When is it time to review a life insurance policy?Sunday 31 May 2020 | Reading Time: 10 minutes
Your life insurance policy isn’t something you should just purchase and forget. Get in the habit of reviewing it every couple of years, and more importantly, whenever you experience a life-changing event. Here are major events that should remind you it is time to review a life insurance policy.
The act of taking your vows or dissolving them means a significant financial change. If you’re getting married, you’ll likely be sharing finances. When you pool your money together and start sharing accounts, it’s a good idea to make sure your policy adequately covers your husband or wife, should you pass away. Here are some important insurance actions you should take:
Update your beneficiaries
A beneficiary is the person, business or trust that receives the death benefit proceeds from your life insurance coverage when you’re gone. Once you’re married, that person should be your spouse. So, it’s important to update your beneficiary a soon as you can. Adding your spouse as a beneficiary is even required in community property states. If you have life insurance coverage through work, remember to update your beneficiary on that policy as well.
Update your retirement accounts
Retirement accounts like IRAs and Roth IRAs, workplace retirement plans such as your Pension, 401(k) or 403(b), and FSA and HSA Flexible spending accounts allow you to designate a beneficiary who will inherit the account should you die.
Update wills and trusts
It’s a good idea to update any wills or trusts you have. Whoever is named beneficiary will have a greater claim than those named in the will. But lining everything up will make the process easier for your loves ones.
If you’re getting divorced, a review of your life insurance policy is a bit more involved. For starters, the type of life insurance coverage you have plays a big role. Your former spouse may be entitled to part of the policy if you have permanent life insurance that accumulates a cash value over time. This means you’ll need to come to an agreement to split the cash value of the policy with your ex. If you have a term or universal life insurance policy that doesn’t accumulate cash value, you may not need to divide the policy. However, even if you have term life insurance, it could get tied up in a divorce. If you have kids with your ex and the divorce requires you to make alimony payments or child support while your ex is the primary beneficiary, you may be required you to keep him or her on your policy.
If your divorce goes through without restrictions on your life insurance policy make sure to change your beneficiaries as soon as possible. If you don’t remove your former spouse, he or she can make a claim on the policy payout when you pass away. This situation could be difficult for your surviving family. Change your beneficiaries by submitting a change form to your insurance carrier.
3. After a home purchase
If you’re planning to purchase a home and take out a mortgage you’ll probably want to take a look at your policy. Buying a home is one of the biggest financial obligations you can have. A life insurance policy is smart financial protection for homeowners, especially couples. A mortgage is a substantial debt, and many mortgage lenders will want to ensure it gets paid even if you pass. If you die before paying off your mortgage, your debt will pass on to your family, and your spouse may not be able to afford to pay for the house on one income. You don’t want your family to have to move and find a cheaper home. Even if they sell the house, there is no guarantee they will make enough on the sale to cover your mortgage. With all of these factors to consider, it may be time to make an update or change to your policy. Options include:
Term life insurance
Term life insurance promises to pay a set amount if you die while the policy is in effect. You choose the coverage amount and how many years the policy should last. Most life insurance companies sell term life. New homeowners can buy a term life insurance policy timed to match the duration of their mortgage.
Mortgage life insurance
An alternative to term life insurance is mortgage life insurance, which has the limited benefit of paying off your mortgage balance if you die. It pays the exact amount of the mortgage balance, and the payout goes directly to the lender, not your family.
Permanent life insurance
A permanent life insurance policy can last until you die if premium requirements are met. It can build cash value over time, but it generally is a lot more expensive than term life insurance.
Make sure to talk to a financial professional about how buying a home will impact your life insurance needs.
4. Having a child or more dependents
A new bundle of joy in the home may mean it is time to review your life insurance policy.
A new addition to your home is another sign that it’s time to examine your policy. You must now care for an additional person-emotionally, physically and financially. It’s important to ensure that your family should be able to support themselves in the immediate aftermath of your death. You’ll also want to help secure their future. Life insurance can help cover many expenses that your spouse may incur for a child when you are gone, from daycare to college.
Term life insurance may be the best option for most families because it’s inexpensive compared to other options. When buying life insurance, you may want to cover the years you’re raising your children, building savings and paying off debts. Both parents usually need life insurance. If you or your spouse is a stay-at-home parent, you should consider coverage because you provide essential services that a surviving parent would have to pay to replace, like child care. To figure out how much life insurance to get, you need to assess your family’s financial needs if you aren’t around.
When you buy a life insurance policy, its generally not advisable to name your small children as beneficiaries even though you want to leave them money. If a beneficiary is a minor when you die, the court will have to appoint a guardian to your children before the life insurance company can pay the benefit. Instead, you may want to consider setting up a life insurance trust, which will hold money and property for your children. You can name the trust as the beneficiary and appoint a trustee, such as your spouse, to manage that trust per your instructions. To set up a trust, speak to a lawyer.
5. Employment change
If you’ve just been offered a new job, received a raise or were promoted, you may want to consider purchasing additional life insurance to better cover your family’s new standard of living. Having a change in employment, whether a new job or promotion, should mean that it is time to revisit your policy and possibly update your life insurance plan. Whether an increase or decrease in household income, the change can have an effect on living standard, and as such should be reflected in your policy.
6. Death of a beneficiary
If your main beneficiary passes away, you should revise your policy to reflect this. Say you purchased a policy when you were younger, your parents may be named as beneficiaries, for example. From that time to present, your parents may have passed on. Should that be, it may be time to review your life insurance policy.
7. Change in health
If you’ve recently made a positive health change you should check out your policy to see if you can update your rates based on your healthier lifestyle. If you’ve become healthier through exercise or changed your habits in a way that significantly impacts your health, you could qualify for new life insurance rates. Lowering your blood pressure, giving up cigarettes, or having surgery to reduce weight or rectify medical issues are examples of changes that might alter your policy. Should you experience any of these changes, you may want to explore your options.
If you are looking to purchase life insurance and you have chronic health problems, coverage could be difficult to obtain. Conditions such as heart disease, high blood pressure or high cholesterol, obesity, diabetes, or depression will raise red flags at most companies. Serious health concerns such as cancer can mean high rates or a denial of coverage.
Fortunately, science is constantly improving and helping to make certain health conditions less of a risk. You can also do something to improve your situation. Exercise, eat responsibly, try to keep your weight down and take medication that your doctor prescribes. If you take care of yourself and try to lead a healthy lifestyle you should see noticeable, positive health changes.
For additional help, look for an independent agent who works with an impaired risk specialist – a broker who knows insurance companies that may provide a good rate for your health condition. If you can’t get individual life insurance, you also have the option of buying life insurance that doesn’t require exams. For example, many people opt for group life insurance through their employers. However, coverage can be limited to one or two times your salary, and you may lose the insurance if you leave the job.
8. Care for loved ones
If you provide care for family member, you might want to consider what could happen if you were to pass. If you function as a primary caregiver to a loved one, review your life insurance to make changes for their benefit. If you leave a young child behind, your spouse may need to work full-time to pay the bills. This often means paying for child care. Other costs might include cleaning the house regularly or shopping for groceries. If you were looking after a parent or grandparent, they may need to be placed in assisted living or a home for the elderly if another family member can’t care for them. A life insurance policy can do a lot to assist with potential challenges by making the transition easier for your loved ones who may not be able to provide the same level of care.
Caregivers often have significant amount of out-of-pocket expenses. According to the AARP, they spend an average of nearly $7,000 on costs related to caregiving a year. Should something happen to you, those expenses will need to be covered by your loved ones. Life insurance can help provide for those costs, and prevent them from struggling.
It’s also important to keep in mind that if you’re a caregiver who works a full-time job, your risk for illness and depression is increased. To provide for others, it’s vital that you care for yourself emotionally and physically. But in case something does happen to you, life insurance can give you that feeling of security.
Hopefully, you’ve been putting money away for retirement for a while. But it doesn’t hurt to review and ensure your loved ones will have enough if you die after you retire. If it seems that there isn’t enough, you may want to consider an additional life insurance policy. Either way, it’s a good time to review what you already have.
A life insurance policy is typically thought of as a way to pay your beneficiaries money upon your death, but it’s also worth exploring how your policy can be used as a source of income in retirement.
Term life insurance has no cash value so it can’t be used as income. However, if you purchase a permanent life insurance policy, that policy builds cash value over time it can be withdrawn as a source of funding in retirement. As long as the amount you withdraw doesn’t exceed the amount you’ve paid in premiums, it generally won’t be subject to taxes.
Often, life insurance can fall into the category of out of sight, out of mind; you purchase a policy and call it good. Resist the urge – review your life insurance policy should you experience any of these life events.