Life insurance protects your family from the loss of income if you pass away. It covers your final expenses and helps your loved ones maintain financial goals, such as paying the mortgage or college tuition. In the United States, 44% of households would have significant financial difficulties within 6 months if they lost the primary wage earner. Life insurance can help bridge that gap and keep your loved ones from financial stress.
Variances in your income, health, or family can cause your insurance needs to change. It’s important to review your coverage periodically to ensure your coverage reflects your current situation.
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Reasons to Reassess Your Life Insurance
Life is dynamic and ever-changing, and it’s important to periodically reassess your life insurance policy to ensure it aligns with your current circumstances and goals. The coverage may be outdated if you have not updated your policy in years. You should review your coverage annually to be sure it meets your current and planned life circumstances. Beyond a yearly review, here are some common reasons to consider taking another look at your policy.
When You Need to Change Beneficiaries
Your beneficiaries are the people you name to receive the death benefit from your insurance policy. Most people name one or more people who depend on them financially, such as a spouse or children. Other types of beneficiaries include a trust, a charity, or your estate.
There are a few things to keep in mind if you need to change your beneficiaries:
- Only the policyholder can change beneficiaries on a life insurance policy.
- You can change beneficiaries on an active policy at any time, with the exception being if you named an irrevocable beneficiary (someone who has full rights to the policy’s funds).
- No one can change beneficiaries after you die.
- If you live in one of 9 community property states, you need your spouse’s permission to name someone else as beneficiary if you bought the policy after getting married.
There are numerous circumstances in which you may want to change your beneficiary, including the following:
- Your named beneficiary is no longer financially dependent on you. You may want to make a change if your child was previously your beneficiary and has become a self-supporting adult. It may be more important to you for your spouse to receive the benefit to pay off the mortgage or cover health care costs.
- Your relationship with your beneficiary has changed. You might remove beneficiaries after divorce or if a relationship has become estranged.
- You have welcomed new members into your family. You may want to update your policy when you welcome new children to the family through birth, adoption, or marriage. You can add new dependents to your policy and adjust the proportion of the death benefit your beneficiaries receive.
- Your marriage status has changed. Most people add their spouse as a beneficiary when they get married. If you bought the policy while married to someone else, be sure to update the beneficiary.
Sometimes, you cannot remove a beneficiary from a life insurance policy without their permission. While you can change a normal or revocable beneficiary, you cannot remove an irrevocable beneficiary from a life insurance policy without their permission.
When You May Want to Change Your Coverage
Advisors recommend choosing a death benefit amount based on financial obligations your loved ones would take on if you died. If your circumstances change, so does the amount of life insurance coverage you need. Common circumstances include the following:
- You have significant new debt. Some policyholders buy life insurance to protect their beneficiaries from significant debt, such as a mortgage or a business loan. If you die, your beneficiaries will receive enough money to repay your home loan or help the business survive, protecting your business partner from creditors.
- You have now repaid a significant debt. After repaying a significant debt, you might find you are over-insured. After you pay off a loan, such as a mortgage or business loan, consider canceling term insurance policies bought to cover that debt.
- Your family has grown. When your family grows, the amount of insurance needed to achieve your goals grows as well. The number of dependents in your family increases when you have a baby, adopt a child, or care for elderly parents. Make sure your coverage is enough to cover childcare, tuition, or eldercare.
Other Changes to Consider
Changes in your family and finances are not the only factors to consider during an insurance review. You may also consider new waiting periods, financial impact, and more. Here are a few other practical considerations.
Changing from term to permanent life insurance
Term life insurance ends after a set time, such as 10, 15, or 20 years. When the policy ends, you have no more coverage. Most term life insurance is convertible, meaning you can convert it into a whole life or permanent life insurance policy without going through health underwriting. If your health has declined or you have a serious illness, avoiding underwriting can allow you to get coverage you would not qualify for otherwise.
Even if you don’t convert a term policy, you can purchase permanent life insurance to avoid a lapse in coverage. Permanent policies cost more than term policies but build cash value over time. You can borrow against this value or it could increase the death benefit for your beneficiaries. Buying a new policy requires underwriting, including a health exam.
Your insurance policy’s term is ending
Another option, when you’re near the end of a term policy, is to renew it. Most term policies renew without health underwriting. Your rates go up when you extend a term policy, and premiums increase each year. If you are in good health, you can buy one or more new term policies, and ladder them, so they expire at different times. You’ll go through full health underwriting when buying new policies.
You want to cancel your coverage
A review of your family finances might show that you’ve managed your resources well enough that you no longer need life insurance. Some people may feel confident canceling their policy if they’ve paid off their mortgage, funded retirement, and feel their children are financially independent. Experts advise you ensure you have a financial plan in place for covering funeral expenses and any medical debt that could be left behind before canceling coverage.
Be sure to speak with an experienced insurance agent about the long-term impact (if any) when making changes to your life insurance.
All in All
Life insurance plays a crucial role in protecting your family’s financial future, ensuring they can cope with the loss of your income and cover essential expenses. However, as circumstances change, it’s essential to reassess your life insurance policy periodically. By doing so, you can make sure your coverage remains adequate and aligned with your evolving needs. A regular review allows you to make informed decisions in order to provide financial security for both yourself and your family.