Life insurance is an essential element of your estate plan, helping to provide for your loved ones after your death. But as your needs evolve, your life insurance coverage may need to change too. Here are nine reasons to update your life insurance policy.
1. You Want a Different Type of Life Insurance
There are two basic kinds of life insurance: term and permanent.
- Term life insurance lasts for a set term, typically 10 to 30 years. If you die during that term, your survivors receive a death benefit.
- Permanent life insurance provides a death benefit, but it also builds cash value that you can borrow from or withdraw. It also lasts your lifetime (or up to age 99, depending on your policy). However, permanent life insurance can cost up to 15 times more than term life insurance.
Term life insurance is more affordable, especially if you purchase a policy when you're young and healthy. As you get older, you might be able to afford permanent life insurance. Conversely, if you can't afford your permanent life insurance payments anymore, you could drop the policy and take its cash surrender value instead.
You might also want to add insurance riders to your policy, such as a rider to cover long-term care or allow you to tap your death benefit if you have a serious illness. Coverage that requires a rider with your current insurer might be part of standard life insurance with other carriers, so it could pay to shop around.
2. Your Term Term Life Insurance Policy Is Expiring
To maintain coverage after term life insurance ends, you'll need to renew your policy or shop for new insurance. Not all term life policies are renewable; if yours is, you can generally renew it for one year at a time without an application process or a medical exam. This can be an option if your health has worsened since you got the policy, but keep in mind premiums usually increase each year as you age.
If you're healthy and would prefer paying the same premiums year after year, you can get quotes for term life insurance from several insurance carriers to compare your options. You'll typically need to fill out an application and have a medical exam.
3. Your Family Status Has Changed
You may not need life insurance if you're single with no dependents, but once you marry or have children, you'll want financial protection for your family should you die. You'll need more life insurance coverage with each new child, especially if you'd like coverage to pay for their college educations.
Getting divorced, on the other hand, might mean reducing or dropping life insurance coverage if you don't have children requiring financial support. Or you might want to change your life insurance beneficiary to leave an inheritance for friends or family members or give money to a favorite charity.
4. You're Buying or Paying Off a Home
Getting a mortgage is a major financial commitment, typically stretching decades. Purchasing enough life insurance to cover your mortgage helps ensure your loved ones can remain in the family home even without your income. Conversely, once your home is paid off, you might opt to reduce your life insurance coverage.
5. Your Health Has Changed
Because life insurance rates are partly based on your health, poor health or bad habits such as smoking can mean higher premiums. If your health has improved significantly since you purchased life insurance, you might qualify for the same coverage at lower rates. See if your current insurance carrier will reconsider your rate (this generally involves a medical exam), and shop around with other insurance providers to find the best option.
Changes to a child's or partner's health can also mean modifying your life insurance. For example, if your partner becomes disabled or your child develops a chronic condition, they may need costly care not covered by health insurance. Increasing your life insurance coverage can help pay these expenses should you die.
6. Your Financial Situation Is Better—or Worse
The small life insurance policy you bought when you first got married may not be enough once your career takes off. A higher income often translates to higher expenses, such as a bigger house, a vacation home or private school for the kids. You may need more life insurance to ensure your family can sustain this lifestyle without you.
What if you're facing tough financial times? When money is tight, the financial security life insurance provides is more important than ever. Instead of dropping your term life insurance, see if you can find a better rate with another insurance company. Are your permanent life insurance premiums suddenly beyond your budget? Consider canceling the policy and using its cash surrender value to buy term life insurance instead.
7. Your Employment Changes
Changes to your or your partner's job might affect your life insurance needs. For example, if one partner leaves a job and loses their employer-provided group term life insurance, you may want to increase your other life insurance coverage to help make up the difference. If your partner becomes a stay-at-home parent and you're relying on one income, more life insurance can prevent your partner from having to go back to work immediately if you pass away.
Starting a business might also call for new life insurance. Purchasing life insurance on key partners in a business can give the surviving partners enough money to buy out the deceased owner's share or keep the business afloat financially.
8. You're Nearing Retirement
As retirement nears, evaluate your finances and consider whether you still need life insurance. Should something happen to you, is your partner old enough to receive Social Security or pension benefits or withdraw money from retirement accounts without penalty? If your home is paid off, your children are financially independent and your partner would have enough money without you, you may be able to drop life insurance.
9. You're Supporting Aging Parents
You may not have imagined it when you first bought life insurance, but as your parents get older, their health and finances might change. If there's a chance your aging parents may become financially dependent on you, increasing your life insurance coverage helps ensure they'll be cared for no matter what.
The Bottom Line
Your health, gender and age are among the factors insurance carriers consider when setting life insurance premiums. Your credit-based insurance score may influence your premiums too. In most states, insurers can check these scores when you apply for life insurance.
Although credit-based insurance scores differ from the scores lenders use, such as the FICO® Score☉ , they are based on similar data. Checking your FICO® Score for free through Experian could indicate whether your score needs improving. Making timely payments and paying down credit card debt may have a positive impact on both types of scores, and could mean paying less for life insurance.