Maximizing Life Insurance: Strategies To Boost Your Coverage

Life insurance is intended to provide financial protection for you and your family in the event of unforeseen circumstances. As your life changes, so do your financial obligations, and it's important to ensure your coverage is sufficient. There are several ways to increase your life insurance coverage, including purchasing additional riders, converting to a whole life insurance policy, or choosing a term plan with an increasing cover option. Increasing your coverage will provide enhanced protection for your beneficiaries and ensure they receive sufficient financial support.

Converting a term policy to a whole life policy

There are several reasons why you may want to convert a term policy to a whole life policy. Here are some key points to consider:

Peace of Mind

Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, which can be ideal for covering temporary obligations. However, whole life insurance offers permanent coverage for as long as you pay the premiums, providing peace of mind that your loved ones will always be protected.

Cash Value Accumulation

Whole life insurance policies accumulate cash value over time, which grows tax-deferred. This can be accessed for major expenses or left to your beneficiaries. Additionally, whole life policyholders may be eligible to receive dividends, further increasing the financial benefits.

No Medical Exam Required

When converting a term policy to a whole life policy, you typically won't need to undergo another medical exam or answer health-related questions, as long as it's done within the specified timeframe or before a certain age (e.g., 75). This can be advantageous if your health has deteriorated, as it guarantees coverage despite any changes in your health status.

Long-Term Planning

Whole life insurance is often favoured by those looking to secure their financial future, especially during their golden years. It guarantees a death benefit to your beneficiaries for as long as the policy is maintained, making it ideal for paying final expenses, providing financial security to a surviving spouse, or leaving a financial legacy for children or grandchildren.

Flexibility

Converting to whole life insurance offers flexibility in terms of coverage and premiums. You can decide on the amount of whole life coverage you need and keep the remainder of your term coverage to ensure you're not underinsured. Additionally, you have the option to convert only a portion of your term policy to permanent coverage if that better suits your needs and budget.

Health Considerations

If you experience a serious change in health status, such as a diagnosis of a critical illness, converting your term policy to whole life insurance can be a wise decision. It guarantees a death benefit payout for your family, even if your life expectancy has decreased.

Buying a new policy

Buying a new life insurance policy is a good option if your existing policy doesn't match your coverage needs. You can also increase your coverage by converting your term policy to a whole life policy. However, if you need to increase your coverage, buying a new policy may be the best option.

• Work policy isn't enough: If you have life insurance through your employer, consider whether the coverage is sufficient for your needs. Think about the expenses that are currently covered by your salary. In the event of your death, will the insurance payout be enough to support your family, and for how long? If your work policy only provides basic coverage for a limited time, you should consider increasing your coverage.
• Income increase: If your income has increased, you may want to raise your coverage accordingly. This is especially important if your higher income has led to adjustments in your standard of living, such as more expensive cars, homes, or other purchases. Increasing your life insurance coverage will ensure that these expenses can continue to be covered in your absence.
• Traditional life milestones: Certain life milestones, such as getting married, having children, or buying a home, often lead to increased financial responsibilities. As your life changes and your bills and responsibilities rise, you'll want to ensure that your life insurance coverage is commensurate. For example, if you're married, you'll want enough protection for two, and you should increase your coverage for each child you have. Similarly, if you've purchased a home with a long-term mortgage, you'll want to increase your coverage to help pay off the balance in the event of your death.
• Long-term debt: If you have long-term debt, such as student loans or other significant debts that could saddle your beneficiaries with financial burdens, it's a good idea to increase your life insurance coverage. This will ensure that your outstanding debts can be paid off in the event of your death, reducing the financial burden on your loved ones.
• Partner's employment status: If your spouse or partner is no longer employed, you should consider increasing your life insurance protection. Having two salaries and two insurance policies provides a safety net. If one salary or policy is reduced or eliminated, increasing your life insurance coverage will ensure that you still have a commensurate level of protection.
• Additional financial responsibilities: If you're being relied on financially for new expenses, such as college costs, car loans, or other significant expenses, you'll want to boost your coverage. This will ensure that these expenses can be covered in the event of your death, providing financial support to your loved ones.
• Changes in long-term plans: If you find yourself taking care of or financially supporting someone you hadn't planned on, it may be wise to increase your coverage. Speak with a life insurance expert to determine if this is the right decision for your situation.

When considering increasing your life insurance coverage by buying a new policy, it's important to do an honest assessment of your life, your family, your financial situation, and your future goals. If you can afford to pay for additional coverage, it's worth increasing your protection to provide peace of mind and financial security for your loved ones.

Increasing the death benefit

Many term life insurance contracts are written with a level death benefit, a renewable term, and non-cancelable coverage. While your premiums don't increase as you age, and your coverage remains in force as long as you pay the premiums, your coverage also doesn't increase.

Another type of term coverage renews annually, with premiums increasing each year as the policyholder gets older, while the death benefit remains the same.

Term life insurance contracts with increasing term policies allow you to add to your death benefit by a certain amount or percentage at specified times without medical underwriting. Decreasing term policies, on the other hand, allow you to reduce your coverage and premiums over time.

• Buying big in anticipation of future needs: The younger and healthier you are, the larger the death benefit you can purchase for the same premium. Consider future financial responsibilities, such as having children, starting a business, or taking out loans, and buy more coverage than you currently need to account for these possibilities.
• Purchasing an additional term policy to ladder your coverage: Instead of trying to estimate your future coverage needs, purchase more than one term life insurance contract to align your coverage with your current needs and budget. You can purchase policies with different terms and death benefits, and add riders to some if needed.
• Converting your term policy to a permanent policy: Convert your term insurance to permanent insurance to benefit from lower premiums and the ability to lock in a death benefit for the rest of your life, even if your health declines. However, converting your policy will increase your premiums.

It's important to note that increasing the death benefit on your life insurance policy will likely result in higher premiums. Additionally, some policies may have provisions that allow you to increase your coverage without undergoing medical underwriting, while others may require a medical exam.

Buying big for future needs

The younger and healthier you are, the larger the death benefit you can purchase for the same premium. This is a good enough reason to apply for more coverage than you currently need.

Consider a couple in their mid-20s who just closed on a mortgage for their first home. Both partners work full time and plan to pursue long careers. Their only financial concern is leaving the other with a home they couldn't afford on one income. They agree that the upheaval of selling a home and moving shouldn't be part of the grieving process if one of them dies young. They also have dreams of having children, starting a business, or taking out loans to pursue an MBA. They can foresee scenarios where there would be additional expenses to preserve their family's lifestyle, and their financial responsibilities could multiply. Accordingly, they decide to each buy a 30-year, $1.5 million term policy naming the other as the beneficiary—even though their only obligation right now is a $400,000 mortgage. These term contracts allow them to reduce their death benefit if they decide they want to cut back on their coverage (and therefore, their premiums) later on, which can be much simpler than attempting to add extra coverage in the future.

You can also purchase an additional term policy to ladder your coverage. This means buying more than one term life insurance contract to align your coverage with your needs and, possibly, your budget. For example, instead of purchasing one 30-year policy with a $1.5 million death benefit, you might purchase three smaller policies with 10-, 20- and 30-year terms. The 20-year policy might provide $1 million in coverage to account for the years when you expect to have the largest responsibilities and the least accumulated savings. Meanwhile, the 10- and 30-year policies might each provide an additional $250,000 in coverage to reflect a larger mortgage balance when you're younger and a just-in-case benefit when your children have moved out and you're approaching retirement.

When deciding how much life insurance to buy, consider your financial obligations and whether you want a policy large enough to take care of your loved ones after your death. If you need help, consider reaching out to a life insurance agent.

Laddering your coverage

Laddering your life insurance coverage is a strategic way to tailor your coverage to your changing financial needs. It involves purchasing multiple term life insurance policies with staggered end dates, instead of relying on one large policy. This approach is designed to reflect the reality that most people's financial obligations decrease as they age.

Here's how it works:

How to Ladder Your Coverage

Laddering your life insurance coverage means buying multiple term policies with different expiration dates. For example, you could buy a $250,000 10-year term policy, a $250,000 20-year term policy, and a $250,000 30-year term policy. This would give you $750,000 in coverage for the first 10 years, $500,000 for the next 10 years, and $250,000 for the final 10 years.

You can also stagger the policies over time. For instance, you could start with a 10-year policy, then add a 20-year policy a few years later, and finally, add a 30-year policy further down the road. This allows you to have more coverage when your financial needs are highest and scale back as your needs diminish.

Benefits of Laddering Your Coverage

Laddering your life insurance coverage offers several advantages:

• Flexibility: It allows you to align your coverage with your financial needs at different life stages, ensuring you have the right amount of protection when you need it the most.
• Cost savings: Laddering typically saves money over time compared to buying one large policy. By breaking up your coverage into smaller, staggered policies, you match your insurance to your life stages, which is generally more affordable than holding a single, large policy for an extended period.
• Adaptability: As your financial responsibilities change, shorter-term policies drop off, leaving you with the right amount of coverage and lower costs at each stage of life.

Who Should Use the Laddering Strategy?

Laddering life insurance policies is a cost-effective way to ensure financial protection, but it may not be suitable for everyone. It is ideal for those with stable and predictable financial needs, such as long-term responsibilities like supporting dependents or paying off a mortgage.

On the other hand, if you're uncomfortable forecasting your financial needs decades into the future, a single long-term policy could provide more simplicity and peace of mind. Laddering may also not be ideal for individuals who expect their financial responsibilities to remain high over time, such as those with ongoing financial obligations that won't decrease.

How to Determine the Amount of Coverage You Need

When deciding how much life insurance coverage to purchase, it's important to consider your current financial obligations and future needs. Two common methods to calculate this are:

• The DIME Formula: This considers four key factors: Debt (including funeral expenses), Income (multiplied by the number of years you want to provide for), Mortgage, and Education. You add up these factors to calculate your total coverage needs.
• 10x Income Rule: A simpler approach is to multiply your current annual income by 10 to get a rough estimate of the coverage you need.

You can also use a life insurance calculator to get a more personalized estimate of your coverage needs, taking into account various factors such as age, income, mortgage, and other debts.

Reviewing Your Policies Regularly

It's important to review your life insurance policies regularly to ensure they remain aligned with your changing financial goals. Life circumstances can shift, and policies that worked initially may no longer provide the appropriate level of protection. Here are some key aspects to consider when reviewing your coverage:

• Conversion expiration dates: If your term policy has the option to convert to permanent life insurance, note the expiration date for this conversion.
• Beneficiaries: Update your beneficiaries as needed, especially after significant life events like marriage, divorce, or the birth of a child.
• Term policy expiration dates: Keep track of when your term life insurance policies expire to plan for future coverage needs.
• Policy riders: Review any riders, such as waiver of premium or accidental death benefits, to ensure they still align with your situation and needs.
• Premium costs: Evaluate whether the premiums are still affordable, and consider adjusting your strategy or reducing coverage if needed.

By staying on top of these points, you can ensure your life insurance plan continues to meet your financial goals and provides adequate protection for your loved ones.

Frequently asked questions