When to review a life insurance policy

Life insurance can offer your family meaningful financial protection and peace of mind, but it shouldn’t be a “set and forget” purchase. Reviewing your policy regularly can help ensure you still have adequate coverage to meet your financial needs. Policy reviews often occur annually, but revisiting your life insurance coverage after major life events is a good idea, too.

Checklist for a life insurance policy review

Policy reviews, whether once a year or after a life event, can help determine if your coverage needs to be updated. When reviewing the terms of a policy, you may want to consider your:

• Current life insurance policies, whether personal or through an employer
• Current coverage amounts
• Changes in health, family, and finances
• Personal and financial goals

As life changes, life insurance coverage needs may change too. Here are several events that often encourage a policy review.

1. Having a child

A new baby is likely a signal that it’s time to review a life insurance policy. If the insured parent were to pass away suddenly, life insurance can help the spouse keep up with expenses, from daycare to college.

Term life insurance is an option for many families because of its lower cost compared to permanent life insurance. When buying life insurance, consider the years spent raising children, building savings, and paying off debts. Both parents usually need life insurance, whether they’re in the workforce or a stay-at-home parent. The coverage amount should reflect the essential services a surviving parent would have to pay to replace, such as childcare or housekeeping. To determine how much life insurance to purchase, each individual should assess their family’s financial needs.

When purchasing a life insurance policy, it’s generally not advisable to name young children as beneficiaries. Suppose a beneficiary is a minor when a parent passes away, and a guardian hasn’t been determined. In that case, the court will likely have to appoint a guardian for the children before the life insurance company can pay the death benefit. A life insurance trust can be set up as an option to receive the death benefit. The insured would then name the trust as the beneficiary and appoint a trustee to manage the trust per their instructions. A lawyer can help ensure a trust is set up correctly.

2. Getting married or divorced

After marriage, many couples combine accounts, share finances, and create a joint financial plan. This can be a good time to ensure that a life insurance policy adequately covers both partners if either should pass away. Here are some important insurance actions to consider:

Review beneficiaries

A beneficiary is the person, business, or trust that receives the death benefit proceeds from life insurance coverage when an insured passes away. The person listed as a beneficiary is often a spouse, depending on the life insurance policy. If life insurance coverage is offered through work, it’s also important to update the beneficiary on that policy.

Review retirement accounts

Retirement accounts like IRAs and Roth IRAs, workplace retirement plans such as pension, 401(k) or 403(b), and FSA and HSA flexible spending accounts allow a person to designate a beneficiary who will inherit the account should they die.

Update coverage amounts

While existing coverage may have been adequate in the past, providing a benefit to a spouse to continue an income stream may entail updating the amount of death benefit coverage.

Reviewing a policy after divorce

If a person has gone through a recent divorce or is in the process of divorcing, it’s a good idea to review a life insurance policy. This may be particularly important if an ex-spouse is listed as a beneficiary on the policy and the insured would like to remove him or her.

Even if there are no directions in the divorce decree considering a life insurance policy, it might be good to review the beneficiary. Without removing a former spouse, he or she may receive the death benefit when the insured passes away. Beneficiaries can be changed online through the life insurance carrier’s website, by submitting a paper form, or by contacting the carrier directly.

Update retirement accounts

Retirement accounts like IRAs and Roth IRAs, workplace retirement plans such as pension, 401(k) or 403(b), and FSA and HSA flexible spending accounts allow a person to designate a beneficiary who will inherit the account should they die. Make sure they are now going to the desired heirs.

3. Purchasing, refinancing or paying off a home

Purchasing, refinancing, or paying off a house is an exciting event and is likely one of the larger financial obligations of a person’s life. When buying a home and taking out a mortgage, life insurance can help protect that asset and help a surviving spouse to keep up with those payments. This can be a good time to review the type and amount of life insurance coverage you have and whether revisions need to be made. Options include:

Term life insurance

Term life insurance pays a death benefit if the insured dies while the policy is in effect. The insured chooses the coverage amount and how many years the policy should last. New homeowners can buy a term life insurance policy timed to match the duration of their mortgage.

Permanent life insurance

A permanent life insurance policy can last until you die if premium requirements are met. Permanent insurance cash value may support an early home payoff or can be retained for coverage of the “next” home the client has. Talking to a financial professional can help you better understand how buying a home could affect personal life insurance needs.

4. Planning for retirement

For those nearing retirement, a common part of getting finances in order is reviewing life insurance coverage to ensure any loved ones left behind can keep up with mortgage payments or other financial obligations. If lifestyle choices or expected retirement costs have changed, the insured may want to revisit their life insurance policy to ensure adequate coverage.

While a life insurance policy’s primary objective is to pay a death benefit to beneficiaries, some types can also provide cash value to supplement income in retirement. During a policy review, an insured will typically review their estimated retirement income and financial needs and determine if any gaps need to be filled.

5. Change in employment

You may be promoted, change jobs, or experience a job loss throughout your career. These key events may affect living standards and provide an increase or decrease in household income. If you do experience an employment change, it can be helpful to revisit life insurance coverage to ensure the death benefit is where it should be to provide suitable financial protection.

6. Providing care for loved ones

Reviewing life insurance regularly is a smart step for those who care for young children or aging parents. If a young child is left behind, a spouse may need to work full-time to pay the bills, including childcare, house cleaning services, or grocery delivery. Additionally, if you are a caregiver for an aging relative, it’s a good idea to consider the financial value of the support being provided.

Caregivers often have a significant amount of out-of-pocket expenses. According to the AARP, most family caregivers report spending an average of over $7,000 annually in out-of-pocket costs related to caregiving needs in 2021. Should something happen to the caregiver, those expenses may still need to be covered. Life insurance can help provide for those costs and make sure loved ones are protected.

7. A change in health

Life insurance is often based on your age and health when you apply. If you adopt positive habits that impact your health after coverage is in place, you could qualify for new life insurance rates. Giving up tobacco, lowering blood pressure, having surgery to reduce weight, or rectifying medical issues are examples of changes that might positively alter health. When a person experiences any of these changes, they may want to explore their policy options.

Caregivers often have a significant amount of out-of-pocket expenses. According to the AARP, most family caregivers report spending an average of over $7,000 annually in out-of-pocket costs related to caregiving needs. Should something happen to the caregiver, those expenses may still need to be covered. Life insurance can help provide for those costs and make sure loved ones are protected.

Talk to a financial professional

As life circumstances change, reviewing a life insurance policy to see if it aligns with those changes can help keep a family on track financially. Meeting with a financial professional each year or following any major life events can help you explore your options, revisit your coverage, and discuss ways to protect your loved ones’ future.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.

Neither North American nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums concerning such arrangements.

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REV 2/2024