Out of the all the important things we do for our loved ones, taking out the right life insurance policy is probably one of the most important.
And once you get the right policy, you might be tempted to check that item off your to-do list and think: Whew. Now I don't need to think about that again.
And in fact, most people don't: According to "Life and Disability Insurance: What 20- and 30-Somethings Think," a survey by LearnVest and The Guardian Life Insurance Company of America, almost eight in 10 people have never changed or even considered changing their life insurance policy.
But the reality is, our lives change, and our insurance policies should change as our circumstances do.
Do you know the signs that you might need to reevaluate your coverage? We've compiled a list of the top six reasons you should probably take another look at your policy to make sure it still works for you.
1. The number of people who depend on you has changed.
Let's say you're married and have a policy with your spouse listed as a beneficiary. If you have children, you should consider adding them as contingent beneficiaries, which makes them the backup beneficiaries in case something happens to you and your spouse at the same time. You might also want to get coverage for a larger amount to, say, provide for the expected cost of their college educations.
This is not as simple as increasing coverage on the policy you already have—it might be cheaper for you to buy a separate policy for the additional amount. To decide which option is right for you, talk to your financial planner or an independent insurance agent who can compare rates from different companies. You can also compare rates online and determine which is the least expensive route.
On the flip side, if a dependent, such as a child, becomes self-sufficient—say, your youngest graduates from college and gets a job—or, God forbid, in the event a dependent on your plan passes away, you can lower the amount of your "death benefit," which is the amount that would be paid out in the event of your death, or reevaluate how much insurance you need.
2. Your child becomes disabled.
Some parents take out a term policy to be sure to provide for their children until they become self-sufficient. But if circumstances change, and a child becomes disabled, the parents may want instead to look into a permanent policy that will provide for the child no matter when you should pass away. The longest term policies typically last 30 years, so if you have a disabled child who is 10, and you're only 45, you may want a permanent policy, because it will provide a benefit to him or her even if you pass away at 76 or later.
3. You've taken on significant debt, such as a mortgage or student loan.
The original reason you might have taken out your life insurance policy was to provide for your dependents if you were to pass on. But debt that you take on can become their burden in the event of your death. For that reason, if you take out a mortgage or a student loan, you'll want to consider whether you should increase your coverage accordingly. Follow the same strategy as above, in which you consult your financial planner or an independent insurance agent, or comparison shop online, to find out whether it makes more sense to purchase an additional policy or replace the existing one with a larger benefit.
4. You pay off your mortgage.
Suppose you bought a home and took out a 30-year mortgage on it, and also purchased an accompanying 30-year term life insurance policy so your family would be able to pay off the debt if you died. However, after a number of years of diligently paying extra principal each month, you've paid off your mortgage in 18 years. Congratulations! The only thing is that you might now have an unnecessary life insurance policy. Consider the rest of your financial picture to see if there are other needs for life insurance—if you find none, you might want to cancel that policy or reduce the benefit amount and save the extra bucks.
5. You bought your policy before 2009.
Why 2009? That was the year that insurance companies were required to switch to 2001 mortality tables. Before that, they were relying on mortality tables from 1980. While this is a rather morbid-sounding topic, it actually can have a big effect on the price of your policy. Here's why: Between 1980 and 2001, mortality improved—and since people are living longer, they're also paying into their insurance policies longer, and that delays the moment that the insurance company has to pay out.
The upshot? Monthly premiums are now lower as a result. Since you cannot renegotiate your existing policy, you should shop around to see if you can get a lower quote for the same policy. Even though you're older now than when you bought your current policy, you might still get a cheaper rate with a new policy now. But always make sure that your new policy is in place before canceling the old one.
6. Your insurance company has been getting a lot of bad press.
If you have doubts about the company holding your policy, investigate its stability. Find out whether the company's financial rating by places like A.M.Best, Fitch or Moody's has recently been downgraded (this can be done easily by doing a web search for the company's name and the word "rating"). If so, consult a third party—not the insurance company itself, but either your financial planner or an independent insurance agency that sells policies from multiple insurers—to help you decide whether it's time for you to switch policies.
If the rating hasn't been downgraded, that probably means that while the company is enduring some bad publicity, its ability to pay cash out on your policy is not in question.
The information in this article is designed to be general in nature and for educational purposes only. It should never be used as an argument for the replacement of any life insurance policy. LearnVest and Guardian, it subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. LearnVest Planning Services and any third parties listed in this message are separate and unaffiliated and are not responsible for each other’s products, services or policies.