When Should I Change My Life Insurance Coverage?

The one thing we of which we can all be certain is change.  Life happens every day and, as a result, we are constantly assessing our situation and changing our course, usually by making small adjustments.  A life insurance purchase is one of the few decisions we make with a more long term perspective. But, over time, as life unfolds, we may find that even our life insurance coverage may no longer provide the protection it once did.  As with any core element of our financial situation, a change in life insurance coverage should be only be considered after a thorough review of your current and future financial needs.

The question of, “Should I change my life insurance coverage?” comes up for many people who have either let life pass them by without periodically reassessing their financial situation, or because they experienced a major life change for which their current coverage may no longer be adequate.   Ideally, life insurance coverage should be reviewed regularly, as often as annually.  In doing so, it is more likely that only smaller changes in coverage will be necessary.  But, for most people, life can change in big ways, sometimes abruptly – a birth, a death, a marriage, a new home, a divorce, a new job, a lost job.  And, all of these changes should prompt an immediate review of your life insurance coverage.

Look before You Leap

Most life insurance professionals would agree that it is almost never a good idea to simply change one life insurance policy for another.  Your life insurance costs are always going up, so the policy that you bought a year ago, would cost more if purchased today especially if there have been any negative changes in your health condition.  Also, when you exchange one life insurance policy for another, the contestability period of the coverage starts all over again.

 In most cases, the best course of action would be, instead, to add a policy especially if your existing policy is more than five years old. In some cases, it may be possible to adjust your existing policy.  Some types of life insurance policies allow for adjustments to the death benefit amount or even the premium.  You may also be able to add policy riders that can increase your protection. In all cases, it is strongly suggested that you review your existing policy with a life insurance professional who can tell you precisely what options are available to you.

When Change may be Good

There may be some instances when it might make some sense to change your coverage, but it should be done with careful deliberation and in consultation with an unbiased, financial professional.

Cheaper Term Life Insurance

If you already own a term life insurance policy, you may be surprised, depending on your age and how long you’ve owned the policy, to find that term rates have dropped significantly over the last decade.  It is not uncommon to find the same amount of term coverage available for less than what you might be paying.  This is especially true for some super preferred term rates, which, by the way, require that your health be super as well. 

Policy Consolidation

Some people acquire smaller policies over time.  They may start out with a $50,000 policy out of college, and then add another $50,000 policy when they get married, and then another $100,000 policy after the birth of their first child, and so on.  In some cases, a person who owns, say, $400,000 of life coverage from five or more policies, may benefit from consolidating all of the life coverage into one policy. Again, depending on your age and the age of the policies, it may be possible to find one policy for the complete coverage of $500,000 for less than the combined premiums of the other policies.  Many life insurers offer breakpoint pricing on larger face amounts which could result in a reduction of total premium costs.  

If your existing policies have cash values, they can transfer over to a new policy without tax consequences.  This is accomplished through an IRC Section 1035 Exchange when certain requirements are met.  Each policy should be carefully reviewed to determine if there are any fees associated with their surrender. When considering change of this magnitude, it is vital that you have a thorough analysis of your existing coverage and costs done so you can compare them directly with any proposed new coverage.

Summary

When planning your financial future you should expect things to change, and with that, you should review your financial plan to ensure your future needs will be met.  The need for life insurance rarely goes away completely. In fact, for most people, the need for additional, permanent protection often increases.  Life insurance is a long term commitment that should be revisited regularly, but certainly in anticipation of or as a result of major life events.  It is rare that the first life insurance policy that one purchases will suffice in the long run. The issue as to whether your life insurance plan needs an addition, and adjustment or even a wholesale change can only be addressed after a thorough analysis of your current policies and your long term needs.

The cost and availability of Life Insurance depend on many factors such as age, health, and amount of insurance purchased. In addition to premiums, there are contract limitations, fees, exclusions, reductions of benefits, and charges associated with policy. And if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent upon the claims-paying ability of the issuing company.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2020 Advisor Websites.