As we enter Life Insurance Awareness Month, it seems a good moment to reevaluate why we have the insurance we do and whether it is the right amount to fulfill the needs we have. Against the backdrop of the COVID-19 pandemic and with an election only months away that has the potential to greatly change tax policy, many are considering their mortality and financial security of their loved ones after they’re gone.
Life insurance is designed to offer a source of financial stability for surviving family members after someone’s death. While the COVID-19 crisis has changed some of the ways we used to apply for a life insurance policy, getting coverage is still possible and the need hasn’t diminished. Some providers even suggest that it has never been easier to get a policy, with CDC guidelines around social distancing minimizing in-person medical exams and a streamlined underwriting process overall.
If you already have a life insurance policy, it is a good time to review how much coverage you have, why you purchased it, whether your needs have changed, and then reassess what you may need going forward. In case any of you were wondering, I have been asked if a death benefit would be paid due to a death from COVID, and the answer is yes. Having said that, if you are applying for a new policy and you are currently with the virus, an insurance company would not likely issue new coverage until you have completely recovered.
There are a wide array of various life insurance products that can be tailored to meet fairly specific purposes. People use life insurance for reasons ranging from covering burial/funeral expenses of the deceased, to funding a buy/sell agreement, to supplemental retirement income, paying for college, charitable giving, and estate tax planning, among others. The primary use that your policy will address can help in calculating how much coverage you may need.
If you are looking to cover a financial loss, a basic equation for determining how much financial coverage you require from your policy is:
[Financial obligations you want to cover] – [existing assets that can be used toward the liability] = Your life insurance need
If it is an income stream that you are looking to cover, then you would take the estimated annual income needed (i.e. $150k/year) and divide it by the interest rate you expect you can earn on your money. Plug the result into the first item in the equation above.
For those with Permanent Life Insurance policies (Whole and Universal), it is a good idea to review your policy to make sure it is performing to expectations. With extended low interest rates, these policies may not be performing according to original projections. Some newer derivations of permanent policies offer greater latitude to fit specified needs, and as we live longer, it is possible to outlive some older policies that may have ended at age 95 or 100. And with interest rates so low, it may also be a good time to refinance life insurance for a more efficient payment structure for the remainder of your life.
Using insurance as a supplemental investment vehicle is also worth reviewing. Life insurance has been awarded unique tax benefits such as tax-free growth of cash value inside the policy and income tax free death benefits. As long as a policy stays inforce, you can even pull money out of it as a withdrawal or loan without paying taxes. So, don’t overlook this vehicle for some additional savings options.
Finally, we also recommend that you take this moment of heightened focus on life insurance to update your beneficiary designations. As our families grow with children and grandchildren, updating beneficiaries becomes important to ensure that the proper beneficiaries are listed to match up with our intentions. Adding the stress of an incomplete, unequal, or disputed insurance payout on top of a recent loss of a loved one is part of no one’s wishes for their family.
Whether we face a global pandemic, shifting tax structures, or other unexpected events, working with a financial advisor to get a full picture of the uses and limitations of various products is often the best way to ensure you’ll have what you need for whatever comes down the road. Don’t hesitate to reach out with your specific questions to get a better understanding of your options and standing.