Life insurance is a critical component of financial planning, providing a safety net for loved ones in case of an unexpected loss. While purchasing a policy is an essential first step, it’s equally important to review your life insurance periodically. Life is dynamic and, as circumstances change, your coverage needs will naturally evolve.
Major Life Events
During a person’s lifetime, there will be major life events that warrant another look at life insurance policies. These include:
Marriage or Divorce
When a person marries, another person becomes emotionally or financially dependent; often both. With marriage also comes shared future goals that usually include financial goals such as paying off a mortgage, sending kids to college, paying for parents’ assisted care into old age and more. This added responsibility means you should increase life insurance coverage accordingly.
Divorce is another important life event where life insurance should be evaluated. You may want to change beneficiaries, decrease coverage amounts or even cash out policies if their primary goal was to benefit a person who is no longer a spouse.
Having a Child
A child is an added financial responsibility as well as a joy. Over their time in your care, a child will cost an estimated cost of about $17,000 per year for a middle class family. But this estimate doesn’t account for unusual circumstances, such as caring for a child with a medical or mental disability, substance abuse problems, or even such things as expensive interests that may require specialized training or equipment. If the main breadwinner in the home is suddenly unable to bring in finances, this will have a major impact on the quality of life, stability and future challenges of any children in the home. Every time a child is added to the household, whether it’s an adoption or natural birth, life insurance needs should be reassessed.
Buying a Home
Buying a home means taking on the responsibility of paying a mortgage for years to come, in many cases. Even if the home is paid outright, there will be large expenses in the future, such as replacing the roof, repairing a foundation, replacing the HVAC and more. A substantial life insurance policy will help to ensure that your loved ones are able to keep and maintain the home that they live in, which increases their stability, safety and peace of mind.
Career Changes
Just as major life events warrant scrutinizing your life insurance needs, so too, do changes in your career.
Income Changes
Are you making more or less than before? While a decrease in income doesn’t mean you should decrease your life insurance coverage, positive income changes certainly do. This is because now you may be upscaling your family’s quality of life, and you want to leave them in a similar position should anything happen to you. Even if you’re the sort who chooses to live on your old salary and invest the extra, an increase in life insurance helps to ensure that your family keeps those investment options open. A final note: Even if life insurance feels less affordable after a decrease in income, try to retain the policy, since premiums usually increase as you age, and signing on with a policy after your income goes back up will cost more. Also, a temporary reduction in income shouldn’t lead to a permanent change to your future financial plan, or why you bought life insurance to begin with.
Milestones in Financial Planning
Financial growth or setbacks can also affect your life insurance requirements, so pay attention to your policies during these milestones.
Debt Accumulation
If you’ve taken on significant debt, such as credit card debt, student loans or business loans, your life insurance should cover these liabilities, since your family may be saddled with them after your demise. This is certainly the case if credit cards are in both your name and your spouse’s name.
Investment Growth
As your investments grow and you build wealth, your life insurance needs may decrease. However, if you rely on life insurance as part of your estate planning strategy, it’s best not to alter your plan. Your CPA can work with you to help determine smart financial moves.
Aging and Health
As you advance in years, one or more of your beneficiaries may have passed on before you, in which case you should review your life insurance policy. Another possibility is that your beneficiary is financially sound in their own life—such as an independent adult child with their own family. However, if it’s important to you to pass on the financial gift of a life insurance policy payout, there’s no reason not to stick with your original plan.
Health Changes
A significant change in your health status might make it more challenging to secure new coverage, so reviewing your policy while you’re still healthy and insurable is essential. One good thing to know is that some policies may include options to convert term life insurance to whole life coverage if your health deteriorates.
Approaching Retirement
As you get closer to retiring, your financial situation is obviously going to change. Living on a fixed income means cutting back, and this is a smart time to review your life insurance policy to ensure it still aligns with your retirement budget and long-term estate planning needs. Many people find it helpful to confer with family members to determine what may be needed into retirement and after you pass on.
Other Triggers
Changes in personal circumstances aren’t the only times when you should review life insurance needs. There are also other triggers that bring about a need for such reviews. These include:
Policy Expiration
Do you have a term life policy? If so, there’s an expiration date, as well as premium increases the older you get. Use these deadlines as opportune times to take a second look at your policy. You may want to consider converting it to a whole life policy or make other changes.
Economic and Market Changes
Broader economic factors can also influence your life insurance needs.
Inflation
Over time, inflation reduces the purchasing power of your life insurance payout. If you’re already retired, you probably are already aware of how higher prices can gouge your savings. Periodic reviews of your life insurance policy work to ensure the payout you leave behind keeps reasonable pace with rising costs. This is particularly true if you happened to purchase your policy many years prior.
Interest Rates
Low-interest-rate environments can impact the performance of cash-value life insurance policies. Monitoring your policy’s performance helps you address any gaps in expected versus actual returns.
Life insurance isn’t a one-and-done purchase. Regular reviews ensure your policy evolves with your life circumstances, financial goals, and market conditions. By staying proactive, you can provide lasting security for your loved ones and achieve peace of mind knowing that your coverage meets your needs.
by Kate Supino