The main goal of life insurance is to provide financial support to your family and loved ones after your death, especially those who rely on your income. Over time, your needs may change as your family grows, your dependents get older, or you take out larger loans, making it necessary to increase life insurance coverage.
Additional coverage means increasing the amount of death benefit you leave to your beneficiaries. As a policyholder, you designate the beneficiaries. As long as your policy is active at the time of your death, they will receive a death benefit payout once you pass. This can be used to pay for funeral expenses, settle your outstanding debts, fund a child’s college education, or any other costs.
If planned well, your policy’s death benefit will make it easier for your beneficiary to settle your final expenses and plan for their own future.
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When Should You Buy Additional Life Insurance?
Additional life insurance can be used to increase coverage temporarily, such as to provide protection if you take out a substantial business loan, or permanently, such as to provide a larger death benefit when you have more children.
You can get a temporary increase in life insurance coverage by purchasing an appropriate term life insurance policy or rider. Buying a house is a common reason for purchasing additional life insurance. Some term policies are specifically tailored to last the duration of the mortgage and also decrease in death benefit to correlate with the decrease in loan debt over time. Personal loans, home equity loans, auto loans, and business loans are other common reasons to seek increased coverage.
Additional insurance can keep beneficiaries from losing their home to foreclosure, needing to sell other assets, or having to keep up with large monthly payments if a major income earner has died.
How Much More Life Insurance Do You Need?
There are several things to consider before deciding how much life insurance coverage you need. First, add up your current expenses, including outstanding payments for any debts. These costs could include child care costs, utility bills, and mortgage payments. Then, consider how long you expect these expenses to stay at about the same level.
Some people’s costs could drop as their children grow up and become financially independent — the parents would no longer have a need to factor in child care expenses. Likewise, when you pay off your mortgage, your current and future expenses could be lower.
Those who expect their expenses to drop in the long run can get a lower amount of whole life coverage for their initial policy purchase, but use additional term life policies to provide more coverage in the meantime.
As an example, if your annual income is $80,000 per year, you could have chosen a death benefit of $800,000 when you first purchased a whole life insurance policy. This would give your surviving spouse and children an amount comparable to receiving an additional 10 years of your income after your death. Then later, you may decide to include some money for your children’s college tuition.
However, as most permanent life insurance policies do not allow changes in the death benefit amount, you could purchase an additional life insurance policy to raise the benefit amount to $1.2 million. This can provide a family with 2 kids about $200,000 per child for their education.
Your Options to Increase Life Insurance Coverage
There are several ways that you can increase your life insurance coverage, and understanding your options can help you make a good decision.
Purchase a New Term Life Insurance Policy
Term life insurance provides coverage at a set price for a predefined term. It’s usually 10, 20, or 30 years. This type of temporary coverage works well when your expenses are high and you have dependents who need your income, such as your children or spouse. A term life policy can supplement a whole life policy if you find yourself needing to provide more coverage for a few years instead of a lifetime.
For example, if you take out a 10-year business loan, you could get a 10-year term life policy that specifically addresses the business loan. This way, if you die before the loan is paid off, your death benefit can cover the remaining balance so that your loved ones do not need to figure out a way to cover those expenses without your income.
Another term life policy method to increase coverage is to get multiple policies with different terms, a strategy referred to as “laddering.” As the multiple policies expire, your coverage decreases as well to coincide with your decreasing debts. While this can be useful in some circumstances, keeping track of multiple policies with different premiums can be difficult. If a policy expires before your expenses decrease, your family members may not have the coverage they need. A late payment could also lead to an accidental policy lapse.
In addition, insurance companies may limit the amount of life insurance that a single person can have to prevent overinsurance, even if the beneficiaries are different or if they purchase policies from different companies. This means you may not be able to get a new policy if you already have extensive coverage.
Purchase a New Whole Life Insurance Policy
If you already have a whole life insurance policy and you decide that you need more coverage, you can cancel and cash out your current policy, using the money however you want. This includes using it towards purchasing a new whole life policy with more coverage. Note that the money given to you when you surrender your policy may be taxed.
In addition, when you get a new whole life policy, you may need a medical exam to assess your health. Insurers will also consider your medical history, age, and whether you have a potentially dangerous profession like firefighting to build your risk profile and determine your policy rates. In general, the older you are when you purchase a life insurance policy, the more expensive it is likely to be.
There is also the cash value component to consider. Some whole life policies accumulate cash value over time, similar to a savings account. You can use this cash value to supplement retirement funds or to help pay your premium, or for any other use, such as taking it out as a loan. However, if you take out a loan against your life insurance policy’s cash value, the insurer will subtract the loan amount from the death benefit before paying the beneficiary if you die before repaying all of it. If you surrender an existing policy to purchase a new one, your cash value may be taxed, based on how much is there when you canceled the policy.
Another option with whole life policies is to have multiple whole life policies. There is no law against having multiple life insurance policies. However, just like the risk with laddering term life policies, multiple whole life policies could prove difficult to track, increasing the risk of a missed payment premium causing coverage to lapse.
Convert an Existing Term Life Policy Into Permanent Life Insurance
With many term life insurance policies, policyholders can convert to whole life insurance at the end of or during the term. If you do not wish to change your death benefit, converting usually doesn’t require additional underwriting like a medical exam. However, rates will be calculated at the age you are when you convert the policy; not at the age you were when you purchased the existing term policy.
If you did want to raise your death benefit on an existing policy, you would likely need to undergo additional health evaluation. Not all term policies can be converted though, and some insurers only allow this for a specific period of time, known as the conversion provision.
Increase Your Existing Whole Life Insurance Coverage
Some insurers and plans allow life insurance coverage adjustments, such as universal life insurance, which allows adjustments to premium and death benefit amounts within policy standards. You can also typically add riders to an existing whole life policy for additional coverage, but you may need another medical exam or underwriting. A higher premium is likely as well.
Add Riders to Your Existing Life Insurance Policy (150 words)
A rider, also called an endorsement, is a policy provision that adds benefits or changes to the terms of the original policy. For example, an accidental death rider pays an additional benefit if the insured dies in an accident or within a set timeframe of an accident.
Another common rider to increase coverage is a family income benefit rider, which gives beneficiaries regular monthly payments for a certain number of years instead of paying the money in a lump sum. This offers family members a regular income, and it can help keep your beneficiaries from spending the death benefit money too quickly and ending up in a poor financial situation.