Why Review Your Life Insurance Policy
The best insurance policy is the one that protects you and your family at the time you need it most. By having your policies reviewed, you are ensuring that you have proper and adequate coverage for your specific needs.
Cash value life insurance policies are valuable assets, just as are your equities, bonds, and other investment assets. The policy values are dependent on how the policy performs. Sometimes the performance is not as great as it was originally illustrated to be 5, 10, 15, or maybe even 20 years earlier. Because of this, the death benefit and cash value may not be adequate for what you are trying to accomplish.
About 20 years ago, many universal life insurance policies were being credited interest rates of around 10%. Today, these same policies may only be receiving an interest rate of around 4 – 5%. Because of the recent economy and the severe decrease in interest rates, many life insurance policies do not have enough cash value within the policy. This can result in the policy terminating much earlier than expected. We have seen policies that were originally illustrated to last until age 100 that are now expected to terminate at age 80 or earlier. Older policies were issued with the 1980 CSO mortality table. Even though they may have been issued with the best underwriting class obtainable at that time, there are currently additional, more competitively priced classes available. Today all insurance carriers are using the 2001 mortality table, which is a direct result of people living longer. These changes alone make it imperative to have your policies reviewed. A simple review has allowed us to discover alternatives for reducing the required premium, raising the death benefit, and extending the length of time the coverage will stay effective.
When policies are being examined, there are many other potential problem areas to focus on. During these reviews, it is important to assess who the current owner and beneficiaries of the policy are. In some cases, we have discovered that the wrong trust was named as the owner. This can result in a tremendous tax consequence depending on the size of the estate. The life insurance proceeds may be subject to estate tax if the policy was owned by the revocable trust instead of the irrevocable trust. This is a very simple mistake that may have originally been overlooked by your insurance agent, attorney, and even yourself.
In the case of incorrect beneficiaries, it is important to review these designations any time your life circumstances change. We have reviewed policies that named the ex-spouse as the primary beneficiary when it should have been changed to their current spouse or children. In addition, minor children should typically not be named as beneficiaries of life insurance policies. In the event the life insurance proceeds are paid to a minor child, the court will have to name an adult to act as the custodian until the child is old enough to control the funds. This may not be the same person you would have otherwise chosen if you were given the option. Instead, a trust should be established and named as the beneficiary. The trust should designate a guardian to watch after your children and a custodian whom you trust to watch over the funds within the trust. In many cases, it may be wise to name separate people as guardian and custodian. This avoids conflicts of interests and helps for each to make rational decisions.
In any event, life insurance policies should periodically be reviewed. If everything is still adequately fulfilling your original goals and expectations, then you will at least have peace of mind. This review process costs nothing, but has the potential to save you thousands.
Tyler L. Rivetti is an advisor at Rivetti Financial who specializes in insurance planning for physicians and medical practices. Rivetti Financial has provided comprehensive financial services for the exclusive benefit of physicians, residents, and fellows since 1979. Contact Tyler at email@example.com or at 818-620-1346 for a complimentary consultation.