You may have purchased life insurance years ago and never looked back. Rich Ramassini, director of strategy and sales performance of PNC Investments says that’s a big mistake.
“Life is dynamic,” he says. “Some of the reasons people have life insurance is to replace income or to fund goals that you expect to fund if you are living and working. But when you die, that income goes away and so does the money to fund some of those goals.”
Ramassini has five questions every person should ask about their life insurance coverage:
Do I have the right type of coverage?
There are two types of life insurance: term and permanent. Ramassini says with term insurance, there is an even exchange. You pay a premium and if you die within a certain period of time, a death benefit will be paid out. He notes that once this type of insurance expires, it gets more expensive as you get older. Permanent life insurance typically provides both a death benefit and a cash value. Part of the premium will go to the cash account, while another part will go to a death benefit. The cash value can be invested in different ways. But unlike term life insurance, permanent insurance does not expire as long as you keep paying the premiums. Ramassini says you should take into account your health when deciding which plan is right for you.
Am I paying a fair price?
Ramassini says it’s better to purchase life insurance when you are younger. The premiums are more reasonable because your risk of dying is lower. Premiums are based on actuarial tables, which calculate risk. Actuarial tables take into account longevity and other factors.
“Many people that have insurance haven’t looked at it in five, ten, fifteen years or more,” he says. “People are living longer. The actuarial tables have changed and the policies may be more affordable. Many people find that they can either keep the same level of coverage they have and pay a lower premium. Or they can keep paying the same premium and get additional coverage because the numbers work more to their favor.”
Do I have enough coverage?
Ramassini says when it comes of life insurance, the biggest mistake people make is believing what they have at work is enough. Employers will often provide a group life insurance policy as part of their benefits package. The policy will likely be some kind of multiple of the employee’s salary. He says workers often don’t take the extra step to find out if that coverage is sufficient.
Ramassini says there are five broad categories why people choose to purchase life insurance:
Pay off debt: You may want life insurance to pay off some of your debt, such as your mortgage, student loans, credit cards or car loans.
Fund future needs: It may be a goal for parents to save for their child’s college education. Mom and dad may be contributing to a 529 plan and relying on those contributions to take place over the course of their lifetime. Ramassini says life insurance can help cover those future expenses.
Income for survivors: Ramassini says when purchasing life insurance, most people focus on replacing the income they earn from their job. He says many people don’t take into account the value of a spouse that stays at home. Don’t forget about the costs associated with childcare and running a home. The surviving spouse would have to find a way to replace that income.
Pay off your final expenses: Unfortunately, it’s not cheap to die. Your funeral has to be paid for. Money may also be needed to pay for things you would want to happen based on your wishes. Without life insurance, Ramassini says your loved ones will end up stuck with the bills.
Leave a legacy: Many people want to leave their families in a better place than they were before. Ramassini says life insurance allows some people to do that.
“Think about all of those various factors and how they apply to you,” he says. “When you do the calculation and compare it to the life insurance you have and the death benefit proceeds, often times there’s a gap.”
Is my policy at risk of lapsing?
Holders of term policies are required to pay their premiums either monthly or annually. If you don’t pay your premiums, you don’t get the benefit. Ramassini says consumers should make sure their premiums are up to date and their policy is current. Permanent life insurance has a cash value and death benefit inside the policy. When the cash value gets big enough and is generating dividends within the policy, some people will let the dividends in the policy pay the premiums. Be careful: your policy runs the risk of lapsing if your cash value and dividends aren’t enough to pay the premiums.
Does my life insurance support my objectives?
As your circumstances change, Ramassini says it’s important to reevaluate your need for life insurance. If you pass away after your children are done with college, you won’t need to fund any educational needs. If you recently paid off your home, your survivors won’t need insurance money to pay off the mortgage. As we continue in our careers, gather assets and decrease our debts, he says we can often fulfill any needs with existing assets or other resources. That means our need for life insurance may go down over time.
“Life insurance is an important part of proper financial planning,” Ramassini says. “If you are not factoring in life insurance into your financial plan, it is incomplete. Do yourself the honor of doing that calculation and understanding your true life insurance needs. Determine if you have adequate coverage for those needs. Review that policy on an ongoing basis to make sure it’s keeping up with the dynamic nature of your life.”
