Your Personal Finances-Life Insurance: Adapting to Changing Needs

When Pat purchased her life insurance policy ten years ago, she assumed that her life insurance planning was complete. She thought that if she just paid her premiums on time, she could sit back and not worry about life insurance any more.

True, Pat’s policy has provided her with protection for her family’s finances in the event of her death. However, that doesn’t mean she should let her insurance program run on autopilot. Life insurance is just like any other piece of your financial puzzle. Periodic monitoring as your circumstances and needs change can help ensure your life insurance is achieving its desired objective. Let’s take a closer look at some of the details that Pat, like all policyholders, should review, at least annually.

Is Coverage Current?

Pat must first determine if her original reasons for purchasing her policy are still current and if her personal circumstances or needs have changed. For instance, when Pat initially purchased her policy, she was newly married and owned a small, modest home. Now, Pat and her husband, Ed, have three children and a much larger home. Is Pat’s existing policy adequate for these additional responsibilities covering a substantial mortgage, funding college for three, and contributing to the protection of her family’s finances? More than likely, Pat may require additional life insurance. And, she may want to make sure she has adequate coverage on Ed, as well.

If Pat’s existing policy is term insurance, she may consider converting it to a permanent policy. Permanent insurance is unique in that it contains a cash value, as well as the same death benefit features of term insurance. In the future, the cash value could come in handy to help supplement college costs or retirement income needs. It is important to note that access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, can increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

Updating Beneficiaries
Currently, the primary beneficiary of Pat’s life insurance policy is her husband, Ed. If Ed were to predecease Pat, the policy currently names Pat’s nephew as a contingent beneficiary. Now that Pat has her own family, she may want to update her policy’s beneficiary arrangement to name her children as contingent beneficiaries instead of her nephew.

Planning for a Growing Estate
Regardless of the type of life insurance Pat owns and who is named as the beneficiary, the death benefit proceeds from the policy may be included in Pat’s estate. As their asset base increases over the years, Pat and Ed should periodically monitor and update their estate conservation strategies to help minimize the effects of estate taxation.

Life insurance can play a significant role in solidifying the family finances of couples like Pat and Ed. However, it is also important to recognize that life insurance policies, like all financial matters, need to be reviewed on a regular basis with a qualified professional. A qualified insurance professional can be a valuable resource when evaluating your present situation and determining an appropriate course of action.

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax, legal, or financial advice and may not be relied on for purposes of avoiding any Federal tax penalties.

Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities.

This article is reprinted with permission from LIBERTY PUBLISHING, INC., BEVERLY, MA COPYRIGHT 2010.