Evaluating Your Life Insurance: Are You Overinsured?
As a small business owner, you likely understand the importance of having a solid wealth plan, and life insurance is a key component of that plan. However, life circumstances and tax laws change, which may leave you with more life insurance than you need. It’s essential to periodically reassess your insurance coverage to ensure it aligns with your current needs and goals.
Why Reevaluate Your Life Insurance?
Life changes such as divorce, children becoming independent, or shifts in tax laws can impact your life insurance needs. Over time, you might find that you are overinsured, tying up money that could be used more productively elsewhere. Regularly revisiting your insurance situation and stress-testing your coverage can help determine if adjustments are necessary.
Steps to Evaluate Your Life Insurance
1. Assess Your Policy:
When you purchased your life insurance, you were likely given estimates about its future cash value and performance. It’s important to verify if the policy is performing as expected by obtaining an inforce illustration. This document will show if your policy’s cash value and death benefits are on track.
Working with a professional is advisable, as interpreting these reports can be complex even for trained CPAs.
2. Evaluate the Strategy Used to Purchase Life Insurance:
Review the method you used to purchase your policy. Did you pay premiums out of pocket, or did you use borrowed money? Evaluating the assumptions behind your approach is crucial to understanding if your strategy remains viable.
3. Determine What You Need and Want:
Reflect on whether the original reasons for purchasing the policy are still relevant. Consider any new laws or developments that could impact your insurance needs.
Clarify your goals and expectations for the future. For instance, if your policy was initially intended for estate tax payments but is no longer needed for that purpose, you might repurpose it for other needs, such as a buy-sell agreement with a business partner.
Action Steps to Consider
Once you have assessed your life insurance, you have three primary options:
1. Keep Your Life Insurance Policy As Is:
If the policy still meets your needs and goals, you may decide to maintain it as is. For example, if you no longer need the policy for estate tax reasons but want to leave money to your children, continuing to pay the premiums might be the best option.
2. Exit Your Life Insurance Policy:
If the policy is no longer necessary, you could surrender it and take the cash value. Alternatively, consider a life settlement, where you sell the policy to a third party for cash, potentially yielding more than surrendering the policy.
3. Restructure or Trade Your Life Insurance Policy:
Modify your policy to better align with your current needs. This could involve changing premium structures or converting the policy to one that offers more suitable benefits.
The Value of Stress Testing
Stress testing your life insurance can uncover potential issues and ensure you are not overinsured. This process involves working with an expert to evaluate the current policy and identify any adjustments needed. Engaging other trusted advisors in this analysis can provide a comprehensive review.
Conclusion
Regularly evaluating your life insurance is essential to ensure it aligns with your current needs and goals. By stress-testing your coverage and exploring your options, you can make informed decisions that enhance your wealth management strategy.
Ready to optimize your life insurance coverage? Contact us at Diversified Asset Management to ensure your life insurance is aligned with your financial goals.
Robert J. Pyle, CFP®, CFA, AEP®, CEPA®
Diversified Asset Management, Inc.
📞 (303) 440-2906 x 101
📧 rpyle@diversifiedassetmanagement.com
🌐 Diversified Asset Management
For personalized guidance tailored to your unique situation, contact Diversified Asset Management, Inc. at info2@diversifiedassetmanagement.com or (303) 440-2906. Our experts can help you navigate the complexities of business succession and ensure a successful transition.
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Robert J. Pyle, CFP®, CFA, AEP® founded Diversified Asset Management, Inc., in 1996 to provide personalized, comprehensive wealth management services to successful individuals, families, single women, and business owners. His specialty is addressing the complex financial needs of self-employed professionals, corporate executives, and small-business owners. Our disclosure can be found here. The views, opinion, information, and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc. Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting, or tax advice.