Avoiding life insurance pitfalls

A thorough policy review offers big dividends

All too often, life insurance is a step in the planning process that we simply set-and-forget. Unfortunately, time passes quickly, life circumstances change and a policy that was once appropriate may no longer be suitable for you and your family. If it’s been some time since you’ve looked over your policy, I recommend having a thorough review performed. From then on, an annual review will ensure your life insurance continues to stay in sync with your and your family’s needs.

Over the years, I’ve found that even basic policy information may be forgotten by some of my most meticulous clients. Broaching the following questions is often an eye-opening experience for many clients:

  • Do you know what type of life insurance you currently have?
  • Do you know when the term expires?
  • Can your term policy be converted to whole life?
  • When is the last time you reviewed your policy?
  • When was the last time you reviewed your beneficiary designations?
  • Have you completed beneficiary designations?
  • Is it possible an ex-spouse or someone who has passed away may still be listed as a beneficiary?
  • Is your policy a part of a past employer benefit that has not followed you?
  • Does your policy have a rider on it for long term care expenses?

If you’re not certain of the answers to these questions, it’s time to dust off your existing policy and have it reviewed with your current circumstances in mind.

A complex topic worthy of expert advice

In addition to annual policy reviews, proper planning is critical for your financial well-being and peace of mind. An easy way to ensure your insurance is up to date is to incorporate your policy reviews into your overall estate planning discussions with your trusted advisors. It’s worth a bit of extra time each year, even if you don’t anticipate any changes. These discussions are especially important if you have a taxable estate, which is often more common than you may realize. The proceeds of life insurance owned by you at your death are part of your gross estate. If you live in a state that has a low estate tax exemption, like Massachusetts with a $1M exemption, owning a policy with a $1M death benefit will push you into taxable territory.

Discussing your estate and financial plan with your team of trusted advisors can help you determine what type of life insurance is ideal for your situation. It’s wise to stay current on the pros and cons of the various life insurance products available – and an advisor can quickly share the latest developments with you. How you hold the insurance is another area where a professional can quickly guide you to determine if holding the policy in your name, jointly with your spouse or in trust is appropriate for your particular circumstances.

Understanding the importance of due diligence

I ask you to ponder this fact pattern to illustrate just how critical regular policy reviews can be. Client has an estate north of $30M, which of course will come with a hefty estate tax bill when the time comes (even with our current large federal estate tax exemption). Many years ago client purchased a whole life policy and transferred it to an irrevocable life insurance trust, hoping the proceeds could provide some much-needed liquidity at the time of death and placed it in an irrevocable life insurance trust to remove the proceeds from their taxable estate, a sound planning step, so far …

However once the policy was transferred to the trust they gave it little thought and the trustee of the trust did not keep up with annual policy reviews. Long story short, due to their ages and the current interest rate environment the policy will lapse in three years and purchasing additional insurance is no longer an option. What they thought would be $1.5M to help their loved ones will soon have no value. If regular annual policy reviews and discussions had been conducted, this unfortunate situation would have likely been avoided.

Determine and define your needs

At SVB Private, our team of advisors can help you avoid these types of scenarios and provide you with a high-level understanding of your life insurance options and how they fit into your holistic estate and financial plan. Whether you have young children and are looking to be sure expenses are paid in the event of an untimely death, are interested in providing liquidity in the event of an estate tax bill or are looking to help structure a buy-sell agreement, we have found that many of our clients benefit from some amount of life insurance but the type of policy, amount of death benefit and how the insurance policy should be owned are entirely client specific.

Partnerships designed to set your plan in motion

Once we’ve discussed your planning goals and shared our perspective on your situation to help you determine and define your insurance needs, we will work with you and your insurance professional to identify appropriate life insurance solutions. Partnering with the right advisors is critical at every stage of the process – from the strategy, to the acquisition, to the active monitoring of your insurance policy. If you have questions regarding how life insurance may fit into your holistic wealth and estate plan, contact your SVB Private advisor to get the conversation started.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of Silicon Valley Bank, a division of First-Citizens Bank and First Citizens BancShares, Inc. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.