Making Cents: Term Life Insurance Reviews
By: John P. Napolitano, CFP®, CPA, PFS, MST
Many people buy their life insurance and then don’t think about it until the next premium notice arrives.
Even if you’re in the early stages of a 20 year term policy that was to replace income for the premature death of a young parent, there may be issues for you that were not addressed by your agent. But if your life insurance has any purpose beyond that, such as to help pay death taxes or to assist with the continuity of a business, life insurance is not a set it and forget it asset class.
One word of caution. There are many agents out there promoting their services to review your policy. While this article will back up that need and highlight some of the benefits, beware that many agents also cloak their reviews as another way to replace what you have or to sell you more insurance. Consider getting an independent person to review the contract who has no interest to sell you another one.
Starting with the simple term policies that are frequently bought as a temporary stop gap to prevent financial disaster in the event of the passing of a bread winner. Just because you got a great rating, from a strong company for a good premium doesn’t mean that everything was done properly.
The classic structure is have the policy owned by the insured with the surviving spouse as a beneficiary and the children as the contingent beneficiary. Two potential pitfalls of this structure include having either beneficiary receive the proceeds directly and outright. Let’s say a young spouse receives the death benefit and does no other estate planning. Should this person re-marry, the assets from that policy become part of his or her new marital estate and may never be used or received by your children. A similar problem arises in the case where both young parents pass. In that case, the policy proceeds would then pay to the minor children where they would get total control of the money when the reach age 18. Also not optimal.
What would be optimal is using a trust to control the death benefit in a responsible way to prevent misuse of the funds due to both parents passing and a potential second marriage.
In the case of business insurance, the stakes are frequently higher in that you may not be dealing with family and the amounts of insurance involved could be materially larger.
Take a look at the owner and beneficiary elections. Do they still make sense under today’s facts and circumstances? There are many possibilities that could cause this policy to not work completely for you any longer.
The questions to ask include how much insurance is needed today? This should be based on the value of the company and tie neatly into your ownership and management succession plans. That valuation should be updated each year. How is the agreement structured? Is it a cross purchase or stock redemption agreement? Both may work, but the structure of the company will usually dictate a preference of one method over another.
John P. Napolitano CFP®, CPA is CEO of U. S. Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.