As you go through the rest of your year-end financial wrap-up, it’s also a good time to take a look at your life insurance policy. Most people buy a 10 or 20-year term life insurance policy and then just forget about it, but you could be under-insured if your life has changed since you bought the policy.
When to Adjust Your Life Insurance
If you bought your life insurance more than a year ago, stop and ask yourself these questions:
1. Has my income greatly increased?
2. Have I had children?
3. Have I married or divorced?
4. Are my children independent adults?
5. Have I bought a new home or a second home?
6. Has my spouse returned to work or retired?
7. Have I returned to work or retired?
8. If I expect to receive a pension, has the pension policy changed regarding spouse benefits?
Changes to Income/Living Expenses
If you’ve received a small raise and nothing else has changed, then you probably don’t need to update the insurance policy, but if you’re income has increased 30-50% since you bought your policy, then it may be time to make a change. The general rule is to buy a policy worth at least five times your income, under the theory that spending and living costs increase as income increases. If you’re frugal, you might not need that much, but it’s a good rule-of-thumb. In other cases, you may need much more. For example, you may have moved into a larger house and now have a larger mortgage. You may want an insurance policy that will completely pay off that mortgage, instead of relying on the standard income rule.
Changes in Children’s Status
If you’ve had additional children or your children are no longer dependents, then your living expenses have undoubtedly drastically changed. If you have young children, you may need to increase the policy to ensure that their needs will be met. If you’re children are adults, then you may be able to scale back because you won’t need to provide for them.
Changes in Marital Status
If you recently married, you may need to increase your policy to provide for your new spouse and future children as well as any prior children. If you divorced and aren’t mandated to provide an insurance policy for your spouse as part of the agreement, then you may be able to reduce your policy. At the very least, update the beneficiaries to accurately reflect your new situation.
Changes in Employment Status
If you or your spouse has retired, see if your living expenses have gone down. If they have, then you can probably scale back the insurance policy. However, it may be worth keeping the policy if either of you is likely to require expensive medical care and your spouse will be left with large medical bills.
Changes to Pension Benefits
If you receive a pension that guarantees the same income to your spouse after your death, then you may not need a life insurance policy. Unfortunately, spouse benefits are frequently cut when companies look to contain pension costs. Check your current benefits for a spouse benefit, then adjust your life insurance accordingly.
If you haven’t made any life changes, it may still be worthwhile to see if you can get a better price for your policy. If you do need to make changes, contact your current insurer for a quote, then use a service like NetQuote to request competitive life insurance quotes before you make a change. The end of the year is a good time to do this, but you can update your life insurance policy anytime you experience a life change.