A lot of people like to treat their life insurance policy like a hurricane preparedness kit. They buy it, file it away, and assume it will just stay good forever. But there are dozens of reasons why you might need to change or upgrade a policy. Just like it’s important for wealthy people to reevaluate their wills on a regular basis, it’s also important to evaluate your non-probate assets, like life insurance contracts. Getting an insurance policy review is the best way to be sure that your policy is still effective for your circumstances and that your needs haven’t changed. A review can even find ways to improve your plan with a few simple modifications.
Getting a Policy Review After Major Life Changes
The most obvious time to get a life insurance policy review is during one of the big four life changes: marriage, divorce, birth, or death. While most policyholders assume these big four events apply when they happen to them, they may not know that these events also apply when they happen to their beneficiaries.
Your beneficiaries — either on your policy or through a trust — will have major life changes that may significantly change their future needs. Most of our policyholders are more settled, meaning you’re no longer having children or getting married. Instead, it’s your beneficiaries who might be getting married and having children.
This might mean looking at your current estate plan to see if you need to create a legacy plan for grandchildren or remove beneficiaries who won’t need as much coverage in the future. In either case, getting a policy review after a major life change is always important, but it’s not the only time to review life insurance. You also need to consider a policy review when you have assets that appreciate rapidly.
Reviewing Your Coverage as Your Net Worth Increases
One asset that appreciates rapidly that you might choose to pass on to your beneficiaries is stock. Consider the case of Andy Bechtolsheim, the first investor in the internet giant Google. Andy paid $100,000 in 1998 and received somewhere in the neighborhood of three million shares of the company stock when it went public, which netted him about $272 million. The point of the story is that certain assets are extremely unpredictable in how quickly they’ll appreciate. Before Google went public, Bechtolsheim wouldn’t have even needed an estate plan! Less than five years later, he needed a pretty extensive one.
If you have highly appreciating assets or even assets that just have the potential to appreciate steadily, like property and shares of stock, then you’re going to need a policy review whenever the value of those assets changes. Those changes can happen overnight and overlooking planning for them in your estate could leave your family with a heavy tax bill. But those changes are so unpredictable, that it might be hard to catch them in time. That brings us to the third reason why you need a life insurance review – because you have life insurance.
Periodic Reviews as a Preventive Measure
Even without a major life event or sudden increase in assets, it’s important to have life insurance policies reviewed periodically. Permanent policies, like universal life, have a cash value portion that can be used by the policyholder. While most think of cash value in a life insurance policy as being available for loans or using it as collateral, money may also be available as a withdrawal that need not be paid back.
A policy review may uncover ways to reduce or pay off your policy. In some instances, you might even find that the cash value of your policy is enough to purchase a better life insurance policy through a tax-free exchange under Section 1035 of the IRS code.
There also might be times where you’re paying a higher premium than necessary. While the cost of most policies is based on your life expectancy, other factors may change that cost. For example, if you participated in high-risk hobbies, like flying a plane or scuba diving, then your life insurance premium would have been higher. If you’ve stopped those high-risk hobbies, you might be entitled to a lower premium. The same goes for other high-risk activities, like smoking.
In addition, some policies are based on current rather than guaranteed assumptions. As a result the cost of insurance within an existing policy can rise due to increased mortality expense. Left unchecked, such an adjustment can adversely impact the duration of coverage that the policy provides. The value of an insurance policy review simply can’t be overstated.
How Do You Get a Policy Review?
Usually, you can go right to the source when you need a policy review, meaning you can go back to the individual who sold it to you and ask him or her to look it over. You can also review it yourself, though if you’re not familiar with the jargon used in the contracts, this might be a bit of a challenge.
If you want an unbiased, expert review, it’s usually best to take your policy to a third party to take a look. At Howard Kaye, we offer a policy review to all of our new clients to see if certain triggering events or simple cash growth within the policy might make it time to upgrade your estate plan. Contact us today at 800-DIE-RICH to schedule your complimentary, no obligation policy review.
