Life insurance is a contract between you and an insurance company to provide money to your family if you pass away. It allows you to protect your dependents from the loss of your income if you die.
Further, life insurance is highly customizable. All families have different needs and financial requirements, and insurers continue to offer new products to reflect a perpetually changing society.
However, while every family is unique, families themselves change over time. Just as the policyholder may pass away, babies are born and children get married. Therefore, as your family’s circumstances change, so will your coverage needs.
Given the frequency with which profound life events occur, it’s worth spending some time at the beginning of each year to review your life insurance policy to ensure that it still meets your family’s needs. Read this article to learn how to perform an annual review of your life insurance coverage.
When Should You Reassess Your Life Insurance Policy?
Most people should review their life insurance policy on an annual basis, with the beginning of a year presenting an excellent opportunity to do so. Given the emphasis on finances during tax season, the first quarter sees many giving their finances a thorough inspection. While you consider taxes to your income, property, etc., you may want to pause and determine if the amount of coverage you have is adequate.
Say your children just moved to or graduated college. Given that they are adults and will soon be financially responsible for themselves, will you still need the same death benefit you’ve been paying for since they were in elementary school?
On the other hand, consider a scenario where you just got married and only have a small life insurance policy to cover your burial expenses. While filing your first joint tax return, take some time to determine whether your significant other will be left with any undue financial burden should you unexpectedly pass away. This could be a good opportunity to purchase a new policy with a more comprehensive death benefit.
What to Evaluate In Life Insurance
Evaluating your life insurance needs involves thorough introspection on where you’ve been, where you are, and where you’re going. Make sure to pay special attention to the following:
Your Current and Anticipated Debts
Experts recommend having enough life insurance to cover significant debts, such as a mortgage. Remember that if you pass away with unpaid debt, your family may become legally and financially responsible for it, depending on the type of debt you leave behind. Therefore, take stock of how much coverage is necessary to allow them to live without that financial burden. For example, if you buy a term insurance policy to cover your mortgage, your coverage should match this need. In this scenario, you should purchase a 30-year term policy if you have a 30-year mortgage.
If you find your coverage is inadequate, you can purchase additional insurance to make up the difference. Consider the example of a married individual who buys a 30-year term policy that equals the amount of their mortgage. A few months later, they want additional coverage because their wife is having a baby. That person may choose to contact their agent and buy a new term policy.
In contrast, after paying off a large debt like a mortgage or business loan, you might feel overinsured and are paying excessive premiums. Most insurers let you lower your death benefit to reduce your premium, but strict guidelines exist. Some companies allow only one coverage change during the life of the policy. Others require the policy to be in place for at least a year, and a few insurers make you wait three or four years. Review the terms of your policy to determine whether your insurer allows you to reduce your policy’s value once it’s in force.
Since it’s possible you will have only one opportunity to reduce coverage, you’ll have to be strategic. It’s probably not worth changing your insurance after paying off a small debt, but it would be worth it after paying off your mortgage or selling a business.
Questions to Ask Yourself
Consider the following while evaluating your coverage:
- Did I take out a new mortgage or refinance my home?
- Did I borrow money for a new business?
- Did we sell the house or pay off the mortgage?
- Did I buy or sell a business?
Your Current and Anticipated Financial Dependents
Given that, in most cases life insurance exists to provide financial security to your loved ones, it’s a good idea to evaluate whether the right people are designated as beneficiaries.
Consider whether your household changed with the birth or adoption of children. If you’re responsible for elderly parents, you may want to add enough coverage to pay for their care if you die before them. In contrast, if you divorce or your children become financially independent, you’ll have fewer people who depend on your income to cover their expenses.
To update your beneficiaries, contact your insurance company and submit a change of beneficiary form. This allows you to add or remove beneficiaries or change how the insurer splits the death benefit.
You can also specify the primary and contingent beneficiaries. A primary beneficiary receives a benefit upon your death. A contingent beneficiary collects a benefit if a primary beneficiary can’t accept it or has passed away. For example, a married person might name a spouse as the primary beneficiary. Their children would be contingent beneficiaries and receive the death benefit if the spouse dies first.
Questions to Ask Yourself
Consider the following while evaluating your coverage:
- Did I get married or divorced?
- Did I have a baby or adopt a child?
- Am I responsible for a parent who requires long-term care?
- Has my child become financially independent
- Do I need to change my beneficiaries?
Time Left On Your Term Life Policy
When reviewing your insurance coverage, note when your term life policy expires. When you buy a term life insurance policy, you choose a purchase coverage for a set period, referred to as the term. Term policies are a common form of life insurance, typically lasting from ten to 30 years. If you die during that term, insurance pays your beneficiary. If you do not die during that period, the policy may end, and you no longer have insurance coverage.
If your term policy is ending and you’d like to continue your coverage, you may have the option to either extend the term for a longer period. Further, some term policies allow you to convert your term to permanent coverage, which does not have any expiration dates and does not require you to re-apply for coverage.
Many people enjoy convertible coverage because it allows them to avoid medical exams, otherwise known as underwriting, that can increase their premiums or deny them coverage. Remember that convertible term coverage comes with higher costs and may not be further changed once the conversion is completed.
Another option is to purchase an additional term life insurance policy to meet your current needs. For example, if you have ten years remaining on your mortgage and your youngest child will complete college during that time, consider buying a 10-year term policy with a benefit that covers your remaining mortgage and tuition costs.
Remember that life insurance only gets more expensive as you age, so it’s in your best interest to get life insurance while you’re still young and healthy to get a reasonable rate.
Your Current Life Insurance Riders
Life insurance riders provide additional benefits to your policy for an extra cost. For example, an accelerated death benefit lets you receive part of your benefit while you’re alive if you have a terminal illness.
If you or a loved one may need skilled nursing care toward the end of life, you may want to consider adding a “long-term care” rider to your policy. Like the accelerated death benefit, this rider provides a partial, premature pay-out of some of your death benefit to pay the costs associated with residency in a live-in medical facility.
Finally, review your riders and remove any that you no longer need, such as a child insurance rider that covers funeral expenses if a child dies or a family income rider that provides regular payments to your family if you pass. Often, as children grow up and become financially independent, they may not need the same level of financial support as they would have as children. Therefore, reducing or eliminating these add-ons could help you better enjoy your older years.
Importance of Keeping Your Life Insurance Policy Up to Date
While insurance is essential to protecting your family should an emergency occur, we purchase policies because we need them. Therefore, there is little reason to pay higher premiums for coverage you no longer need. Simultaneously, life is continually changing. Children grow up and start their own families, necessitating protection for their little ones.
Doing annual reviews of your life insurance keeps your coverage up to date to meet your family’s current and expected needs. You can add riders or increase coverage to repay your debts and make sure your dependents will have sufficient income if you die. As your family matures, regular reviews can save money.