27 Oct 2011
- Written by Charles Sims Jr.
It’s a good idea to review your life insurance situation on a regular basis. Here are some reasons why your coverage may need to evolve to keep pace with your life.
If your income and/or net worth have increased significantly since you purchased your policy, ask yourself whether your current coverage would enable your survivors to maintain their current standard of living. Major life events such as birth, marriage, death, and divorce may also affect the amount of coverage you need.
Because of inflation, a policy purchased years ago may no longer offer the same level of protection. For example, a 3 percent inflation rate can cut the purchasing power of a death benefit in half in about 24 years, based on the Rule of 72 (72 ÷ 3 = 24 years).
One popular reason for owning life insurance is to provide liquid funds to help heirs pay estate taxes and any other debts. Considering that the estate tax has changed several times over the past decade, it’s a good idea to review your coverage in light of current estate tax laws and your net worth.
As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.
(Charles Sims Jr., CFP, is President/ CEO of The Sims Financial Group. Contact him at 901- 682- 2410 or visit www.SimsFinancialGroup.com. The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.)