What Should I Do With All These Life Insurance Policies? Inquiring Lawyers Want to Know
It's not uncommon for an attorney to have a hodgepodge collection of life insurance policies.
August 22, 2019 at 02:31 PM
7 minute read
I work with a lot of attorneys. In my experience, it seems that lawyers are a favorite target client for life insurance sales forces. From what I've seen it's not uncommon for an attorney to have a hodgepodge collection of life insurance policies. So, a very common question is "What should I do with all of these policies?"
To answer this question, let's take a step back and start with a high-level overview of the types of life insurance policies you may have, and then I'll provide a framework for how to decide what to do with these policies.
Term insurance. As the name connotes, a term life insurance policy is insurance that will remain in place for a set number of years, hence the name "term." Typically, a term policy will be for 10, 20 or sometimes even 30 years. One of the most attractive aspects of term insurance is that it tends to be the most inexpensive form of life insurance. Ideally, the annual premiums (the cost you pay to have the insurance) will be fixed ("level term") for the duration of that term. At the end of the term, you often have the option to extend the policy, however it can potentially be expensive to do so, because you are now 10, 20 or 30 years older than when you initiated the policy.
Whole life insurance. As the name indicates, whole life insurance covers you for your whole life. Sometimes it is referred to as permanent insurance. Whole life insurance also builds up cash value inside the policy, so there's an investment savings component to it. Given the cash value buildup feature and the fact that the insurance is permanent, these policies tend to be much more expensive than term insurance.
Now that you know the difference between the main two types of policies, let's explore how you might decide what to do with policies you own.
In my view, life insurance is mostly about risk management and income replacement. Depending on your phase of life and balance sheet, life insurance may or may not be necessary for you. Let's consider three different potential profiles:
The associate with young children. If you're a parent with young children, life insurance can be a key part of your overall financial plan. I tend to favor term life insurance with a high-quality insurance company for this phase of life. If tragedy were to strike, how would your family be able to support their desired lifestyle when your income disappears? Term life insurance can be used to replace the income that would be lost if you were no longer here. Also, given that you are still in the early stages of your career, your budget is far from unlimited, so term insurance works well because it is quite affordable, especially given your relative youth and (hopefully) good health. At this phase of your life, think of life insurance as an inexpensive safety net. Figuring out how much you need takes a little work. I would suggest speaking with an independent insurance professional or independent financial planner who can help you calculate the right amount of death benefit needed.
The partner with college-age children. By this phase of your career, hopefully you've been able to build up some investment assets through 401(k) savings and other investments. If something were to happen to you at this point in life, you would have these assets that your family could fall back on to at least partially fill the income gap. So, your need for insurance could potentially go down during this phase of your life. Assuming you still have an inexpensive term policy or two that you took out when you were younger, you may be inclined to keep those in place, just in case, until the end of the policies' terms. If you have a whole life policy, you may have some flexibility to convert that policy to a new term policy and use the cash value of the whole life policy to pay the premiums. This could free up some cash flow for you as well as you'd be exchanging the sizeable premiums of your whole life policy for likely lower premiums on a new term policy. It's important that you speak with a qualified insurance professional on this topic to make sure any conversion is done properly to avoid any adverse tax consequences. Also, you may think about timing up the length of your term policy to certain milestones such as your youngest child finishing college so that you know there will be money available to meet those financial goals in your absence.
The senior partner with adult children. Once your kids are all grown and fully "launched," your need for life insurance might change dramatically. If you've been a good saver and have built up significant investment assets, you may very well be able to self-insure. This is a great spot to be in. In my experience, I've often had clients who get to this phase of life and find that they no longer need the life insurance they have in place. If you fall into this category and have a term policy or two, you may consider letting that policy lapse. If you have a whole life policy, an increasingly popular strategy has been to convert that policy to a "hybrid" policy that offers long-term care benefits. These policies continue to offer a death benefit but also can be utilized to cover health care costs in the event you need long-term health care later in life.
These are just a few concepts for you to consider. The right decision for what to do with your various life insurance policies is a very personal, customized decision, and there is no one-size-fits-all approach. Before you make any decisions, you should sit down with either an insurance professional or financial planner to look at your exact situation and help you make an educated decision about what is the right path for you and your family.
Important Disclosure:
Investments involve risk and past performance may not be indicative of future results. Balasa Dinverno Foltz LLC investment and wealth management strategy recommendations may not be profitable, suitable or equal historical performance. BDF does not provide legal, tax, insurance, social security or accounting advice. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning. BDF's current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.
Justin Peacock is an owner and wealth manager at BDF, a fee-only wealth management firm based near Chicago with assets under management in excess of $4 billion. BDF serves clients nationwide, and Peacock provides financial planning services specifically tailored to addressing the distinct needs of lawyers. He can be reached at [email protected].
Read more:
Get Your Financial Life in Order, Already
On the Path From New Associate to Retiree, You Should Hit These Financial Milestones
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