As financial advisors we see all different kinds of life insurance policies that were sold for all different reasons at all different times of life. Here are a few examples:
A “baby policy” sold to your parents when you were just an infant. Policies are often from the 1950s, fully paid up, and offer a death benefit of around $1000. You’ve carried the life insurance certificate around with you for most of your adult life. You may or may not have remembered to tell us about it (please do).
Action Item: Even though the death benefit is modest, make sure to tell your family about this little policy. Maybe they can use it to do something special in your memory (or your parents’ memory – they were they ones to shell out the cash for it 50 years ago).
Level Term Life Policies. This is our favorite type of life insurance and likely what we advised you to buy. This type of policy gives you the biggest bang for your buck. You can buy a high amount of death benefit for a very reasonable premium. Premiums are level and the policy lasts for a certain term (10, 20, 30 years). Term policies are generally used to replace income your family was counting on during your working years. Your heirs will likely never see a payout of this policy (and they’ll be happy about that).
Action Item: Make sure you have the right amount of insurance in place. Understand the terms of the policy and make sure your heirs know where the polices are located (your Shakespeare vault would be an excellent spot to store a copy).
Permanent Life Policies: Permanent life insurance policies are meant to be just that “permanent.” Many times they are designed to be in place for your entire life and carry a “savings component” or cash value in addition to the death benefit. They are much more expensive than term life insurance and are generally looked at as “inheritance” vehicles rather than income replacement. There is a whole slew of permanent life insurance policies: Whole Life, Universal Life, Variable Life, just to name a few. The word “permanent” can be misleading. Some of these policies may need more than the planned premiums to remain in force for your lifetime. These policies are NOT our favorites. They are expensive, complicated, and often purchased for the wrong reasons.
Action Item: Ask your insurance company for an “in force” illustration of the policy. Illustrations are essentially spreadsheets that show us how the policy will perform in the future. It will show the growth (or decline) of the cash component to the policy along with how that affects the death benefit. This is important information to understand in order to determine if these policies are worth keeping in place.
Life insurance is an important part of your financial plan and has different purposes at different stages of your life. Be sure to take inventory and understand exactly what you have in place to determine if it is still appropriate.