By: Vanessa McElwrath, CFP®, CPA, Wealth Management Partner
Tidying up is so in right now, thanks to organizational guru Marie Kondo. Unless you have been hiding under a rock for the past few months, you too have probably heard of her new Netflix show which features people whose lives are transformed after learning her techniques or “KonMari” method for organization and declutter. And while I’ll leave the whole-house cleaning advice to her- if you peaked in my closets you would see why- I’d like to offer some suggestions for “Marie Kondo-ing” your financial picture starting with your life insurance policies.
I will be the first to admit that the thought of life insurance doesn’t necessarily “spark joy” for many of us, but there is an element of Marie Kondo’s approach to organizing that is relevant. After all, organizing has become so attractive and popular because it offers the possibility of control. So one way to take control of your life and the hereafter is to organize your life insurance and legacy plan.
Here’s how to “Marie Kondo” your life insurance needs:
- Organize your policy information and documents.
To start, it’s a good idea to keep original policies on hand but this isn’t super helpful if no one else knows where to find these documents. You want to make sure you actually communicate the relevant details of your policies and where to find them to the appropriate people, such as your spouse or your personal representative in your will. Make sure your wealth advisor also has a copy on file.
And just because you bought a policy at one point in time doesn’t necessarily mean that it is still active. Even by just accidentally missing a payment, you could have inadvertently surrendered your policy. Check to see that your premium payments are being paid on-time and from the right account.
- Understand what kind of policies you have.
Like a wardrobe, life insurance policies come in all different shapes and sizes. For the vast majority of households, a simple term policy will be sufficient. With a term policy, you essentially “rent” the life insurance benefit for a specified period of time through stable premium payments and hope you will never need it. After the term period is over, the policy will lapse or you may have the option to continue the coverage but usually at much higher and often cost-prohibitive premium rates.
Overall, it’s important to periodically revisit the years remaining on the policy. If your plans change and you anticipate that you might need the policy for longer than the remaining years left, it may be wise to apply for a new policy.
If you find yourself with a permanent life insurance policy, such as whole life or variable universal life, it’s very likely that the details of the policy will be much more complex and difficult to digest. Unlike term life policies, permanent policies have premiums that can vary from year to year, and they have a “cash value” or investing mechanism inside of the policy. If you find that you have a permanent policy, make sure you understand the reason why you need this type of life insurance over a simple term policy. Going forward, you should also make sure you set a reminder to review these policies every 2 to 3 years to evaluate the performance of the cash value feature. You will want to compare the in-force illustration with the original illustration you received when you took out the policy and compare it to current market options.
If you don’t understand why you have permanent life insurance as opposed to term life insurance, consider it a red flag. While there are unique instances in which permanent policies are needed (i.e. buy/sell agreements for business owners or for estate tax purposes), these policies are too often sold inappropriately with very high commissions. They are often touted as great investing vehicles though there are many other more cost effective options such as liquid savings accounts, brokerage accounts, 401ks, IRAs, and 529 plans. A wise person once told me that permanent life insurance policies are like a tire inflator with a spatula attached. Sure, you may need both, but do you really need them together?
- Consider the death benefit level.
It’s also very important to periodically revisit the death benefit amounts that your life insurance coverage provides. Perhaps a $1M life insurance policy was sufficient when you first sought the coverage as a young family of three when it was just you, your spouse, and one child. That may no longer be the case if you are now a family of 6, with one parent working outside the home, and a sizeable mortgage. On the other hand, you don’t necessarily want to be worth more dead than alive. Having too much coverage only seems to serve your insurance broker. It’s a delicate balance and no “right” answer exists, but a good ballpark figure is around 10-15 times your annual income. If you are not sure how much you need, you can also work with your financial planning professional to conduct a thorough life insurance needs analysis.
Along with the death benefit, you should review and understand any potential riders or the “bells and whistles” you may have on your policies. Common riders can include long-term care benefits, additional death benefits due to accidental death, or guaranteed renewal provisions. You should evaluate the benefits of each rider and only buy or keep the ones best suited for you and your family.
- Review your beneficiaries.
Make sure you know who you have listed as your beneficiaries on all of your policies. It’s imperative to update after major life events such as marriage, births, deaths, and divorce. And it’s important to remember that like retirement accounts, life insurance death benefits are paid directly to named beneficiaries, not necessarily according to instructions in your will. Furthermore, it’s generally advisable to keep your beneficiaries in the know and to give them the peace of mind that you have planned for the economic impact your passing may have on your loved ones.
Now that you have taken some steps to organize, understand, and take control of your life insurance needs, consider any necessary follow up actions. It may be worthwhile to engage an outside advisor to help you tackle any follow up actions and to implement a process to consistently and systematically review on a go-forward basis. And while thinking of the possibility of death is never an easy subject, it is imperative-particularly if anyone is dependent on you financially.