they need.
How we can help
Let’s be honest, the job title of “insurance agent” doesn’t always evoke warm, fuzzy feelings. But regardless of those feelings, it’s important for you to have someone to walk alongside you on life’s journey. CLA’s salaried insurance representatives are prepared to put your agenda at the forefront of the discussion and help you manage risk by understanding your options.