Are You Certain Your Life Insurance Policy Is On Course?
Archie Mathys is an insurance research writer on current events affecting American life. He studies investments, productivity, personal finance & the Wall St. news updates.
Few things are as bothersome as making sure that your beneficiaries will be in good financial ground should you die abruptly. Life insurance, and the benefits it pays out, is critical to achieving that peace of mind -although one that is often delayed to future work because it elicits undesirable emotions. After all, most of us don’t want to consider the death of a loved one, especially one’s own.
In spite of the unwelcome emotional responses it attracts, some people opt to review their life insurance policy, but it should not be something you merely just purchase and then forget about. Avoiding the topic can have consequences. In fact, it’s important to review your life insurance policy annually during your annual financial checkup.
How Much Coverage Do I Need?
How much coverage you need depends on several features, including your age, number of dependents, and the financial resources you have at your disposal. Some financial advisors say you need as much as eight times your salary for the death benefit. But general numbers like that can be too much for the average worker.
Actually, you should seriously consider sitting down with your financial advisor and thrash out all the answers till you’re satisfied. And it all boils down to a simple mathematical calculation: Resources subtracted from what you need gives you the amount of coverage you should get. This may sound straightforward, but the calculation should also factor in Social Security benefits, pensions and any other income your heirs may come across.
Additionally, a number of variables and unknowns can make precision calculations almost impossible. These projections are long-term, as far out as 20 to 30 years, and just like steering a ship with a small degree off course, using one inflationary assumption versus another, or one assumed return on investment versus another, can make a big difference. Just a 0.05% adjustment can cause the needed death benefit to change hugely, which is why it is important to work with an established financial adviser.
Regular Reviews Are Needed
Frequent insurance policy checkups are essential. You should revisit your policies and death benefits whenever there is a significant life event, like the birth of a child, the purchase of a new home or business, writing a will, or an inheritance.
The birth of a child may encourage you to increase your death benefits because most parents want to stack the odds in the favor that their child will have the resources necessary to attend college and otherwise be taken care of until they reach adulthood. On the other hand, the benefits metric can also change should you come into an unexpected inheritance, which would likely reduce your coverage needs.
Depending on whether you have term, variable, universal or whole life insurance, there are other compelling reasons to review and update your policy frequently. The devil is in the details. For instance, variable insurance enables policyholders to choose from a finite list of sub-accounts. Many of these sub-account investment choices can be in the stock market via a fund-type arrangement and therefore are directly impacted by stock market returns. Because of this, variable insurance needs to be maintained like other investments through rebalancing and other methods.
Likewise, whole and universal policies don’t have sub- accounts, so they aren’t affected by the performance of the financial markets. They are, however, impacted by the interest rates, so you can’t just totally be oblivious to them entirely.
As a rule of thumb, it is best to be safer than sorry when determining how much coverage your family needs. For example, if calculations suggest that your family needs $900,000 in death benefits, you may want to consider getting $950,000. After all, your beneficiary isn’t going to complain if they’ve got too much life insurance, but they’ll sure be upset if they run out.
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