Life insurance is a complex topic, and it often leaves many people confused about what they should do with their existing policy. With the following checklist, you will be better prepared to understand your life insurance policy and determine whether it is still appropriate for your financial situation.
This checklist covers the key issues to consider when reviewing an existing life insurance policy, such as:
Do you need to do a general review of your life insurance policy?
If so, consider the following:
Do you need to review your options for surrendering, selling, or replacing your life insurance?
If so, consider the following:
Have you been notified that your policy is at risk of lapsing?
If so, consider ways you might rescue your policy (e.g., additional payments, paying off any loans, redirecting dividends, reducing death benefit, etc.), but be mindful of any potential negative effects on your cash flow and savings goals.
Is your policy’s death benefit larger than what you currently need?
If so, consider ways to lower your death benefit (e.g., reduced paid-up, request for death benefit decrease, switching from an increasing death benefit to a level death benefit, etc.).
Is your policy’s death benefit smaller than what you currently need?
If so, consider ways to increase your death benefit (e.g., using dividends to purchase paid-up additions, additional premium payments, increased death benefit via guaranteed insurability rider, etc.).
Do you need to review your policy’s loan features?
If so, consider ways you might leverage policy loans (e.g., income supplement, volatility buffer, alternative financing, etc.) to benefit your financial situation, but be mindful of interest rate factors (e.g., fixed, variable, rising rate environment, etc.) and any potential risks (e.g., lapse) that could impact your policy.
Do you need to review how your cash value is growing?
If so, consider the following:
Have you been taking loans from your policy’s cash value?
If so, consider the tax risks with taking loans from your policy, as a policy lapse (with outstanding loans) may cause a taxable event.
Have you been taking distributions and/or dividends as cash?
If so, consider reviewing your policy’s tax cost basis, and be mindful of the tax implications of distributions/dividends taken as cash (not including policy loan disbursements) in excess of your premiums paid.
Have you been notified that your policy is (or is at risk of becoming) a Modified Endowment Contract (MEC)?
If so, consider ways you may be able to prevent the policy from becoming a MEC. If your policy already is a MEC, be aware of the implications (e.g., LIFO taxation, gains taxed as ordinary income, 10% penalty prior to age 59½, MEC status irreversible, etc.), but understand that the death benefit is still income tax–free to your heirs.
Are you concerned about the tax consequences of surrendering, selling, or replacing your life insurance policy?
If so, consider how your policy surrender or sale may affect your tax planning goals (e.g., increase in AGI/MAGI), and understand the potential differences in taxation between a policy surrender (i.e., gains in CSV taxed as ordinary income) and a policy sale (i.e., gains in CSV taxed as ordinary income, and gains beyond CSV taxed as capital gains). If replacing, consider utilizing a Section 1035 Exchange to avoid a tax liability.
Are you concerned about having an estate tax issue?
If so, consider some planning strategies (e.g., gifting to an irrevocable life insurance trust) for removing your policy from your estate, but be mindful of the 3-year lookback provision.
Are you concerned about your estate having illiquidity issues?
If so, consider prioritizing the preservation of your life insurance policy in order to provide liquidity to your heirs upon inheritance of your estate.
Do you need to review the beneficiary of your policy?
If so, consider the income tax–free nature of death benefits proceeds and how that may be designated in a tax-efficient manner (i.e., designating to a person rather than a charity). Be wary of the gift tax consequences associated with the “Goodman Triangle” (i.e., when the insured, owner, and beneficiary of the policy are three different people).
Has your health improved since purchasing this policy?
If so, consider applying for reconsideration of your underwriting class to see if you can get better rates on your existing policy. Be aware that you will need to go through the underwriting process again, and it is generally only allowed if you’ve had the policy for a while (e.g., greater than one year).
Has your health worsened since purchasing this policy?
If so, consider ways you might increase the death benefit and/or increase the length of coverage (e.g., guaranteed insurability rider, paid-up additions dividend option, additional premiums, term conversion rider, etc.), and be sure to take advantage of your waiver of premium rider if disabled. If applicable, consider ways you might tap into your death benefit early (e.g., viatical settlement, accelerated death benefit rider, etc.) but be mindful of the effect it may ultimately have on your wealth transfer goals.
Do you need to review any state-specific issues (e.g., amounts exempt from creditors, amounts protected under guaranty association, etc.) related to your life insurance policy?
This checklist was prepared and first distributed by fp PATHFINDER.
This material is intended for general public use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation. This is not an offer to buy or sell a security.
Shore Point Advisors is an investment adviser located in Brielle, New Jersey. Shore Point Advisors is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Shore Point Advisors only transacts business in states in which it is properly registered or is excluded or exempted from registration. Insurance products and services are offered through JCL Financial, LLC (“JCL”). Shore Point Advisors and JCL are affiliated entities.
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