Reviewing and Paying Your Life Insurance Needs

When you buy a house, you know that after paying the mortgage for 25 or 30 years, you’ve paid it off and you’re done making mortgage payments. Not so with life insurance. As a general rule, you pay the premiums for as long as you live. But there are exceptions to the general rule.

You may be able to buy certain insurance that only requires a limited number of payments. For example, the old government life insurance retirement for veterans that my father bought after World War II was a 20-year paid-up policy; after 20 years, you were finished making payments.

Today, depending on the type of life insurance policy you have, you can arrange to have a paid-up plan. This is also called a vanishing premium. You pay premiums long enough to build up enough cash value in the policy that can be used to continue paying the insurance element for as long as you live. The premium payment depends on the performance of the policy. I have one that projected an 8-year period, but with the low interest rates, it’s more like 12 years before the policy becomes self-sustaining. And even after you’re in a position to stop paying premiums, you may have to ante up again if the policy doesn’t make enough to continue carrying the death benefit.

It’s critical that you not overlook or delay premium payments. If you do, your policy could lapse. Most companies give you a 30-day grace period (if your premium is late by say 10 days, you’re still insured). They will notify you (or someone you designate to receive such notice) that the premium is late. However, once the grace period passes and policy lapses, it’s not a simple matter to reinstate it; you basically have to start from scratch.

Now that you know how to go about getting insurance, let’s see what you need. While you were raising a family, you probably took on life insurance to protect your family by providing a fund to replace the wages you’d never be able to earn if you died early. Many people, maybe you, too, never look at their coverage once they’ve put it in place. They simply pay the premiums forever. At your stage in life, this could be a big mistake. If you’re over insured, you’re missing the chance to earn more on your money. If you’re under insured, you’re exposing your family to potential disaster.

It’s important to look again at why you’re carrying life insurance and whether the kind and amount you have are right.

Replacing income. Proceeds from life insurance (and the income that can be earned on them) can be used to provide income for your family. If you’re still working and dependent on your earnings, your spouse may need the insurance proceeds to replace your lost wages when you die.

Financing estate costs. Whether or not you’re working, you may have sizable assets that will cause your estate to owe taxes-federal and possibly state estate taxes. There’s no federal estate tax if the size of your estate (other than property passing to your spouse or to charity) is under the exemption amount in effect for the year you die.

Of course, even if you’re under the federal limit, your estate may still owe death taxes to your state.

Trusts that are used to own insurance on your life are irrevocable trusts (you can’t change your mind once they’re created). Since the trusts, and not you, own the policy, your estate doesn’t include the policy. Typically, these trusts are used to own second-to-die insurance (explained later in this chapter). Using life insurance trusts in estate planning is discussed more thoroughly later.

There may also be administrative costs (attorney’s fees and selling costs) to settle your estate. Life insurance can be used to provide the necessary cash to meet this contingency.