Revisiting the Efficiency of your Life Insurance Plan

A common issue upon which I revisit with clients on a regular basis is the efficiency of their life insurance.  Typically people will have either an old policy that was taken out when they first started their career and/or a specific amount provided by an employer.  While updating your coverage to a new policy can sometimes lower your costs with greater amounts of coverage because of the changing nature of insurance company mortality tables, often the original intention of the insurance has changed for the person.  For me, the question of reviewing their coverage always starts with the “Why?” question.  Why did you initially set up this coverage?

In my estimation, the main reasons for having life insurance protection in place are as follows:

• Income Replacement—purchasing enough coverage that would provide your heirs or dependents with enough money to replace the income you would have provided during your working years.  From a cost efficiency standpoint, this can often be accomplished through buying a term policy with a term that matches the number of working years remaining before retirement—with the idea that you are using the cost savings to fund retirement plans.

• Estate Tax Mitigation—purchasing permanent insurance coverage (sometimes via an irrevocable life insurance trust) to mitigate estate taxes that will be owed by your beneficiaries upon your passing.  While this type of plan should be orchestrated with an estate planning attorney, it can be helpful when estates are in excess of the government’s estate tax threshold (currently estates valued at $5MM).
• Tax-Favorable Savings Vehicle—For those people who are max funding retirement savings plans, Roth IRAs, personal savings, and emergency funds, a permanent life insurance policy could be a good way to grow cash value in tax-favorable way.  This typically is not a cost-viable plan until these other types of savings vehicles are being maximized.

I believe it is important to be careful with the overall cost of your life insurance plan.  Do not make the premium cost an impediment to other savings vehicles (especially tax-deferred savings potential).  When looking particularly at permanent life policies, be careful not to make it too large of a cash-flow item in the retirement budget.  It is always best to review your life insurance plan to be sure that it fits with the rest of the elements in your financial plan an overall wealth management.