Many people buy life insurance because they want to provide liquidity for their family in the event of their death. Many families are sold permanent life insurance where part of the premium is used to build a cash value fund to help offset the higher cost of insuring you when you are older. However, many people buy a cash value policy because it also allows them to save tax deferred. If you have permanent life insurance with a cash value, there are three major reasons you should review your policy often.
- The markets and economy can affect performance of cash value. Depending on the type of cash value insurance policy you own, your policy may gain or lose value based on the performance of the underlying investments. In the extremely low interest rate environment we’ve had the past five years, your cash value may not have grown to the nest egg you anticipated. This is especially true for business owners who have purchased a policy with the express purpose of providing for a future income stream. Likewise, you need to consider the financial strength and claims-paying ability of your insurer.
- Situations change. The risks you were insuring against may increase, decrease or be eliminated as you age. For example, you may have already paid for your children’s education, or you may now need more life insurance to offset estate taxes. If your life insurance policy was part of a business succession plan, you need to ensure that the policy still covers your family’s interest in your business if the business has grown. The features and benefits of the policy you were sold may no longer be meaningful. You may be better served by repurposing the policy to cover current needs, such as long-term care.
- Borrowing from your cash value may significantly alter your death benefit. If you were to die, your beneficiaries generally only receive the death benefit, not both the death benefit and the cash value of your policy. The cash value is often available for you to borrow against; however, doing so lowers the death benefit for your beneficiaries. For example: you have $150,000 in cash value and your death benefit is $250,000. If a loan is taken from the policy, the loan amount plus interest is deducted from the death benefit that is payable to the beneficiaries. In some situations, you may exhaust your benefits and the policy may lapse, or you will have to increase your premium to keep your current benefits.
In each case above, you should request an in-force illustration from your current insurance carrier to show where your policy stands now and the projected future performance of your policy based on current and guaranteed assumptions. Be sure you ask to have both of these provided to you so that you are able to have the best information available to you should you decide that changes are necessary.
At Henssler Financial we believe you should Live Ready, and that includes understanding the effects of your insurance products. If you have questions regarding your life insurance, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at email@example.com.