Caution: Writing Your Own Deed to Avoid Probate Can Lead to Unintended Consequences
Perhaps you first obtained life insurance 10 or more years ago, but you haven’t updated your insurance plan (or thought about it much) since. You should consider reviewing your policies. A re-assessment has the potential to pay off significantly. The insurance industry has come to understand that we are all living longer than they originally thought. As a result, older life insurance policies can often be reworked to allow clients to purchase more death benefit for the same money and/or to keep the same death benefit for less money. In addition, new policies can contain useful guarantees and benefits that old policies lack , long term care benefit riders being just one example.
When you buy life insurance, you need to assess an array of financial responsibilities and risks, such as education goals for your children, your and your spouse’s long term career and retirement ambitions, whether you want a cash value policy or term insurance and so forth. Many other questions follow. For instance, should you choose variable life insurance, universal life insurance, or whole life insurance?
The big picture challenge is this: as you get older and your objectives evolve, your insurance needs change in kind. Common events that might inspire a review of life insurance needs include:
- Getting married;
- Having a child;
- Getting divorced;
- A major financial upheaval (such as a big promotion or business deal or, conversely, a job loss or career change);
- A spiritual epiphany that changes your general outlook on the world and/or your tolerance for risk.
- Simply getting older
Here are some tips for reviewing older coverage.
First off, evaluate your policy carefully. What guarantees do you have regarding the death benefit? Most older policies are not guaranteed, so if interest rates or mortality costs change, the policy can lapse unless you pay larger (and sometimes substantially larger) premiums. Can you convert the coverage into other insurance forms or into annuities? What happens to the interest paid and received? Have you taken withdrawals or loans against the policy? If so, have those caused consequences? Did you make overoptimistic assumptions when you purchased the policy?
If your family is expanding, you will probably want greater and more comprehensive death benefits. Alternatively, as your family contracts (e.g. your children grow up and get married), you might want to convert a term plan to whole life policy or tap assets for your retirement plan.
Seeing your life insurance policy in context
Many people buy and manage their life insurance in a vacuum. It’s potentially more resourceful to see your insurance as just a component of a bigger overall project – i.e. your overall financial and estate plan.
Call our experienced team at (800) 827-7784 to explore not just how to review your life insurance policy but also how to achieve true peace of mind and clarity regarding your long term planning.
Ralph G. Brodie J.D. – University of Arkansas L.L.M. of Taxation – New York University
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