Why and How to Update Your Life Insurance Policy
Buying a life insurance policy is a critical step in protecting your loved ones. However, life doesn’t stand still. Your financial situation, family size, and personal circumstances evolve. Regularly reviewing and updating your life insurance coverage ensures your family’s financial safety net adapts to your life’s biggest changes.
Key Takeaways:
- Review your life insurance annually and after major life events.
- Changes like marriage, buying a home, or having a child likely necessitate increased coverage.
- Update beneficiary designations after life events, such as a divorce, to ensure the insurance payout goes to the right person.
- Monitor your policy’s cash value and fees and adjust premiums or policy type if necessary.
- Consult a financial advisor to keep your policy aligned with your evolving goals.
When May You Need To Update Your Life Insurance?
Life events often bring major financial shifts. Adjusting your life insurance policy to reflect these can ensure you have adequate coverage. Here’s how specific life events may affect your life insurance needs:
Marriage
Marriage often brings new financial responsibilities. If your partner depends on your income, you may need to increase coverage to account for shared expenses, like a mortgage or everyday living costs. Life insurance can replace income that would otherwise cover shared debts, such as credit cards or student loans.
As Melissa Murphy Pavone, CFP and founder of Mindful Financial Partners, put it, “Life insurance ensures financial stability for your spouse in the event of an untimely death.”
Divorce
Divorce can impact your insurance needs. It means separating finances and updating coverage to reflect that. Losing a partner involves accessing their life insurance benefits and reassessing your own policy.
Pavone noted, “Post-divorce, it’s critical to update ownership and beneficiaries on existing policies to avoid unintended payouts.” If you keep your ex-spouse as the beneficiary, they inherit the insurance payout, even if you write something different in your will.
“Life insurance is often used to secure alimony or child support obligations. A review can ensure these commitments are protected,” Pavone added.
Birth of a Child
Having a child alters nearly everything in your world. However, your life insurance policy will remain the same. You should consider increasing the coverage to account for the added cost of raising a child. If you name a spouse or partner as the primary beneficiary for your life insurance death benefit, consider what would happen if you both passed away.
Minor children cannot collect from a life insurance policy. You could name a custodian who would manage money on behalf of your minor children until they reach adulthood. If you don’t name a custodian in your policy, the courts pick one for you. You can name your children as beneficiaries once they reach legal age.
Jason Turchin, a life insurance attorney, advised, “You should review the beneficiary designation on your policy to ensure that all intended children are listed…Do not rely on the goodwill of the listed beneficiary to share the proceeds.”
Buying a Home
You should update your life insurance to cover the new mortgage debt when purchasing a home. This protects your family from financial strain if something happens to you. Consider enough coverage for other homeownership costs like property taxes, maintenance, and potential renovations when determining your coverage amount. You may also decide between term life insurance, which covers you for a set period, and permanent life insurance, which lasts a lifetime. A mix of both can offer flexibility and long-term security. Adding policy riders, like critical illness or disability coverage, can further protect your finances in case of unexpected events.
Changes in Financial Situation
Certain changes in your financial situation may warrant an update to your life insurance. For example, if you get a promotion, increase your coverage to match your new income level and lifestyle. If you’re taking a pay cut, you might need to decrease your coverage to save on the insurance premium. When taking out a major loan, such as for a business or home equity, consider increasing your coverage to be sure the debt can be paid off if you pass away.
Health and Lifestyle Changes
A healthier lifestyle means you pose less risk to insurers, which can translate into lower premiums. Non-smokers typically pay less for coverage than smokers. If you’ve made significant health improvements since taking out your policy, review your coverage and see if you could requalify.
The Importance of Reviewing Beneficiary Designations
When you buy life insurance, you’ll name a beneficiary to receive the payout when you die. This person (or entity) can be: Your spouse, child, another family member, a trust, or a charity. You should review and update this choice regularly (once a year and after major life events) for these key reasons:
- Life changes like marriage, divorce, having children, or a spouse’s death can shift who you want to receive your insurance money.
- It guarantees your death benefit goes exactly where you want, preventing family arguments or unintended payouts.
- It allows you to update the beneficiary’s contact information which makes it easier for them to claim benefits when the time comes.
- Reviewing beneficiaries helps you understand the potential tax impacts on your loved ones.
Be sure to inform your beneficiaries that they are named in your life insurance policy and the name of the carrier. Every year, families miss out on tens of millions of dollars in death benefits simply because they don’t have essential policy details.
The Importance of Reviewing Policy Performance
The goal is to ensure your life insurance continues supporting your family as it grows. Regular reviews keep your safety net intact. Here’s why policy performance tracking is crucial and how to make adjustments.
The cash value of your life insurance acts as a savings component you can use for major expenses, like paying off debt or funding education. Early on, more of your premium contributes to cash value growth, but this may slow over time as insurance costs rise. Fees can also impact your policy’s value by reducing cash growth and the death benefit. Keeping an eye on fee changes helps you decide if you should stick with your policy or explore other options. If your policy is underperforming, consult a financial advisor to assess your options. You may need to adjust premium payments or consider switching policies or investment strategies.
How to Review and Update Your Life Insurance Policy
When it’s time to review or update your policy, here’s a simple process:
- Schedule a Policy Review: Contact your insurance agent or financial advisor to set up a meeting. Gather your current policy, past reviews, and financial statements.
- Assess Your Coverage Needs: Consider your financial obligations, including debts, income replacement needs, future expenses like college tuition, and upcoming goals. Life events such as marriage, divorce, having children, or career changes may impact your coverage requirements.
- Analyze Your Policy: Review key details like the death benefit, cash value, premiums, and any outstanding loans. Check that your listed beneficiaries are up to date and accurately reflect your current wishes.
- Explore Additional Coverage: Consider adding policy riders for critical illness or disability coverage if your needs have changed. Assess whether your current life insurance policy type–term, whole life, or universal life–still aligns with your long-term financial goals.
- Make Adjustments: Decide if you need to increase or decrease coverage. Work with your agent to understand how changes affect your premiums or benefits, especially if your health or financial situation has shifted.
- Keep Records and Plan Future Reviews: Document any updates and notify relevant parties, including beneficiaries. Schedule an annual review or revisit your policy after major life events to ensure it continues to provide the right level of protection.
How Often Should I Review My Life Insurance Policy?
Most financial advisors recommend reviewing your life insurance policy once a year and after major life changes, including:
- Marriage
- Divorce
- Birth or adoption of a child or grandchild
- Significant health changes for you or your partner
- Taking financial responsibility for an aging parent
- Purchasing a home
- Refinancing your home
- Receiving an inheritance
- Changes in income (promotion, new job, pay cut, starting a business, retiring)
What Are Some Reasons to Change My Beneficiaries?
There are several common scenarios where you might want to consider changing your life insurance beneficiaries:
- Marriage or divorce
- Birth or adoption of children
- Death of a designated beneficiary
- Significant changes in relationships
- Reaching the age of majority (for minor beneficiaries under age 18)
- Relocation to another state or country
- Changes in financial circumstances or estate planning strategies
Does Life Insurance Automatically Renew?
Most term life insurance policies have an automatic renewal feature. This allows you to extend your coverage, although the cost will increase as you renew at an older age. Unlike term life insurance, permanent life insurance doesn’t require renewal because it’s designed to last for the insured’s lifetime as long as premiums are paid.
The Bottom Line
Regularly reviewing your life insurance policy helps ensure it provides the coverage and growth you expect as your situation and family change. Conduct a comprehensive policy review once a year or after major life events. A financial advisor or insurance agent can offer personalized recommendations.
