Financial Spring Cleaning: Life Insurance Audit

So much of the maintenance of our personal finances falls into the category of “boring, but important.” But when it comes to life insurance, our subconscious resistance to the topic is further compounded because, unlike retirement or career planning, your pot of gold at the end of the life insurance rainbow is actually a headstone.

We don’t like to talk about life insurance for numerous reasons, but especially because it requires acknowledgment of the fragility of our own lives, and of those we love. But considering the extremely high probability of our mortality, life insurance is one of the most important topics to include in your financial spring cleaning.

To ensure your life insurance planning is on track, ask and answer these five questions:

  1. Where are your policies?Yes, it’s important to know where your original, physical policies are (and it’s a good idea to communicate that information to the Personal Representative in your will). But you also want to ensure that all of the policies you think you own are, indeed, active.

Many life insurance companies only send a single annual statement, so if your automatic draft setup changed or you missed your bill in the mail, you might have surrendered your policy without even knowing it. (If this turns out to be true, talk to your agent about the possibility of having the policy reinstated before you get a new one.)

Once confirming the location and standing of your policies, consider holding onto the single annual statement–and proof of premium payments, for good measure–for each policy throughout its lifetime for your records.

  1. What type of policies do you have?There are vast differences in the genre and performance of life insurance policies. If you have a group policythrough your company benefits, the chances are good that it is periodically renewable, meaning the rates rise every five years or so. This is one of several reasons that the corpus of your life insurance plan should not be dependent upon group policies. (Unless your health disqualifies you from receiving reasonable rates for individually underwritten life insurance policies, they will typically be your best bet.)

If you have term life insurance, keep an eye on the length of the term. Yes, your premiums should remain stable for the entirety of the term, but many term policies continue beyond the term but with cost-prohibitive premiums. If you sense that you might need life insurance longer than you expected originally, as reflected in your current term policy, it may be wise to apply for a new policy to extend the term. Just be careful not to surrender the original until the new policy is in place.

If you have a permanent life insurance policy–like whole life or variable universal life–it’s possible that your premiums can change, and it’s very likely that the “cash value”–the savings feature inside of the policy–has changed. If you really want to keep a close eye on the performance of the cash value, ask your agent for an in-force illustration and compare it with the original illustration you received when you took out the policy. (Just be careful–some agents start sweating when you ask for these.)

Jarid King of First Element Insurance recommends collecting in-force ledgers every two-to-three years to determine the following:

  1. How the policy is performing based on the current premium structure.
  2. How much premium should be paid for the policy to reach maturity.
  3. How the policy compares to current market options.

But the vast majority of households don’t require permanent life insurance policies. These policies are often sold–inappropriately and with very high commissions–as investment vehicles, but unless you’ve maxed out several more efficient and effective savings vehicles (like your emergency reserves, 401(k)s, IRAs, Roth IRAs, 529 plans and liquid investment savings, to name a few), it’s likely that you should be buying term life and focusing your investment efforts to filling those other buckets.

(Permanent life insurance is most appropriate for business owners funding buy/sell policies and very wealthy families using life insurance to lessen the bite that estate and inheritance taxes might take out of their abundant nest eggs.)

  1. Who are the beneficiaries of your policies?These are the folks whose stress over your loss can be eased with effective life insurance planning. You need to have at least a primary beneficiary in order to have a life insurance policy, and they must have an “insurable interest”–a degree of financial dependence–in your livelihood. This primary beneficiary may change over time–if they pass on before you or you get a divorce, for example.

In addition to your primary beneficiary, it’s highly recommended that you have a contingent beneficiary or beneficiaries. The typical scenario would place your spouse as the primary beneficiary and the kids as the secondary beneficiaries, but it is imperative to sync your life insurance beneficiary designations with your estate planning. Depending on your plans, it may be wise to name a trust or your estate as the contingent beneficiary.

  1. What is the death benefit of your policies?This is the amount paid to the aforementioned beneficiaries listed in the policy if the insured–presumably you, sorry–leaves this earth. The death benefit is the reason you purchased life insurance in the first place, to help compensate for your lack of economic influence on the household in the case of your passing.

The amount you need may rise with your standard of living or the growth of your family, but it will hopefully fall as you near retirement if (BIG IF) you’ve saved sufficiently. Once you’re financially independent, you don’t need any life insurance (but it’s possible you may still want some).

Not sure how much you need? You can conduct a thorough life insurance needs analysis, but a simple multiple of your income–like 15 times–will be appropriate in most instances, especially because life insurance is almost as much art as it is accounting.

  1. Are any actions necessary?Now that you’ve completed your life insurance round-up, we posit the most important question: Are any changes necessary? The answer for many is “yes” and at least “maybe” for most.

The agent who sold you the policies will likely be a big help, but that person’s conflict of interest is meaningful enough that I must suggest talking first to a knowledgeable fee-only financial planner who receives no commissions and acts as a fiduciary in all circumstances.

As you answer these five questions, however, let’s not forget the most important question to answer when considering life insurance: Why?

The answer: If anyone is dependent on you financially, you likely need life insurance.

This commentary originally appeared April 11 on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

Save Social Security for Later, When You Need It Most

I think we’ve been looking at Social Security retirement benefits all wrong. In the long-running debate about when to take Social Security — as early as age 62 or as late as age 70 — the focus has been on timing your claim to get the most money, in total, out of the social safety net.

This is a circular argument that will never be fully decided until the Social Security recipient in question dies. So let’s shift the focus from the question “How do we get the most out of Social Security?” to “How do we get Social Security when we need it most?”

Simply put, you’re more likely to run out of money at the end of retirement than at the beginning.

Behavioral science explains why we are all so prone to preferring money today over tomorrow. It’s called “hyperbolic discounting,” and behavioral economists plead that we meaningfully overvalue money now, unfairly discounting money later.

But the risk of making less money in your early retirement years is dwarfed in comparison to the risks of longevity and inflation in the latter stages of retirement. And the probability you will outlive your money meaningfully decreases if you wait to take Social Security.

Prove it!

Let me show you through an example that, while hypothetical, is no doubt close to reality for many.

We’ll consider three couples, the Earlies, the Fullers and the Laters. Each couple:

  • Retires with $1 million in tax-deferred retirement savings.
  • Has an identical 50 percent equity, 50 percent fixed-income portfolio.
  • Has a pretax retirement income need of $90,000 per year.
  • Will supplement their Social Security income with the retirement savings necessary to fulfill their income needs.
  • Includes one household member who will receive the maximum in Social Security benefits and one who will receive 50 percent of the maximum.

The only difference is that the Earlies retire and begin taking Social Security retirement benefits at 62, the Fullers at 67 and the Laters at 70.

This hypothetical case study is designed to result in an academic probability that each couple will not run out of money, and applies more than 3,000 iterations of randomized historical market returns for the respective retirees’ portfolio allocations.

Then, we show the likelihood that each couple will have at least one dollar left in retirement savings at the end of four different time periods — 20, 25, 30 and 35 years into retirement.

Therefore, if you see a result of 47 percent in the 25-year column of the table below, it means the couple represented still had at least one dollar left in their retirement savings at the end of that period in nearly half of the thousands of iterations run. In other words, that couple had a 47 percent chance of not running out of money 25 years into retirement. Statistically, a probability of 85 percent or better is favorable.

The findings

What did we find? If you die early enough — within 20 years of your retirement date — you have a reasonably good chance to outlive your money regardless of when you take Social Security. The Earlies hit the golf course fully five years before the Fullers, but it’s not clear that they’ve suffered for it at the 20-year mark.

At 25 years, however, there’s a greater than 50 percent chance the Earlies have run out of money and now must ask their kids to pay their greens fees. At 30 years their probability of solvency has dropped to 30 percent, and at 35 years they’re likely relying on their reduced Social Security benefit for all of their income.

Why do the Earlies fail? Because in order to meet their income needs with a reduced Social Security benefit, they put too much pressure on their portfolio to pick up the tab. They were forced to take an effective withdrawal rate of 5.62 percent in their first year of retirement.

How do the Fullers look? Pretty good. Buoyed by a Full Retirement Age (FRA) Social Security benefit and beginning with a reasonable 4 percent effective rate of withdrawal from their portfolio, at 20 and 25 years into retirement, they’re in the 90 percent-plus range. But if they plan on seeing their faces on a Smucker’s jar, their probability of success declines to 67 percent when they’re 35 years into retirement.

As you’d guess, the Laters are solid. Because of their increased Social Security benefit, they require only a 3.26 percent portfolio withdrawal rate in year one. Statistically, they ride off into the sunset and should have the funds to test the boundaries of science in their pursuit of longevity.

If you suspect you’ll die early — and have lineal or medical justification for that belief — you might justify taking Social Security as early as you can (although a lesser-earning spouse could still benefit from your higher benefit when you’re gone). And please forgive the inherent insensitivity in this analysis, which presumes the Earlies, Fullers and Laters all have a choice in taking their benefits at various points in time. Many retirees don’t, and if you need to retire and take early Social Security for any number of valid reasons, of course you should do just that.

But if you hope to have a longer retirement — 30 or 35 years, especially — your chances of not outliving your retirement savings improve greatly if you delay Social Security. Waiting is like purchasing longevity and inflation insurance for what will hopefully be a long and prosperous retirement.

This commentary originally appeared January 1 on CNBC.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE