10 Ways To Reduce The Cost And Maximize The Value of Your Life Insurance
I. INTRODUCTION
Life insurance can be a very cost effective asset to reduce family and business financial risk due to death. It can also be a very useful form of investment diversification on an after tax basis to create cash for unavoidable liabilities that occur at death or could be accelerated by death. Examples include estate taxes, business buy out obligations, bank debt, business leases, and debt guarantees.
To maximize the after tax value and minimize the cost of life insurance, life insurance policies must be reviewed and managed regularly, just like any other group of dynamic investments, to make sure you have the right life insurance to meet your current needs, both cost effectively and tax effectively.
You need to ask the right questions and obtain accurate, understandable answers, always in writing, so you can make good decisions. The premiums for some policies have increased, and there may be additional premium increases in the future. If you are in good health, now is the time to evaluate your life insurance.
The following ten questions will be a helpful guide in this evaluation process.
II. OUR TOP 10 WAYS TO REDUCE THE COST AND MAXIMIZE THE VALUE OF YOUR LIFE INSURANCE
#10 Know the purpose of your life insurance today and what may be your life insurance needs in the future. These purposes may be different than the purposes that were identified five or more years ago when existing policies were purchased.
Questions: What are the purposes of your business and personal life insurance today? Are there potential uses for life insurance that you may encounter in the future (e.g. estate tax planning) that should be factored into your planning today?
#9 Determine the appropriate amount of life insurance. Too much life insurance is a waste of money. Too little life insurance is inadequate protection for your family or business.
Questions: How much life insurance is needed today? Is this amount likely to go up, down or stay the same over the next few years?
#8 Determine the duration of your current and anticipated future business and personal life insurance needs. You need to determine if your life insurance is “if I die” (temporary) or “when I die” (permanent).
Question: How long should the business or personal life insurance continue?
#7 Make sure your existing life insurance answers the questions in #8-10, or determine what changes need to be made to have the correct amount and type of life insurance consistent with your life insurance objectives and cash flow parameters.
Questions:
Are your term life insurance premiums guaranteed level for the needed time period or will your term insurance premiums increase dramatically while coverage is still needed?
How important are guaranteed level premiums? (term insurance or universal life insurance with no lapse guarantees)
How important is cash value as an “investment” or to pay future premiums? (whole life, some universal life or some variable universal life insurance)
Is it better to pay lower premiums and have less cash value? (term insurance or universal life insurance with no lapse guarantees)
Is it better to pay the premium every year, or pay a higher premium for a shorter duration? (prepay the premium)
For estate planning purposes, is a single life or second-to-die policy better?
#6 Review your life insurance periodically to make sure it is cost effective for your present life insurance purposes.
Questions:
Is your life insurance with a cost effective and financially strong life insurance company?
Does this life insurance company offer the type of life insurance you need more cost effectively than other quality companies?
Has the policy been issued with the best available insurability category to obtain the best value? (rated vs. non-rated; smoker vs. nonsmoker; impact of build tables and family health history)
#5 Make sure your life insurance is tax effective and that the ever-changing tax rules are being followed correctly.
Questions:
Do you have the proper ownership and beneficiary provisions to meet your current objectives?
Do the business life insurance beneficiary designations avoid income tax traps?
Does the business own life insurance on a controlling shareholder that will place the life insurance in the shareholder’s estate for estate tax purposes?
Do you own life insurance personally that will be in your estate when the death benefit should be removed from the estate?
Do you have personal life insurance payable to a non-spousal beneficiary that could subject some or all of the death benefit to estate taxes at your death?
Are you reporting any business-owned life insurance implemented after August 17, 2006 on IRS Form 8925 with the business tax return?
#4 Make sure that you are making maximum use of potential life insurance policy guarantees for future policy flexibility and predictability.
Questions:
Is your term insurance guaranteed convertible to permanent insurance with no health questions or other insurability questions?
Is it convertible for the full level term period? (usually 10, 15, 20 or 30 years)
What is the maximum age for conversion? (usually age 65, 70 or 75)
Does your universal life or variable universal life insurance have a guaranteed premium for a guaranteed death benefit?
If so, how long does the guarantee last and what needs to be done to maintain the guarantee so you do not outlive the guarantee?
If not, is it cost effective and desirable to rewrite non-guaranteed insurance to a guaranteed death benefit, either with the policy paid-up now or with future guaranteed premium payments?
#3 In some situations, life insurance may be a good after tax investment on a multigenerational basis.
Questions:
What is the after tax internal rate of return at death at various ages of the insured?
Does this make sense as a multigenerational investment, and is it affordable by the children, a trust, or as part of a parental gifting strategy?
#2 Life insurance can be a multigenerational investment to help maximize investment diversification, help match assets with potential future liabilities, and create liquidity at the insured’s death without market timing issues.
Questions:
Is it your desire to pass assets to children, grandchildren, or heirs in future generations?
Could you have an estate tax liability? If so, can you estimate how much this tax liability is likely to be, both now and closer to life expectancy?
Does it make sense to have some small portion of your total assets in an investment that does not correlate with the U.S. stock or bond market?
Does it make sense to have an investment that will be completely liquid (cash) and completely tax free at your death without any market timing issues, especially if cash could be needed to offset estate taxes and other debt obligations?
Recommendation:
If the answer to most or all of these questions is yes, we recommend that a family consider having 1-5% of its current assets allocated to permanent life insurance. This formula will provide a significant amount of permanent life insurance assuming the insured is in good health when the policy is issued. This life insurance can be funded with a single premium payment or annual premium payments. If the death benefit and premiums are guaranteed by a leading life insurance company, the only variable is the date of death.
#1 Review your life insurance with a knowledgeable life insurance advisor every 1-2 years. Life insurance advisors are generally not compensated by commissions for this review process, so you may need to initiate the review. All reviews and recommendations should be provided to you in writing and retained in your records. This makes it easy for you to refer back to prior reviews, provide information to your other advisors (CPA, attorney, financial advisor), and track the performance and trends in your life insurance portfolio.
Questions:
Do you have a written summary of your business and personal life insurance policies?
Have you reviewed your life insurance needs and objectives in the last 1-2 years?
Have you reviewed the adequacy of your life insurance to meet your needs today?
Do you have a current in-force illustration on every cash value policy?
Do you understand your in-force illustration and has it been compared with prior illustrations by you or your advisor so you can see the trends in your policy performance?
Note: Almost every cash value policy that is non-guaranteed is under performing original and prior in-force illustration projections because of continuing very low interest rates. What are the implications for your policies?
Will permanent life insurance policies insuring you, family members or business associates “die” before the insured dies due to underfunding resulting from continuing low interest rates?