How To Adjust Your Life Insurance Payout

Life insurance policies are not one-size-fits-all. You may need to adjust your death benefit or select another type of policy that better suits your needs. While you can change your life insurance policy, there may be some limitations or restrictions depending on the type of changes you want to make. For example, you can decrease the amount of your term life policy, but you cannot increase the amount of coverage without purchasing an additional policy. Alternatively, you can speak to your current provider to see if they can offer a policy that meets your needs.

Changing your life insurance amount after a big life event, such as having a child or getting married

Life insurance is an important consideration when it comes to planning for the future, especially after experiencing significant life events such as getting married or having a child. These milestones often prompt a re-evaluation of one's financial situation and priorities. Here are some key things to keep in mind when thinking about changing your life insurance amount in these circumstances:

Getting Married

Marriage is considered a "Qualifying Life Event," which means that you can make changes to your insurance coverage or enrol in a new plan outside of the regular enrollment period. It's a good idea to review your insurance policies to ensure they align with your new financial situation and shared responsibilities. Here are some specific considerations:

• Update your beneficiaries: Review and update the beneficiaries on your life insurance policies, including those you purchased yourself and those provided by your employer. Typically, your spouse will become the beneficiary, but in some cases, they may need to waive their right to a life insurance payout if you want to designate someone else.
• Explore combined coverage: Look into the possibility of combining insurance policies with your spouse to reduce costs and streamline coverage. This is especially relevant for car insurance, where insurance companies often offer discounts to married couples and provide lower rates.
• Consider increasing coverage amounts: Marriage often brings new financial goals and responsibilities. You may want to increase your life insurance coverage to protect your spouse's financial stability if something happens to you.
• Review deductibles: With two incomes, you may want to increase your deductibles to reduce insurance premiums. This includes reviewing deductibles for auto, homeowner's or renter's, medical, and dental insurance.
• Compare health insurance plans: Compare your and your spouse's health insurance plans to determine if it makes financial sense to share a plan or keep separate coverage. Consider monthly premiums, annual deductibles, in-network options, and additional benefits offered by each plan.

Having a Child

Having a child is another significant life event that warrants a review of your life insurance coverage. Here are some things to consider:

• Assess your coverage needs: Evaluate your short-term and long-term financial goals and responsibilities to ensure your coverage is sufficient to protect your family's financial stability. Consider factors such as income replacement, mortgage payments, college tuition, and other expenses.
• Purchase additional coverage: If needed, you may be able to increase your coverage by purchasing an additional policy or utilising a conversion feature offered by some life insurance companies, which allows you to convert term insurance to a permanent policy.
• Consider child life insurance: While not common, some parents choose to purchase child life insurance, especially if their child contributes a substantial income to the household. This type of insurance typically has low coverage amounts and builds cash value over time.
• Add a child term rider: Instead of purchasing separate coverage for your child, you may be able to add a child term rider to your existing policy, which can sometimes be converted to permanent coverage later.
• Review your beneficiaries: Ensure that your beneficiaries are up to date and reflect your current wishes, especially if you want to include your child as a beneficiary.

Life insurance is a complex topic, and it's always a good idea to consult with a financial advisor or insurance professional to help you navigate these decisions and ensure your coverage meets your family's unique needs.

How to reduce the amount of cover

Yes, it is possible to reduce the amount of cover on your life insurance policy. However, it is important to first review your cover and calculate if it is still enough to meet your needs. You can then compare life insurance policies to find the best cover for you. Here are some ways to reduce the amount of cover:

• Choose an adequate sum assured: Opt for a suitable term insurance policy with the right sum assured. While buying term insurance, it is important to strike a balance between adequacy and affordability. Consider crucial parameters such as your future working years, dependents, and lifestyle needs when deciding on the sum assured.
• Buy term insurance at a young age: Buying term insurance at a younger age can help secure a lower premium. The younger you are, the lower the premium payable.
• Compare policies before buying: Compare term insurance policies to understand which plan suits your needs the most. Check the benefits offered by different plans in relation to the quoted premium to find the most affordable option.
• Avoid unnecessary add-ons: Additional riders or add-ons to your base policy are available at an extra cost. Opt only for those add-ons that you truly need and can afford to help reduce the premium.
• Buy term insurance online: Online term plans are generally less costly compared to offline plans as they save on distribution costs and agent commissions.
• Reduce the term of your policy: Opting for a shorter policy term can help lower the cost of your life insurance.
• Let your cover level fall year by year: Choose decreasing term life insurance where the payout reduces over time. This type of cover is designed for repayment mortgages where the owed amount falls over time, and the corresponding life insurance payout decreases as well.
• Improve your health and lifestyle: Adopting healthier habits can make you a lower-risk insuree, leading to lower premiums. This includes giving up smoking, reducing alcohol consumption, losing excess weight, and getting fit.

How to increase the amount of cover

Increasing the amount of cover on your life insurance policy is a straightforward process, but it's important to first review your cover to ensure it's still suitable for your needs. You can then shop around to compare life insurance policies and find the best cover for you. Here are some steps to follow to increase the amount of cover on your life insurance policy:

Review your cover

Calculate if your current cover is still enough for your needs and, if not, think about how much life insurance cover you need. This is the amount you will need to tell your insurer about.

Compare life insurance policies

Check if your current insurer can offer you a better deal. Contact them, usually by phone, and answer questions about your current situation. Not all policies can be changed, so check this with your insurer.

Shop around

If you can't get a better deal with your current insurer, shop around to find a new insurer that can offer you the cover you need. You can then sign up for the new policy and contact your old provider to let them know you'd like to end your policy.

Start your new policy before ending your old one

Make sure your new policy is agreed and set up before you cancel your old policy, so that you're not left without cover. Check the price of your new premium before you sign up and be aware that there may be a waiting period before you can claim on a new policy.

Choose a registered insurer

Make sure you choose an insurer that is registered with the Financial Conduct Authority (FCA). This means that if the insurer goes bust, up to £85,000 of your money is protected.

Be aware of fees

Make sure you're aware of any fees, how much they are, and how they're applied. Some life insurance policies, such as whole-of-life policies, allow policyholders to access their life insurance money early in certain situations, but there may be fees for this, known as 'surrender charges'.

Consider a 'top-up' policy

If you don't want to change insurers, you could buy a second insurance policy to cover any shortfall in your current policy. This is known as a 'top-up' policy and will cover the amount missing from your first policy. However, you will need to pay premiums on more than one policy.

Change the type of policy

You might be able to change the type of life insurance policy you have. There are several different types of life insurance available, including mortgage life insurance, term life insurance, and whole-of-life insurance. Speak to your insurer about changing the type of policy you have, as this could change your premium.

How to change the way you pay your premium

Changing the way you pay your premium for life insurance is a straightforward process. Firstly, you need to review your cover and calculate if it's still enough for your needs. You can then compare life insurance policies to check if yours is still the best for you, at the right price. If you want to stick with your current insurer, you will need to contact them, usually by phone, and answer questions about your current situation. Not all policies can be changed, so check this with your insurer.

If you want to switch to a new insurer, you can sign up for the new policy and then contact your old provider to let them know you want to end your policy. Remember to check the price of premiums before you move, as life insurance can become more expensive as you get older. It is also important to ensure that your new policy is active before cancelling your old one, so that you are not left without cover.

In terms of payment methods, most life insurance companies accept premium payments via bank transfer or check. Some insurers allow you to use a credit card, but only for your first payment or with an added fee. It is worth noting that cash is never accepted as a form of payment.

Cancelling your existing cover

Cancelling your existing life insurance cover is a significant decision that can arise due to various reasons. It is important to understand the process to ensure you don't face unexpected consequences. The process depends on the type of policy you have and the length of time you've held it. If you have a term life insurance policy, the process is generally straightforward. One effective way to cancel is by stopping your premium payments. If you have automatic payments set up, you may need to call the insurance company to end these transfers. Many policyholders set up automatic payments through ACH (automated clearing house) transfers or electronic fund transfers (EFT).

It is a good idea to call your insurance carrier directly to confirm the cancellation and ensure there are no further obligations on your part. Most insurers have forms or online options to finalise the cancellation process, making it quick and convenient.

If you have a permanent life insurance policy, such as whole life or universal life, the process is more complex due to the additional elements involved. Permanent life insurance policies are designed to provide lifelong coverage, typically with a cash value component. When you surrender a permanent life insurance policy, you may receive a payout from the cash value, but this is often reduced by surrender charges, especially if you haven't held the policy for many years. In the early years of the policy, surrender fees can significantly reduce or even eliminate the cash value you receive.

If you have any outstanding policy loans, your surrender value will also be reduced by the balance (unpaid loan plus accrued interest). Additionally, if you made any withdrawals, this permanently reduced the available cash surrender value. Cancelling a permanent life insurance policy is a significant decision with potential financial implications, so it's crucial to fully understand the consequences before proceeding.

• Financial changes or constraints: If you can't afford the premiums, cancelling your life insurance may be your only option. Before giving up your policy, consider cutting down on non-essential spending. Evaluate your insurance portfolio to ensure you are not overpaying for insurance in one area, causing financial strain in another.
• Policy no longer meets your needs: Your goals and financial situation may have shifted since purchasing your policy. Perhaps your family is no longer dependent on your income, or you've paid off a mortgage earlier than expected.
• Finding a better-suited policy: If you can afford higher premiums, you may switch from a term policy to a permanent policy, which has a cash value component, allowing you to increase its value over time. However, life insurance policies tend to yield subpar returns compared to other investments, so carrying a policy may not be worth the cost if you have no financial obligations.

Before cancelling your existing cover, consider the following alternatives:

• Lower your coverage amount: If you're struggling to afford your insurance premiums, consider lowering your coverage amount. While a reduced amount may not be enough to subsidise your dependents' needs if you pass away, some coverage is better than none.
• Use your cash value to cover premiums: You can use the cash value you've earned on your permanent policy to cover your premiums until you can afford them. Ensure your cash value doesn't go below the minimum required amount (usually equal to your premium amount and any other policy fees) so your policy doesn't lapse.
• Retake your medical exam: If your health or lifestyle has improved since your last medical exam (e.g., quitting smoking or avoiding high-risk hobbies), you may qualify for a lower-risk class and more affordable premiums.
• Consult an insurance expert: Cancelling a permanent life insurance policy can result in paying taxes on the surrender amount. If your policy doesn't suit your needs, you can exchange it for a new policy without incurring tax liabilities on investment gains through a 1035 exchange. Consult a tax professional, as it is a complicated process.
• Selling your policy: There are two ways to sell your life insurance policy: a viatical settlement and a life insurance settlement. A viatical settlement involves selling your policy to a third party when you have a terminal illness and a life expectancy of less than two years. A life insurance settlement is for those without a terminal diagnosis but who are over 65 and in reasonably good health and no longer need or can afford the policy. In both cases, the policyholder forfeits their right to a death benefit.

Remember, cancelling your life insurance cover means your beneficiaries won't receive a death benefit if you pass away. This could leave your dependents without financial support for daily expenses, debt, and other financial obligations. Therefore, it is essential to carefully consider your options and consult an expert before making any decisions.

Frequently asked questions