Is Your Life Insurance Policy On Track?

Derek Ferriera and Martin Johnson
Posted: 6/29/2010

Few things are as important as ensuring that your heirs will be in good financial shape should you die unexpectedly. Life insurance, and the death benefit it pays out, is critical for achieving that peace of mind—albeit one that is often avoided because it elicits undesirable emotions. After all, most of us don’t want to think about anything related to the death of a loved one.

Because of the unwelcome emotional component, some people opt to not review their life insurance policy but it should not be something you merely buy and then forget about. In fact, it’s advisable to review your life insurance policy every year during your annual financial checkup.

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Coverage Considerations

How much coverage you need depends on several factors, including your age, number of dependents, and the financial resources you have at your disposal. Some financial publications say you need eight times your salary for the death benefit. But general numbers like that can be way off base in individual situations.

It comes down to a simple function: Resources subtracted from 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 generate.

In addition, a number of variables and unknowns can make absolute precision almost impossible. These projections are out 20 to 30 years, and using one inflationary assumption versus another, or one assumed return on investment versus another, can make a big difference. Just a half-percentage adjustment can cause the needed death benefit to change wildly, which is why it is important to work with an experienced financial advisor.

Regular Reviews

At the very least, you should revisit your policies and death benefits whenever there is a significant life event, such as the birth of a child, the purchase of a new home or business, or an inheritance.

For instance, the birth of a child may necessitate a boost in your death benefits because most parents want to ensure that their child will have the resources necessary to attend college and otherwise be taken care of until they reach adulthood. On the flip side, 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 variable, universal or whole life insurance, there are other compelling reasons to review and update your policy frequently. 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.

On the other hand, 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-rate environment, so you can’t just ignore them entirely.

In general, it is best to be conservative when determining how much coverage your family needs. For example, if calculations suggest that your family needs $850,000 in death benefits, you may want to consider getting $900,000. After all, an heir isn’t going to complain if they’ve got too much life insurance, but they’ll sure complain if they run out.

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Derek Ferriera CFP(r), CLU, CHFC, REBC and Martin Johnson are registered representatives of Lincoln Financial Advisors Corp., a broker/dealer, member SIPC, and they offer investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients.