Life Insurance Review - Now More Than Ever
In a recent newsletter, I suggested that it was time to get back to basics with our financial plans. A main focus should be a thorough review of the asset and income protection plan afforded by life insurance.
The precipitous decline in the net worth of households due to declining home prices and investment portfolios has led many to bolster and upgrade their life insurance programs. While some individuals have simply purchased relatively inexpensive term insurance, others have taken the opportunity to analyze their entire insurance portfolio and implement significant changes. A carefully planned insurance strategy must consider and balance variables such as time horizon, potential cash outlay, risk tolerance and, most importantly, defined quantifiable financial goals.
Over the years, I have had many clients insist that their need for any type of life insurance coverage would cease when certain objectives were attained such as final college tuition and mortgage payments. Many of these clients purchase term insurance with premium guarantees commensurate with the length of time remaining to satisfy these obligations. However, circumstances sometimes change. When the premium guarantee expires, clients often find that they wish to maintain the coverage.Perhaps other financial commitments have arisen such as graduate school, mortgage on a second home, a second marriage, insufficient assets to sustain a spouse's retirement in the event of the insured's death or the desire to pay future estate taxes without depleting assets. Unfortunately subsequent to the purchase of the original life insurance, the insured may have developed a medical condition that would result in exorbitant premiums or outright declination in the event new coverage is desired.
In my opinion, a life insurance plan should provide significant guarantees and be insulated as much as possible from the volatility of financial markets.Since there is no cash value, term insurance has no exposure to the financial markets. The two main forms of permanent life insurance, whole life and universal life, involve weighing guarantees vs. cost and flexibility. Whole life requires the largest cash outlay but provides the strongest guarantees in the form of fixed premiums and guaranteed cash value. The one variable is the actual paid dividends which is a function of long-term interest rates. While universal life requires a lower cash outlay for the same death benefit, neither insurance costs nor the current interest rate accrual on cash value is guaranteed.In all cases, the trade-off between cash outlay and guarantees must be carefully examined.
With many investors seeking refuge in stable financial investments with strong guarantees, life insurance can offer a safe conservative vehicle that provides family protection in several forms when it is most needed. The financial press has seized this search for stability and reliability and written about the certainty and benefits of tax deferred accrual of cash value in whole life and universal life insurance. Recently, I was contacted by Business Week and asked to comment on life insurance as an option to secure higher yielding tax deferred returns. My response was that while a solid permanent life insurance plan represents a critical centerpiece to family financial security, in my opinion it should not be viewed as an investment or bank alternative but only as a source for unexpected cash needs.
Life insurance is not a product that should be bought and then forgotten. As with all products, many life insurance policies become obsolete as newer streamlined plans enter the market. Furthermore, many life insurance policies represent an imploding time bomb to unsuspecting policyholders for a variety of reasons - escalating mortality costs, lower interest rates or dividends, reduced or missing premium payments and the deleterious effect of cash withdrawals or loans on policy performance.In my meetings with attorneys and accountants, I have urged them to order in force illustrations on existing policies for clients with policies that are 10 years or older. These illustrations will provide the red flags of any potential problems on the horizon.
In summary, like any other financial product, life insurance needs to be periodically reviewed and updated to reflect changing individual needs and the dynamics of the product itself. With the net worth of most households significantly diminished due to the financial meltdown and the continued economic uncertainty, there may never be a more important time than the present to ensure that your family is afforded the protection that you desire and they deserve.
As usual, I welcome your comments and/or questions.
Clifford L. Caplan, CFP®
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