Insurance plays a crucial role in a comprehensive wealth plan, but it’s possible that you may have life insurance that is no longer necessary. Life changes, like divorce or children becoming financially independent, can reduce the need for insurance. Changes in tax laws, such as an increase in the estate tax exemption, may also leave you with more insurance coverage than required. Regularly revisiting and “stress testing” your insurance coverage allows you to assess if your current setup aligns with your needs. This analysis could potentially free up significant funds that are currently tied up in insurance for more productive uses.

Revisiting your wealth planning

Regularly revisiting your wealth plan, as practiced by the Super Rich, is crucial for optimal financial management. A key focus is often placed on reviewing life insurance portfolios to ensure coverage aligns with current needs. Adjustments are recommended to avoid excess coverage and the risk of being oversold on life insurance, particularly for affluent individuals whose circumstances may change significantly over time. This dynamic approach to financial planning helps optimize resources and protection.

Evaluating your life insurance

There are three steps to evaluating your current life insurance situation.

Step #1: Evaluate Your Policy Performance.

Start by assessing your insurance policy’s actual performance compared to the initial estimates. Obtain an inforce illustration, a detailed report outlining the policy’s key financial aspects. This analysis will reveal whether the policy is meeting expectations in terms of cash value and death benefits. Interpreting these illustrations can be complex, so it’s advisable to collaborate with a financial professional to navigate the information, draw informed conclusions, and determine any necessary next steps.

Step #2: Evaluate the strategy used to purchase life insurance.

Many times, people pay life insurance premiums out of pocket. Other times, they might use a wealth planning strategy. One example is premium-financed life insurance, which uses borrowed money to buy a life insurance policy. The point: Not only does the life insurance policy itself need to be evaluated, but so do the underlying assumptions behind the approach to finance it.

Step #3: Determine what you need and want.

Determining the ideal life insurance death benefit is challenging. Begin by reflecting on why you initially purchased the policy and whether those reasons still hold. Assess changes in circumstances and stay informed about external factors such as new laws. Then, evaluate your future needs, considering goals like leaving money to heirs and expectations for the future, such as estate tax exemptions. Seek guidance from a professional life insurance advisor to align your goals with your current policy options. For example, a policy no longer required for estate tax payments could potentially be repurposed for a buy-sell agreement with a business partner.

Action steps to consider

Assuming you find that your current insurance isn’t firing on all cylinders or that it simply no longer reflects your current situation (and the situation you’re likely to find yourself in down the road), there are action steps to consider taking.

1. Compare alternatives. You have three big-picture choices:

Keep your life insurance policy as is. This might mean you keep paying the premiums. For some, this makes sense. Say, for example, you determine you no longer need your policy for estate tax reasons, but you also decide the money could go to your children. In that case, staying the course could be the best route.

Exit your life insurance policy. If your assessment reveals you do not need the money inside the life insurance policy, you can surrender the policy and take the cash inside. Another possibility: a life settlement, where you sell the policy to a third party for cash. This approach can potentially give you more money than you could get by surrendering your policy.

Restructure or trade your life insurance policy. You may be able to modify your life insurance policy. This could entail reducing the death benefit if you decide you’ll need less money, thereby having the policy fully paid up. Or you might convert your current life insurance policy into another life insurance policy with different characteristics that are more appropriate for your needs and goals.

Once you see the various possibilities side by side, you can make a more informed decision.

2. Take action. If you have chosen to keep your life insurance policy as is, there is nothing more to do. Otherwise, you will probably need to instruct your life insurance agent or another professional to implement your decision—whether it is to exit your life insurance policy, restructure it or trade your life insurance policy for another one.

Final Thoughts

If you suspect you may no longer need as much insurance or are uncertain about being over insured, it’s wise to conduct a “stress test” on your situation. Stress testing helps ensure you’re not misled by professionals and can uncover mistakes made in the past. For example, people often overbuy insurance due to faulty assumptions about the future, such as business growth. To effectively stress test your life insurance, engage with an expert in the field who can interpret in-force illustrations, explore alternatives to your current policy, and involve other trusted advisors in the analysis.

The information in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Integrated Financial Partners does not provide legal/tax/mortgage advice or services. Please consult your legal/tax advisor regarding your specific situation. This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory service. Past performance is no guarantee of future results. An investment in any security involves significant risks and any investment may lose value. Refer to all risk disclosures related to each security product carefully before investing. Investment advice offered through Integrated Financial Partners, doing business as Konvergent Wealth Partners, a registered investment advisor.