Don’t Set and Forget Life Insurance
Got life insurance? Great! You’ve taken an important step to help ensure your loved ones are financially protected after you’re gone.
But don’t just check ‘buy life insurance’ off your to-do list and forget about it. Why? Because 10 years from now, your life may look very different than it does today. And that means your life insurance needs may be different, too.
So it’s a good idea to review your insurance needs every year, especially if you’ve reached a major milestone in your life.
When a job change or promotion means you’ll be earning more: As you make more, chances are you’ll spend more. You may even decide to buy that new car you’ve been eyeing or think about buying a home. As you take on added financial obligations, you’ll want to make sure your family won’t be burdened with having to cover that debt if something happens to you. The proceeds from your life insurance can be used to pay off your credit card bills, car loans or mortgage.
When you get married: When you tie the knot, life insurance becomes more than a way to cover your current financial obligations. When you marry, you’ll want to make sure your spouse is financially protected for the future if something happens to you. Life insurance can help to ensure he or she can continue to live the lifestyle the two of you envisioned.
When you have children: When you have children, life insurance takes on a whole new meaning. You’ll want only the best for your kids: good schools, memorable family vacations, inspiring college experiences and unforgettable weddings. Life insurance can help you protect your vision for their future and give them the best opportunity to achieve their goals if you die.
One type of life insurance—permanent life insurance—can also benefit you and your children while you’re alive. Permanent insurance builds cash value that can grow tax deferred and becomes a source of funding you can use to help pay for your children’s college education and their weddings or to help them start their adult life on solid financial footing.
When you have children, you may also want to consider buying separate life insurance policies for them. When they’re young and healthy, you can lock in their insurability. Plus, the policy will accumulate cash value over time that they can use to meet their future financial goals.
When your major financial obligations end: Eventually, you’ll pay off your student or car loans, your kids will graduate from college, and you’ll make your final mortgage payment. At that point, you won’t need life insurance to cover those major financial obligations, so you’ll want to revisit your coverage. If you’ve been covered through term (or temporary) insurance, for example, you may be able to convert it to permanent life insurance and eventually take advantage of the accumulated cash value to meet other financial goals during the next chapter of your life—retirement.
Think about how much your life has changed in just the past 10 years. Now imagine how much your life will change over the next 10 or 20 years. As your life evolves, so, too, will your need for life insurance. Make it a point to review your life insurance policy regularly.
Each method of utilizing your policy’s cash value has advantages and disadvantages and is subject to different tax consequences. Surrenders of, withdrawals from and loans against a policy will reduce the policy’s cash surrender value and death benefit and may also affect any dividends paid on the policy. As a general rule, surrenders and withdrawals are taxable to the extent they exceed the cost basis of the policy, while loans are not taxable when taken. Loans taken against a life insurance policy can have adverse effects if not managed properly. Policy loans and automatic premium loans, including any accrued interest, must be repaid in cash or from policy values upon policy termination or the death of the insured. Repayment of loans from policy values (other than death proceeds) can potentially trigger a significant tax liability, and there may be little or no cash value remaining in the policy to pay the tax. If loans equal or exceed the cash value, the policy will terminate if additional cash payments are not made. Policyowners should consult with their tax advisors about the potential impact of any surrenders, withdrawals or loans.