Reviewing Your Insurance
Reviewing your financial plan on a regular basis
is a sound wealth management practice and helps ensure you remain on
course to meet your financial goals and objectives.
important part of your financial plan, your insurance portfolio should
have a thorough and objective assessment every five years, or more
frequently if there has been a significant change in your family
situation or within your business structure. A comprehensive insurance
review evaluates whether proper protection is still in place and
considers the following:
- Amount of coverage
- Type of coverage
- Cost of coverage
- Cash value of the policy
- Ownership of the policy
- Beneficiary designations
Amount of Coverage
insurance is typically used to create a source of immediate capital
when it’s needed the most. For example, to replace lost income, offset a
tax liability or pay off debt upon the death of an individual or
business owner. However, as individuals and businesses transition
through different phases over time, so can the need for insurance.
insurance review can ensure that proper coverage continues to be in
place – to address the right risks – and can provide recommendations on
how to re-purpose existing insurance to address new or emerging needs.
Type of Coverage
can be purchased on a term or permanent basis; each of which addresses
different types of risks in your financial plan. Term insurance
typically has a built-in price increase every "term” and a set expiry
date. Permanent insurance, on the other hand, provides coverage for the
insured’s lifetime and can have a cash value component to the contract.
insurance initially purchased to cover a debt or mortgage may be kept
in place to fund a child’s university education and, eventually, to
cover a capital gains tax liability resulting from death. As your needs
change over time, the decision between term and permanent coverage will
also change. Sometimes it will be more efficient to use a permanent
insurance policy to fund term insurance needs.
an existing insurance portfolio can mean converting a term insurance
policy into a permanent policy. An insurance review can recommend
strategies for transitioning existing coverage that’s no longer needed
and address new needs.
Cost of Coverage
ongoing cost of insurance coverage should be appraised regularly. Term
insurance can often be renewed after the initial coverage period has
expired, but at a higher price. A healthy individual may actually be
better off providing new evidence of his/her good health and applying
for new coverage at a lower premium. A cost benefit analysis can be
performed on your insurance policies to ensure that premiums are in-line
with the market, based on up-to-date personal circumstances and pricing
trends in the insurance industry.
Cash Value of the Policy
cash value of a permanent life insurance policy can be used to fund the
insurance coverage at the time when the policyholder decides to suspend
the annual premium payments. For example, an insurance policy could be
funded over a 15-year period in such a way that the cash value at the
end of 15 years is sufficient to support the insurance coverage without
any further premium payments. This means that the cash value is critical
in order to keep the coverage intact.
The cash value of a
universal life policy is an investment that must be actively managed.
There are a variety of investment options to choose from – ranging from
fixed income to equity-linked options. The policyholder manages the cash
value component of the policy by changing the investment mix or adding
more money to the policy.
A whole-life contract credits the
policy’s cash value component with an annual dividend which the
insurance company declares annually. The policyholder of a whole-life
contract can only manage the cash value component by adding more money.
Ownership of the Policy
owner of the insurance policy has control over the policy and the
obligation to pay the annual premiums. The ownership of the policy may
be changed if the current owner no longer needs the coverage. For
example, a parent might buy an insurance policy on their child’s life,
and later transfer ownership of the policy to the child when the child
is older and has financial responsibilities of his/her own. Changing the
ownership of an insurance policy is a fairly
process. However, it is considered a disposition of the contract, and
the existing owner may realize taxable income as a result of the change
should also be given to the fact that the last named beneficiary is
entitled to the insurance policy’s death benefit. If the policyholder
changes the beneficiary of the policy, the new beneficiary designation
cancels the previous one. A beneficiary designation in a Will is
considered dated at the time the Will is signed and can override a
policy designation, if the Will is dated later. Contingent beneficiary
designations should be considered for those situations where the primary
beneficiary might predecease the life insured.
Ensure You’re Properly Protected
purpose of an insurance review is to ensure that your insurance
portfolio continues to provide protection to meet your ongoing needs. By
proactively completing an insurance review, issues and concerns can be
addressed and corrective action taken.
We can recommend a BMO
Nesbitt Burns Estate and Insurance Advisor who can help evaluate all
aspects of your insurance portfolio, assess the effectiveness of the
policies you have in place, and recommend solutions to mitigate any
unintended objectives and resulting outcomes.