Life Insurance: Reviewing Your Policy And Making Changes

Life insurance is an important financial safety net for you and your loved ones. It's not a one-time purchase, and reviewing your policy regularly is crucial to ensure your family has adequate financial protection. Life insurance reviews are recommended annually or after significant life events like marriage, divorce, having children, or changes in health and finances. These events can impact your coverage needs and beneficiaries. It's also essential to consider the type of policy, such as term or whole life insurance, and whether it aligns with your long-term goals. Reviewing your life insurance policy ensures that your coverage is up-to-date and provides peace of mind for you and your family.

Reviewing beneficiaries

When reviewing your life insurance policy, it is important to check your beneficiaries and make any necessary changes. Here are some detailed instructions and considerations to help you through the process:

Identify Your Beneficiaries

The first step is to identify who your beneficiaries are. Beneficiaries are the people or entities that will receive the benefits from your policy after your death. Typically, beneficiaries are spouses, children, or other family members. It is important to ensure that the beneficiaries you have listed are still the individuals you want to receive your benefits.

Review and Update Information

Once you have confirmed your beneficiaries, review their information to ensure it is up to date. Check that their full legal names, mailing addresses, email addresses, phone numbers, dates of birth, and Social Security numbers are all correct. Providing detailed and current information will make it easier for insurance companies to verify and locate your beneficiaries, facilitating a faster payout.

Inform Your Beneficiaries

It is recommended to inform your beneficiaries that they are named in your life insurance policy. This helps ensure that they are aware of their entitlement to benefits and can take the necessary steps to claim them. If you prefer not to inform them directly, you can designate a trusted advisor, such as an accountant or attorney, to be aware of this information.

Review and Adjust Benefits

Consider the benefits that each beneficiary will receive. Reviewing your policy regularly allows you to make any necessary adjustments to ensure your wishes are carried out. Life changes, such as marriage, divorce, or the birth of a child, may impact how you want your benefits distributed. You can also choose to add or remove beneficiaries as needed.

Consider Special Circumstances

When reviewing your beneficiaries, keep in mind any special circumstances that may apply. For example, if you have minor children as beneficiaries, consider setting up a trust to manage the benefits on their behalf until they reach the legal age of consent. Additionally, if you intend to name a beneficiary who requires lifelong special care, consult an attorney to establish a special needs trust to avoid impacting their eligibility for government assistance.

Seek Professional Advice

If you have any concerns or require further guidance, consult a financial professional or attorney. They can provide advice and ensure that your intentions are accurately reflected in your policy. This is especially important if you have complex arrangements or need help navigating tax considerations.

Changes in health

Impact on Dependents and Coverage Amount

If you have children with special needs who require lifelong care, you may want to increase your coverage to ensure they are financially supported once you're gone. Similarly, if your partner has high healthcare costs that you're currently covering, you may want to increase your coverage to help them manage medical bills in your absence.

On the other hand, if your children have become financially independent and moved out, you may consider decreasing your coverage, unless you have new costs, such as a new mortgage, that you want to help cover.

Lifestyle Changes

Certain lifestyle changes that positively impact your health may qualify you for lower premiums. For example, if you have stopped smoking since taking out the policy, some insurers may offer a reduced premium for all future premiums. Similarly, if you are no longer involved in high-risk sports activities, some insurers will consider reducing your premiums.

Health Improvements and Premium Reduction

If your health has improved since you took out your life insurance policy, you may be able to reduce your premiums by presenting medical evidence. For instance, if you have given up smoking or had surgery to reduce weight, you can approach your insurance company to re-rate your policy, potentially saving you thousands of dollars in policy costs.

Health Decline and Conversion to Permanent Coverage

Conversely, if your health has declined and you have term life insurance, it is prudent to check if your policy can be converted to permanent coverage. This conversion is often possible with little or no medical evidence required.

Living Benefits and Premium Returns

Many life insurance policies today offer riders that provide a range of living benefits, such as low-cost long-term care and chronic illness choices. In some cases, if you do not access these living benefits, you may even be eligible for a return of some of the premiums paid.

Changes in finances

Changes in your finances can be a good trigger to review your life insurance policy. Here are some scenarios that warrant a review:

You change jobs or get a promotion

If your income has increased significantly, you may want to increase your coverage so your family can maintain their current standard of living after your death. On the other hand, if you experience a job loss, you may need to revisit your life insurance coverage to ensure the death benefit is still suitable.

You take out a new loan

If you've recently financed a new car or house, review your life insurance to make sure the death benefit is large enough to cover paying off any new debts you share with your loved ones.

You pay off your house, car, or other debt

If you significantly reduce the amount of debt you owe, you may need less coverage.

You have a financial windfall

If you receive an inheritance or significant income increase that can help supplement your dependents' income if you die, you might not need as much coverage.

You can no longer afford the premium payments

If your finances have changed and you can no longer afford the premium payments, you may need to adjust your coverage or find cheaper coverage.

You want to incorporate a cash value policy into your financial plan

You may decide that you want to add a cash value policy to your comprehensive financial plan. In this case, reviewing your current policy and making adjustments or switching policies may be necessary.

Changes in family

Life insurance is an important part of financial planning for you and your family. It is recommended that you review your life insurance policy annually, but it is also a good idea to do so after major life events. Here are some circumstances in which you should review your life insurance policy, with a focus on changes in your family:

Getting Married or Divorced

Changes in marital status often mean changes to your beneficiaries and who is depending on your income. This is a good time to review your beneficiaries and consider adding or removing coverage. For example, if you have recently married, you will likely want to ensure your partner is named as a beneficiary on your policy. On the other hand, if you are going through a divorce, you may want to remove your ex-spouse as a beneficiary.

Having or Adopting a Child

Your children rely on you for financial support, and life insurance can help ensure they are taken care of in the event of your death. While it can be complicated to name minor children as beneficiaries, you should consider increasing your coverage as a child will increase your potential costs if you were to pass away.

Financially Responsible for Aging Parents or Loved Ones

If your parents or other family members have become dependent on your income, make sure you have enough coverage to take care of them in case you pass away.

Your Partner Stops Working

If your spouse or partner stops working to stay home with the kids or take care of a sick relative, and you become the sole breadwinner, your income becomes even more critical to replace if you were to pass away unexpectedly.

Your Children Become Financially Independent

If your children are no longer dependent on you, you may consider decreasing your coverage. However, if you have new costs, such as a new mortgage, you may want to maintain or increase your coverage to help cover these expenses.

Receiving a Large Inheritance or Lottery Winnings

If you have received a large sum of money, you might not need as much coverage, as this money can supplement your dependents' income if you die.

Changes in lifestyle

Changes in your lifestyle and health can have a significant effect on the cost of life insurance. Here are some ways you can alter your lifestyle to benefit your life insurance policy:

Stop Smoking

Quitting smoking can lead to lower premiums on your life insurance policy. Some insurers offer a quit smoking review, which includes a short medical test. If the test proves that you have stopped smoking, you may be able to qualify for lower premiums in the future.

Reduce Risk

Insurers may consider reducing your premiums if you are no longer involved in high-risk sports activities, such as rock climbing, offshore diving, or hand gliding.

Improve Your Health

If you adopt positive habits that improve your health, you may be able to qualify for new life insurance rates. For example, lowering your blood pressure, having surgery to reduce weight, or rectifying other medical issues can positively impact your health and may lead to lower insurance rates.

Review Your Policy Regularly

Life insurance policies should not be a "set and forget" purchase. It is recommended to review your policy annually or after major life events to ensure that your coverage meets your current needs and circumstances. Regular reviews can help you determine if you need to increase or decrease your coverage or switch to a different type of policy.

Frequently asked questions