Your financial plan relies on a lot of assumptions. Some of those assumptions include how the markets will perform over the coming decades, what inflation and interest rates will do, and what your cash flow will look like between now and the end of your life. Adverse events during your lifetime can challenge certain of these assumptions and change your needs. As a result, life insurance can be a crucial piece of your financial plan, since it is a tool to protect your future earning potential and your family’s cash flow in the years ahead.
At RVP we don’t sell life insurance, but we do provide guidance to our clients on how much insurance coverage makes sense to protect their quality of life today and their financial legacy down the line. In this article, we will explore how life insurance can be used by high-net-worth individuals and families. It is important to review your needs and insurance coverage regularly as clients can be under-insured, over-insured or simply have inefficient policies to accomplish their goals.
The Basics
As we mentioned, life insurance primarily serves as an income replacement tool during your active working years. If you pass away prematurely, the death benefit helps ensure that the financial commitments tied to your earnings continue to be met. For many clients, this includes things like their mortgage, education costs, and the day-to-day quality of life for their family. For this reason, some life insurance is beneficial for many clients.
If you determine that you require insurance, it is important to evaluate the type of policy that best suits your needs. There are two key types to consider:
Term Insurance
Term life policies provide straightforward protection for a specified period. They are ideal for those looking for high coverage at an affordable rate, catering well to the needs of families with young children or significant mortgages. Term insurance does not accrue any cash value.
Permanent Insurance
On the other hand, permanent insurance covers you for life. The cash value component can grow over time and is accessible in some circumstances. These policies can be helpful when it comes to creating a tax-efficient legacy or charitable giving plan.
Managing Outdated Policies
If you no longer need the income replacement benefits of a policy that you purchased many years ago because your wealth is higher or your needs are less, you may be able to consider a tax-free 1035 exchange into other products, such as Variable Universal Life, which could potentially give you better access to the cash value and offer growth potential in the cash value.
Tax-Free 1035 Exchanges
A 1035 exchange allows you to swap your life insurance policy for a new one without incurring the income tax bill that might be due if you surrender the policy. This can be particularly beneficial if your current insurance plan no longer resonates with your financial goals. An eligible 1035 exchange into a Variable Universal Life (VUL) policy might broaden your investment options and potentially enhance your cash value growth over time.
Hybrid Policies and Long-Term Care Solutions
Many clients are concerned about the rising cost of long-term care. Hybrid life insurance policies that provide early access to the death benefit to cover long-term care expenses offer an innovative solution. For clients with sizable life insurance policies, such hybrids could present a more cost-effective alternative to traditional long-term care insurance.
We can review your current policies and provide advice
Like any aspect of your financial plan, it can be helpful to review your life insurance policies from time to time. In doing so, make sure that the coverage still matches your life and look for the following opportunities:
- Review if any lower-fee products exist.
- Review whether you may need a higher or lower death benefit.
- Review if there are any riders you can add or drop to better customize your policy, or to save on expenses if you have unneeded provisions.
- Review if you can use dividends to reduce or eliminate your premiums, rather than purchasing additional insurance if it is not needed.
These are just a few of the projects we’ve been working on with our clients to ensure that all areas of their financial lives are covered, not just their investment portfolios. We can provide advice on coverage levels and connect you with knowledgeable agents who can find the best solution for your unique goals.
If you have questions or would like to explore the appropriate role of life insurance in your financial plan, we invite you to reach out to our team.
Relative Value Partners merged with Kovitz Investment Group Partners, LLC as of August 2024. All Insights are opinions of the author as of the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete, and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.