Will Your Whole Life Insurance Expire Before You Do?
When an individual or couple seeks life insurance, they inevitably face the question: Whole or term life insurance? Each type can play an important role in an overall estate plan.
Whole Versus Term Life Insurance
Whole life insurance and term life insurance have three primary differences: cost, time limits, and cash value.
Term life insurance tends to be cheaper than whole life insurance. That’s because term life, true to its name, is in force for a defined term of years – often 10, 20, or 30 years. Although term life insurance will pay according to the policy’s provisions, the policy does not gain value over time. The holder of a term life policy cannot borrow against its value.
Those who purchase whole life insurance policies intend the policy to last as long as they do. Whole life policies also gain value over time, allowing the holder to borrow against that accumulated value. For this reason, they tend to be pricier than term life insurance policies.
When Whole Life Insurance Policies Fall Short
Some farmers have purchased whole life insurance as an integral part of their estate/farm succession plan. Frequently, the children who are not actively involved in the family farm business (non-farming children) are the intended recipients of those insurance proceeds. In the parents’ quest to be fair and equitable among the children, the insurance proceeds often pass to the non-farming children to eliminate or reduce the payments that the farming children would otherwise make for the family farm assets they are receiving. Some of our clients, who have purchased whole life insurance as part of their farm succession plan, however, are discovering, unexpectedly, that their insurance may lapse before their deaths. If the policy lapses, there are fewer assets to distribute at their deaths. In the most extreme cases, there are no assets to distribute to the non-farming children.
In other words, a whole life policy can be subject to changes that undermine its ability to do the job for which it is purchased. Policies purchased in periods of high interest rates, for instance, face vulnerabilities when interest rates and investment returns drop. Inflation can eat at the value of a whole life policy’s payout, resulting in fewer assets – in real terms – for beneficiaries. Over time, the policy may no longer generate enough value to cover its own expenses. The policy becomes a liability instead of an asset.
Why It Pays to Review Your Estate Plan With an Experienced Attorney
It’s easy to think of your whole life insurance policy – and your estate plan – as a “set it and forget it” proposition. In fact, regularly reviewing both life insurance and your overall estate plan is essential to a household’s financial health.
Your life insurance affects your finances in several ways. First, the premiums are a regular expense in your budget. Second, the cash value of the policy is a store of value and source of liquidity. Finally, the policy’s payouts play a key role in your estate plan.
Evaluating these factors as part of a total estate plan review every five years can help you ensure that you are on track financially. You will gain a clearer picture of your current financial situation, address upcoming needs, and preserve value for your descendants.
One way to review your whole life insurance is to request an “in-force illustration” from your insurance agent or the insurance company. An in-force illustration provides projections about the policy’s future financial health, including its premium and cash value levels.
This information can help you and your experienced estate planning attorney determine whether the insurance policy continues to play its intended role in your overall estate plan. If you learn that your policy is projected to mature or expire at a certain age, you can make any needed adjustments to your estate plan to ensure all your children are treated fairly.
To learn more about using life insurance as part of your estate plan, speak to the attorneys at the Hazen Law Group today.
