Learn and Plan | When is it time to review a life insurance policy?
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When is it time to review a life insurance policy?

Jan 29, 2024, 10:52:13 PM | Reading Time: 10 minutes

When you decide to purchase life insurance, you take an important step in protecting your loved ones’ future. While having coverage can provide protection and peace of mind, it’s important to review the policy regularly to ensure it continues to deliver on that promise and meet your current financial needs. Policy reviews are typically every year, but it can be a good idea to revisit life insurance coverage after significant life events, too.

Starting with a life insurance policy review checklist

Whether it’s a routine policy review or following a life event, assessing life insurance coverage typically includes several steps. When reviewing the terms of a policy, things you might think about:

  • Current life insurance policies, whether personal or through an employer
  • Current coverage amounts
  • Changes in health, family, and finances
  • Personal and financial goals

As life changes, life insurance coverage needs may change too. Here are several events that often encourage a policy review.

Ring 1. Life insurance policy changes after marriage

After tying the knot, many couples may share finances and combine accounts. This can be an excellent time to ensure that a life insurance policy adequately covers both partners if either should pass away. Here are some important insurance actions to consider:

Update beneficiaries

A beneficiary is the person, business, or trust that receives the death benefit proceeds from life insurance coverage when an insured passes away. The person listed as a beneficiary is often a spouse, depending on the life insurance policy. If life insurance coverage is offered through work, it’s also important to update the beneficiary on that policy.

Update retirement accounts

Retirement accounts like IRAs and Roth IRAs, workplace retirement plans such as pension, 401(k) or 403(b), and FSA and HSA flexible spending accounts allow a person to designate a beneficiary who will inherit the account should they die.

Update coverage amounts

While existing coverage may have been adequate in the past, providing a benefit to a spouse to continue an income stream may entail updating the amount of death benefit coverage.

Broken Heart 2. Updating life insurance following divorce

If a person has gone through a recent divorce or is in the process of divorcing, it’s a good idea to review a life insurance policy. This may be particularly important if an ex-spouse is listed as a beneficiary on the policy and the insured would like to remove him or her.

Even if there are no directions in the divorce decree considering a life insurance policy, you should review the beneficiary. Without removing a former spouse, he or she may receive the death benefit when the insured passes away. Beneficiaries can usually be changed online through the life insurance carrier’s website, by submitting a paper form, or by contacting the carrier directly.

Update retirement accounts

Retirement accounts like IRAs and Roth IRAs, workplace retirement plans such as pension, 401(k) or 403(b), and FSA and HSA flexible spending accounts allow a person to designate a beneficiary who will inherit the account should they die. Make sure they are now going to the desired heirs.

House 3. Life insurance policy changes after purchasing a home

After purchasing a home and taking out a mortgage, an insured may want to look at their life insurance policy. Buying a home is often among the most significant financial obligations; life insurance can help protect that asset. A mortgage can be a substantial debt, and many mortgage lenders will want to ensure it gets paid even if they pass away. If an insured were to die before paying off the mortgage, the debt is often passed on to the family, and a spouse may be unable to afford to pay for the house on one income. With all these factors to consider, it may be time to update or change a life insurance policy. Options include:

Term life insurance

Term life insurance pays a death benefit if the insured dies while the policy is in effect. The insured chooses the coverage amount and how many years the policy should last. New homeowners can buy a term life insurance policy timed to match the duration of their mortgage.

Permanent life insurance

A permanent life insurance policy can last until you die if premium requirements are met. Permanent insurance cash value may support an early home payoff or can be retained for coverage of the “next” home the client has. Talking to a financial professional can help you better understand how buying a home could affect personal life insurance needs.

Parent and child 4. Updating a life insurance policy for a new family member

A new bundle of joy in the home may mean it is time to review a life insurance policy. Life insurance can help cover many expenses a spouse may incur for a child, from daycare to college if an insured passes away.

Term life insurance is an option for many families because of its lower cost compared to permanent life insurance. When buying life insurance, consider the years spent raising children, building savings, and paying off debts. Both parents usually need life insurance, whether they’re in the workforce or a stay-at-home parent. The coverage amount should reflect the essential services that a surviving parent would have to pay to replace, such as childcare or housekeeping. To figure out how much life insurance to purchase, each individual should assess their family’s financial needs.

When purchasing a life insurance policy, it’s generally not advisable to name young children as beneficiaries. Suppose a beneficiary is a minor when a parent passes away, and a guardian hasn’t been determined. In that case, the court will likely have to appoint a guardian for the children before the life insurance company can pay the death benefit. A life insurance trust can be set up as an option to receive the death benefit. The insured would then name the trust as the beneficiary and appoint a trustee to manage the trust per their instructions. A lawyer can help ensure a trust is set up correctly.

Desk 5. Reviewing life insurance coverage after changing jobs

Having a change in employment, whether a new job or promotion, is also an opportunity to revisit a policy and possibly update life insurance coverage. Whether an increase or decrease in household income, the change may affect living standards.

Medicine 6. Updating a life insurance policy after health changes

If an insured has become healthier through exercise or a change in habits significantly impacts their health, they could qualify for new life insurance rates. Lowering blood pressure, giving up tobacco, or having surgery to reduce weight or rectify medical issues are examples of changes that might positively alter health. When a person experiences any of these changes, they may want to explore their policy options.

Groceries 7. Reviewing life insurance coverage when caring for loved ones

Many people care for young children or aging parents, and as a primary caregiver to a loved one, it’s important to review life insurance regularly. If a young child is left behind, a spouse may need to work full-time to pay the bills, including paying for childcare, house cleaning services, or grocery delivery. Additionally, if you are a caregiver for an aging relative, it’s a good idea to consider the financial value of the support being provided.

Caregivers often have a significant amount of out-of-pocket expenses. According to the AARP, most family caregivers report spending an average of over $7,000 annually in out-of-pocket costs related to caregiving needs. Should something happen to the caregiver, those expenses may still need to be covered. Life insurance can help provide for those costs and make sure loved ones are protected.

Glasses 8. Reviewing life insurance coverage before retirement

For those nearing retirement, a common part of getting finances in order is reviewing life insurance coverage to ensure any loved ones left behind can keep up with mortgage payments or other financial obligations. If lifestyle choices or expected retirement costs have changed, the insured may want to revisit their life insurance policy to ensure adequate coverage.

While a life insurance policy’s primary objective is to pay a death benefit to beneficiaries, some types can also provide cash value to supplement income in retirement. During a policy review, an insured will typically review their estimated retirement income and financial needs and determine if any gaps need to be filled.

Estate planning

As you enter your retirement, you might want to consider your estate plan. Estate planning is an important process of designating who will receive your assets when you pass away and allows you to leave instructions about your property, children, health care wishes, and final arrangements. Life insurance can be purchased (or re-purposed) to cover estate taxes, legacy building, or charitable giving.

Talk to a financial professional

Regularly reviewing life insurance can help ensure you have the type of policy you need and the amount of coverage necessary to meet financial goals. As life circumstances change, updating a life insurance policy to reflect those changes can allow you to stay on track financially and rest assured that your family’s future can remain protected. If you’ve experienced any recent life events or would like to take a closer look at your policy, contact your financial professional to discuss if any changes are needed.

The term financial professional does not imply engagement in an advisory business in which compensation is unrelated to sales. Insurance licensed financial professionals will be paid a commission on the sale of an insurance product.

Neither Midland National nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums concerning such arrangements.