Thinking of ditching your life insurance policy? First answer these 3 questions
There are many good reasons to rethink your life insurance policy. Perhaps you have gone through a lifestyle change. Maybe you no longer have dependents. Maybe the premiums are just too high. Just over half of all Americans have a life insurance policy, and if you’re one of them, you need to answer these three questions when deciding whether to stay insured.
- Consider your financial needs for income replacement and estate liquidity.
- Consider your financial needs, such as goal funding and legacy donations.
- Get an overview of the cost of your policy.
What is your life insurance need?
As a tool, life insurance can help fill a monetary gap in some financial plans. Certain financial situations require additional cash in the event of premature death, such as income replacement for dependents and estate cash needs. It is important to note that temporary needs may best be served by term life insurancewhile whole life insurance maybe better for permanent needs.
One of the most frightening financial realities of an untimely death is caring for those we leave behind. When considering the need for life insurance, consider the people around you who depend on your financial resources. Are there minor children or aging adults who rely on your financial support? If so, the loss of that support could be a devastating blow that could be mitigated by a life insurance death benefit.
As any executor will tell you, distributing a deceased’s assets is neither easy nor cheap. In the case of estate planning, a life insurance policy can be particularly advantageous for those with little cash. When a company’s real estate or property constitutes a large part of its wealth, it can be difficult to extract the administrative costs associated with the distribution of assets. But building and business owners aren’t the only ones who can benefit from a life insurance policy. Those who wish to avoid burdening their heirs with estate-related costs may consider having a death benefit large enough to cover the administrative costs of disposing of the assets.
What is your life insurance need?
Another way to look at life insurance is to fulfill certain desires, such as funding goals or giving inheritance. The leverage a life insurance policy provides can help the insured leave a lasting impact after they’re gone.
One opportunity with life insurance is goal funding, where the deceased assigns their death benefit with the intention of achieving a certain financial goal. A common example is college funding for a minor child, where the funding gap toward a post-secondary degree can be made up by a death benefit. In this way, the insured can ensure that the goals he would have achieved in life will still be achieved in the event of premature death.
The bequest is another possible use of life insurance. The insured can assign his death capital to a foundation or organization of his choice, leaving an inheritance in accordance with his wishes. Often, policyholders will directly name charitable, governmental or religious organizations as beneficiaries.
How much does your coverage cost?
Typically, term insurance is pure insurance, with no ability to accumulate cash value. This cash value component of a whole life insurance policy can make things complicated and expensive. Whole life insurance premiums are generally higher because they include the purchase of permanent life insurance, funding of a cash value account and administrative fees. And for those who are in the first 15 years of a whole life insurance policy, watch out! Surrender charges can significantly reduce the cash value of a surrendered policy.
If in doubt, call a professional
A life insurance policy can be an invaluable tool in the right financial plan. But how do you know if this coverage is right for you? One way to find out is to talk to a professional.
Unfortunately, many “professionals” are life insurance salesmen in disguise. Ask these questions to see if your professional works for you or for a commission:
- What are your references? Try working with a CFP® professional. These certifiers are held to a fiduciary standard and a standard of care above others in the industry.
- Is your business fee-based or fee-based? Paid-only advisors are paid directly by their clients for financial services, while paid advisors can sell commission-based products.
- How are you paid? Whether an advisor receives a salary based on assets under management or commissions earned can tell you a lot about the best interests in which they work.
Thinking about the financial circumstances of your death can be an incredibly difficult thing to do. But with the help of a qualified advisor and considering your needs, wants and insurance costs, you can be sure you’re adequately insured should the worst happen.
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