The purpose of buying life insurance is to ensure your loved ones are taken care of in the event of your death. The main goals for purchasing life insurance are to replace your income, pay off major debts like mortgages and other loans, and to provide financial support for your spouse, partner or children’s futures.
Life insurance is not something to be filed away only to be pulled out at the end of its term. It is a good idea to review your life insurance annually or, at the very least, every 5 years. Just like your will, there are changes that happen in your life that need to be reflected in your life insurance to ensure your policy is still doing what you intended it to do when purchased.
Here are some life changes that should prompt you to review your insurance coverage:
Family financial needs change as time passes. For example, your spouse or partner who was once a stay at home parent may now be working. In contrast, someone contributing financially to the household in the past may now have gone back to post-secondary studies or reduced their work hours to care for an elderly parent. Your children, who were once completely dependent on you, may have graduated and be moving towards financial independence. Have you recently done an analysis to see if your policy reflects your family’s current needs?
Change in Job
New jobs come with changes in income, benefit plans, lifestyle and retirement goals. You want to ensure that, if you were to pass away unexpectedly, your spouse or partner will have the income to sufficiently look after him or herself or your children. Is your present insurance coverage sufficient to cover the loss of your income?
One of the primary reasons for buying life insurance is to cover the family’s mortgage in the event of an income earner’s death. Does your current insurance limit reflect the amount of your mortgage?
Your health may improve with age or you may develop an illness.
If your health has improved but your policy was issued with smoker rates, a substandard rating, or exclusion, you can ask your insurer to reconsider your rates. For example if you have not smoked for the last 12 months, you can apply for lower non-smoker rates. In contrast, if you have developed an illness you may want to reconsider your coverage to match your increased risk.
Life Insurance Products
Insurance companies continually develop new products to meet customer needs. A new product may be more suitable for your particular insurance requirements so it pays to review what is available.
Policy options can be added to your policy to meet future needs. One example is a Guaranteed Insurability Rider which allows you to purchase additional insurance in the future without a medical exam or other evidence of insurability. Other riders to consider are Child Protection Rider and Spouse Insurance Rider.
Term policies generally last 10 or 20 years and some have the option to be converted to permanent insurance which provides protection for your entire life. One advantage of converting from term to permanent insurance is to lock in the cost of your insurance. The cost of term insurance will increase with each policy renewal, while the cost of permanent insurance remains level for life. Another advantage of having the option to convert is that medical evidence of good health is not required. If you were to develop a health issue such as diabetes, the conversion option enables you convert to permanent insurance based on your health when you first took out your term coverage.
Considerations for taking advantage of this kind of policy option include, what insurance products are offered for conversion, at what price the option is offered, and at what age the option is available.
Life insurance policies can be held personally, in a corporation, in a trust or in a combination of these entities. Keep in mind the current aim of your insurance, when and where the insurance benefits will be needed and where funds are available to pay the premiums. For more detailed discussion on this topic please see Ownership of Life Insurance – Planning Considerations.
To help you analyze your current insurance needs, here is a calculator to figure out how much money you need to cover your debts and ongoing expenses for your loved ones. InsureRight Calculator.