Saul Simon

Todd Lindley knows how important it is to have the right life insurance coverage as part of a long-term financial plan. “When a surviving spouse sits across my desk, that is the moment that shows whether I did my job well or not,” says Lindley, CFP® and Principal at Montesano, Washington-based Lindley Financial Services, which is affiliated with Lincoln Financial Advisors Corp.<br />
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Few things are as important as ensuring that your heirs will be in good financial shape should you die unexpectedly. Life insurance, and the death benefit it pays out, is critical for achieving that peace of mind—albeit one that is often avoided because it elicits undesirable emotions. “Most of us don’t want to think about anything related to a loved one dying,” says Lindley.<br />
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Because of the unwelcome emotional component, some people opt to not review their life insurance policy but it should not be something you merely buy and then forget about. Unfortunately, avoiding the topic can have consequences. In fact, it’s advisable to review your life insurance policy every year during your annual financial checkup, Lindley suggests. <br />
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<strong>Coverage Considerations </strong><br />
How much coverage you need depends on several factors, including your age, number of dependents, and the financial resources you have at your disposal. “Sometimes you’ll see a financial publication say you need eight times your salary for the death benefit,” says Lindley. But general numbers like that can be way off base in individual situations, he cautions.<br />
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Instead, you should sit down with your financial advisor and determine individual calculations. “We actually create a cash flow projection for your surviving heirs,” he says. “It really comes down to a simple function: Resources subtracted from need gives you the amount of coverage you should get.” This may sound straightforward, but the calculation should also factor in Social Security benefits, pensions and any other income your heirs may generate. <br />
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In addition, a number of variables and unknowns can make absolute precision almost impossible, Lindley says. “These projections are out 20 to 30 years, and using one inflationary assumption versus another, or one assumed return on investment versus another, can make a big difference,” he says. “Just a half-percentage adjustment can cause the needed death benefit to change wildly.”<br />
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<strong>Regular Reviews </strong><br />
Frequent insurance policy checkups are vital, Lindley underscores. At the very least, you should revisit your policies and death benefits whenever there is a significant life event, such as the birth of a child, the purchase of a new home or business, or an inheritance. <br />
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For instance, the birth of a child may necessitate a boost in your death benefits because most parents want to ensure that their child will have the resources necessary to attend college and otherwise be taken care of until they reach adulthood. On the flip side, the benefits metric can also change should you come into an unexpected inheritance. “This would likely reduce your coverage needs,” says Lindley.<br />
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Depending on whether you have variable, universal or whole life insurance, there are other compelling reasons to review and update your policy frequently. Variable insurance, Lindley points out, enables policyholders to choose from a finite list of sub-accounts. “Many of these sub-account investment choices can be in the stock market via a fund-type arrangement and therefore are directly impacted by stock market returns,” he says. Because of this, variable insurance needs to be maintained like other investments through rebalancing and other methods. <br />
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On the other hand, whole and universal policies don’t have sub-accounts, so they aren’t affected by the performance of the financial markets. “They are, however, impacted by the interest-rate environment, so you can’t just ignore them entirely,” says Lindley.<br />
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In general, Lindley suggests being conservative when determining how much coverage your family needs. For example, if calculations suggest that your family needs $850,000 in death benefits, he’ll often suggest you get $900,000. “An heir isn’t going to complain if they’ve got too much life insurance, but they’ll sure complain if they run out,” says Lindley.