Re-evaluating Your Life Insurance Needs
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Buying life insurance gives you the security of knowing your family could carry on financially if you died. But be careful not to let that peace of mind lull you into a sense of complacency forever. As your financial life changes, so will your insurance needs.
After you buy a life insurance policy, it’s a good idea to re-evaluate your coverage every few years, especially after major life changes, such as marriage, divorce or having children.
Here are some of the changes you could make after reviewing your need for life insurance.
Buy more coverage
Maybe you had more children, adding many years of child-care and education expenses that you want covered by life insurance. Or maybe you couldn’t initially afford all the coverage you needed when you bought the policy, and now you can.
The most obvious way to secure more life insurance is to buy another policy that adds to your existing coverage. If your needs are specific — such as covering the years through children’s college or the length of a mortgage — term life is the right type of life insurance.
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If your policy includes a guaranteed insurability rider, you might be able to add more coverage without going through a new application process. Typically the feature lets you add coverage only at certain times or after major life events, such as having a child. The additional price will be based on the amount of coverage, your health when you bought the policy and your current age.
Change your beneficiary
Review beneficiary designations periodically on life insurance and other financial accounts, especially after divorce or remarriage. As the policy owner, you have the right to change the life insurance beneficiary at any time, and the process is as simple as filling out a short form. Contact the life insurance company for instructions.
As you contemplate this, avoid common mistakes such as naming a minor as beneficiary or naming your estate as beneficiary. Name a trusted adult instead. Here’s why: The life insurance company can’t give the insurance payout to a minor until a guardian is appointed, which can eat up time and money in attorney fees and court costs. Naming your estate is a bad idea because the policy proceeds then have to go through the legal probate process, which can take months or even years.
Convert term life to permanent life
Most term life policies are convertible term life insurance, meaning you can switch the policy over to a permanent policy such as whole life or universal life. The type of permanent life policy available will depend on the insurance company that issued the term life insurance.
You don’t have to convert the entire policy. You could convert just a portion, such as $100,000 of a $1 million term life policy.
Check your policy for details on when you can convert. The deadline for conversion may occur before the policy expires.
Cash out a permanent life policy
If you own permanent life insurance and no longer need the policy, you can surrender it for the cash value. Of course, that will mean your beneficiary won’t be able to make a life insurance claim when you die.
Cashing out is a consideration only if:
You have a permanent life insurance policy. Term life has no cash value.
You don’t need life insurance coverage.
You’ve held the policy long enough that the cash value has had a chance to build.
You’re past the point when you’d owe the insurance company a surrender fee for cashing out. Surrender fees are charged if you cash out in the policy’s earlier years.
Sell your life insurance policy
Another option if you don’t want your permanent life insurance anymore is to sell it. In a life settlement, a third party buys your policy at a price that’s more than the cash value and less than the death benefit. The buyer then makes the premium payments and gets the death benefit when you die.
You can sell a policy through a life settlement broker or through a life settlement company that buys policies. Before making any moves, talk to a financial advisor. It’s often hard to tell whether you’re getting a good deal, and the transaction fees can cost up to 30% of the settlement, according to the Financial Industry Regulatory Authority.
Whether you recently bought a policy or you purchased one years ago, remember to review your coverage periodically. If you need more term life insurance, NerdWallet’s life insurance comparison tool can help you figure out the right amount and check prices.
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