When Should You Update Your Life Insurance Policy?

Life insurance isn't a one-size-fits-all approach to financial planning. Instead, there are different options for different life stages, whether you're starting a family, buying a house, acquiring a business,or reaching retirement age.

This is why regularly reviewing your life insurance policy is so important – as your life circumstances change, so should your insurance coverage. Keep reading to learn when you should review life insurance coverage, from significant life changes to financial milestones.

Why You Need to Update Your Life Insurance Policy

A young couple living in an apartment will have different life insurance policy needs than a couple with a mortgage and three children. If the young couple in the apartment never review their life insurance policy, keeping it the same even when they do have a mortgage and three children, the benefit likely wouldn't meet the family's needs after an unexpected death.

Because your life insurance needs will inevitably change over time, reviewing your policy at least once a year is critical. If you don't review the policy regularly, you or your family will risk being financially unprepared in the event of an unexpected death, whether it's you or your spouse.

Major Life Events That Trigger Life Insurance Policy Changes

The most common reason for changing your life insurance coverage is due to a significant change in life circumstances – here are some of the most common life events that would trigger a change in coverage.

1. Marriage or Divorce

When two people get married, they often want to make sure that the other person will be cared for in case of an unexpected tragedy. While single, you may have only had enough life insurance to cover funeral expenses. Still, with another person to consider, you may want to change the policy so that your spouse is financially supported when you pass away.

However, if you ever get a divorce, you likely don't want your ex-spouse as the beneficiary anymore. Instead, you can change the beneficiary to your children or another family member.

2. Having a Child or Dependent

Parents always want their children to be financially taken care of, no matter the circumstances. Having a baby means you have another person to include in all your plans, including life insurance. Whether you're a stay-at-home parent or the primary breadwinner, both parents need some form of life insurance.

Those who contribute financially to the household will definitely want their salary to be covered for several years so their family can continue paying the bills after they are gone, while homemakers need life insurance to cover all the unpaid labor they contribute to the home, from childcare to cleaning.

3. Purchasing a Home or Taking on Debt

One of the main reasons to change your life insurance coverage is if you purchase a home. Homeownership is a massive financial commitment – not only are you responsible for the mortgage, but you'll also need to worry about property taxes, insurance, and potential HOA fees.

If one spouse passes away, it could leave the other spouse scrambling to cover the entire mortgage, which not everyone can do on one salary. This means that after buying a home, you should adjust your life insurance policy so that it would fully cover your family's housing costs, freeing them from that burden.

4. Career Changes or Salary Increases

You want your life insurance policy to reflect your current income and lifestyle fully. As a result, if you get a raise or make a career change, review your policy to verify that it would still cover your salary for several years. You don't want to get acclimated to a higher standard of living, only to realize that your life insurance coverage would not support your new standard of living.

Financial Milestones That Require a Policy Review

Life circumstances aren't the only reason to change your policy – you may also reach significant financial milestones that would result in the need for coverage updates. Here are three of the most common milestones.

1. Significant changes in net worth.

As your wealth grows or declines, your life insurance policy should change along with it. A substantial increase in net worth—such as receiving an inheritance, a successful investment, or a salary boost—might mean you need more coverage to protect new assets.

For example, when it comes to estate planning, a higher net worth can lead to more estate tax liabilities, and life insurance can help with this. Or, if your net worth decreases, your policy should still align with any current liabilities. Over-insuring can strain finances, while under-insuring may leave loved ones unprotected.

2. Starting a business or acquiring assets.

Entrepreneurs and business owners face unique challenges when it comes to life insurance. Many people who start a business take on significant debt, like business loans or personal guarantees. You can mitigate these risks by updating your life insurance.

For example, your policy can cover outstanding business debt so creditors can't seize personal or business assets. Additionally, if your work is vital to your business's success, your policy can ensure the company remains stable if something ever happens to you.

When you acquire assets like property or investments, this can also necessitate a policy review. Be sure to factor these into your overall coverage to make sure your dependents are adequately supported.

3. Reaching retirement age.

Retirement is often the beginning of a shift in financial priorities and obligations, and it can really impact your coverage needs. For some, the need for life insurance decreases as children become financially independent or when mortgages are finally paid off.

However, for others, life insurance is still essential for supplementing retirement income, legacy planning, or end-of-life expenses. If your policy has a cash value, you can tap into it for additional income – this can also be a substantial inheritance for your heirs.

Policy-Specific Reasons for Updating

There are also policy-specific reasons for updating your life insurance – here are a few of the most common reasons.

1. Policy expiration or approaching renewal.

The last thing you want is to completely miss your life insurance policy expiring. Imagine thinking that you and your spouse are covered, then after your spouse unexpectedly passes away, you check the policy and notice that it expired five years ago. No one wants this type of surprise! If you notice that your policy is expiring in the next year, you can take steps to renew it or change the policy details if needed.

2. Changes in premium affordability or health conditions.

Your financial and physical health directly impacts how much life insurance coverage you should have. For example, if your income has increased, you might want to upgrade your policy by either increasing your coverage or opting for additional features. A more extensive policy might provide more security for your family or allow you to plan for estate taxes and legacy gifts.

On the other hand, if you're on a tight budget, you might be able to revise your policy to reduce premiums by switching to a more affordable policy, like term life insurance, or lowering the death benefit.

If your health has changed for the better, it may also lead to lower premiums – especially if you've quit smoking, lost weight, or addressed a serious health issue. However, if your health has worsened, it's worth potentially adjusting your coverage so you can make sure your family is covered in the event of a premature death.

3. Advancements in policy features or benefits.

Life insurance riders are optional add-ons that can give you additional benefits. A few examples include an accelerated death benefit rider, which can give you a portion of the death benefit if you have a terminal illness, or a long-term care rider, providing funds for in-home care or nursing home stays.

As the insurance industry evolves, you may realize that there are better coverage options, giving you a policy with a combination of life insurance with these riders that can benefit you as you get older.

What Life Insurance Components Should Change?

As you start reviewing your policy, what main elements should you watch out for? What is most likely to change? Here are some of the most common things that may change on your life insurance policy:

• Beneficiary: The beneficiary is the person who receives the death benefit after you pass away. Many people change the beneficiary throughout the life of the policy. This is likely when you get married or divorced, or your spouse dies.
• Type of coverage: If you have term life insurance, your policy will eventually expire. When it ends, you may want to get permanent life insurance or another term policy. Either way, it's common for the extent of coverage to change throughout your life.
• Benefit: Because family dynamics are likely to change over the years, you may need to update the benefit amount from time to time. For example, if you and your spouse both work, you'll need a different amount from someone who supports a stay-at-home spouse and four children.

How to Review and Update Your Life Insurance Policy

Here's what to do during your yearly life insurance policy update, plus common mistakes that you should avoid!

Steps for Reviewing Existing Life Insurance Coverage

1. Examine your current policy: Read through your policy documents to verify the type of coverage (term or whole), premium costs, the death benefit amount, and any other riders. Basically, the point is to know what is and isn't covered.
2. Reflect on life changes: Think about what has happened in your life and home throughout the past year, whether you got married, changed jobs, had a baby, or just retired. Determine whether or not these events impact the coverage you need.
3. Compare current and future needs: Reflect on your family's current financial responsibilities, like paying the mortgage, debt, or childcare. Then, consider your financial goals, from paying off your house to retirement savings. Be sure that your policy aligns with these goals.

Mistakes to Avoid When Updating Your Policy

There are common mistakes that people make when buying life insurance, including:

• Underestimating coverage needs: It might be tempting to cut coverage to save on premium costs, but you should avoid this pitfall if possible. Your policy should have enough coverage to protect your dependents and align with any long-term goals.
• Overlooking beneficiaries: Your beneficiary is likely the most critical part of your policy. Make sure this section is complete and entirely up to date.
• Not comparing different options: When replacing an old policy with a new one, always compare it to other options in terms of the benefits and costs. You may be able to find a better option!

Conclusion

You should thoroughly review your life insurance policy at least once a year. By doing so, you'll be accounting for any life events or financial changes so that your family will be fully covered in the event of an unexpected death.

If you need help reviewing your policy or making changes to an existing policy, reach out to Think Life today. We'll help you update life insurance, understand what's covered and what isn't covered, and answer any questions you may have about an existing or future policy. Schedule your review today!

Frequently Asked Questions

When should you update your life insurance?

You should update your life insurance as your circumstances evolve – like if you get married, have children, or buy a home.

What happens if you don't renew your term life insurance?

A term life insurance policy ends when you stop paying your premiums or when the policy's coverage ends.

How often should I review my life insurance policy?

A good rule of thumb is to review your life insurance policy about once a year. For best results, do this with a financial advisor or insurance expert.

Do I get my money back if I outlive my life insurance?

In most cases, you won't get money back if you outlive term life insurance. However, if you have a whole-life policy, you may have a cash value component, which you can treat as a type of savings account.