What To Do After You've Purchased A Life Insurance Policy

Catherine SchnaubeltContributor

RetirementI write about retirement and wealth transfer planning.

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Many factors go into purchasing a life insurance policy that suits your needs. And, like any part of your overall financial plan, your insurance program doesn’t end once you’ve decided on a policy and purchased it. Certain decisions and actions should be taken over the policy’s life, beginning with deciding who should be the policy owner and determining how to fund the premiums, and then monitoring the policy on an ongoing basis to ensure that it continues to perform as expected and meet your objectives.

Ownership Options

You have several options when determining who should own the life insurance policy.

• The policy is owned by the insured. This option is the most flexible for making changes, such as selecting your designated beneficiaries or terminating the policy. Generally, policy proceeds are included in your estate for tax purposes upon your death.

• The policy is owned by a spouse or other family member. This option gives you less control if you are the insured but comes with potential tax deferral benefits. Upon your death, generally, the policy’s proceeds are excluded from your estate but included as an asset in the policy owner’s estate, even if the policy owner predeceases you.

• The policy is owned by an irrevocable life insurance trust (ILIT). With this option, the policy is considered an irrevocable gift to the trust, and the trustee controls the policy. Since policy proceeds are usually excluded from the estates of the insured and the policy’s beneficiaries, the trust provides potential tax and asset protection advantages.

Premium Funding

After deciding who will own the policy, the next administrative task is to determine which method of funding the premiums is most appropriate given your selection and circumstances. You may realize that a combination of strategies works best, which is not uncommon for many life insurance policyholders. To pay your premiums, one or more of the following techniques may be used.

• Pay outright
• Loan the funds to the policy owner or the trust
• Pay with existing trust assets if held in a trust
• Pay with the proceeds from terminating a grantor retained annuity trust (GRAT)
• Split the cost with another party, such as the trustee of an ILIT

You’ll need to make sure your premiums are paid on time to avoid losing your benefits. Additionally, trust-owned policies have unique administrative requirements that may need your ongoing attention.

Periodic Review

Once your policy is in place, it’s important to review it periodically to make sure it still meets your objectives, especially if you experience a life-changing event such as marriage, divorce, or additions to your family. It’s also a good idea to periodically review the financial strength of the insurance carrier for issues that may affect its long-term survival or ability to pay claims.

Since the complexities of insurance providers and life insurance policies can be vast, you may want to consult with a trusted financial advisor or insurance professional when selecting a policy and attending to administrative details. They can also help you monitor the policy and routinely reevaluate its features to make sure it’s appropriate for your personal circumstances and financial goals.

I am a managing director and senior wealth strategist in the Houston office of CIBC Private Wealth Management with over 35 years of industry experience. In this role, I am responsible for the development of integrated wealth management solutions.