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Life insurance isn’t a set it and forget it deal.
Major life events should trigger a review of your policy. During the review, you may find that you need to make some changes.
In this post, we go over changes you can make to your policy. Things like:
- Changing the beneficiary
- Increasing the death benefit
- Removing a rating
And much more.
Read on for a complete list of common life insurance policy changes.
Changes You Can Make To Your Life Insurance Policy
Major life events are things that have a material impact on your life. Things like getting married, having children, changing jobs, and retirement are all examples of major life events.
Whenever you go through a major life event, you want to review your life insurance to make sure that the policy still meets your risk management goals. If it doesn’t, it may be time to make some changes.
Although this list isn’t exhaustive, here are some of the more common changes you can make to your life insurance policy.
Increase or decrease the death benefit
At any time, you can increase or decrease the coverage on your life insurance policy.
Decrease: You usually need the most coverage when you first buy insurance. As time passes, your insurance needs drop as your financial obligations decrease and your savings increase. To save some money, you can decrease your coverage.
Increase: Unlike a decrease, increasing is a bit more complicated. Because the insurance company is taking on more risk, it wants to make sure you’re still healthy and living a low-risk lifestyle. As a result, you’ll have to go through medical underwriting to qualify for the increased coverage.
Remove a rating or exclusion
Rating: This is when the insurance company charges you a higher premium to compensate for the fact that you’re a higher risk than the average person.
Exclusion: This is an activity or condition for which the insurance company doesn’t provide coverage. Exclusions are more common in disability and critical illness insurance. But you also see exclusions in life insurance if you take part in dangerous sports like backcountry skiing and scuba diving.
If you have a policy issued with a rating or exclusion, you can apply to get it removed. Of course, you have to provide evidence that the condition has improved or you stopped the dangerous activity.
Not all ratings and exclusions can be removed though. You’ll need to double-check with your insurance agent before you apply.
Change to non-smoker rates
Did you know that on average, smokers pay double to triple the premium of non-smokers? Fortunately, you’re not stuck paying the higher premium forever. If you can prove that you stopped smoking for at least 12 months, you can change to non-smoker rates.
As part of the process, you’ll have to submit a urine sample that tests negative for cotinine, the metabolized form of nicotine. Switching to non-smoker rates is a proven way to save you thousands over the life of the policy!
Change or remove a life insurance rider
A life insurance rider is an optional coverage that you pay for to enhance your policy. Some common riders are accidental death, disability waiver of premium, and return of premium.
Accidental death: Pays an additional death benefit if you die from an accident.
Disability waiver of premium: Waives the premium if you become disabled.
Return of premium: This is a common rider for critical illness insurance. It refunds you the premium if you haven’t made a claim yet.
For some riders, you can add and remove them at any time, while with others you can only add them when you first buy the insurance.
Exercise a rider option
There’s also a rider called guaranteed insurability. It lets you buy more insurance on specific dates without providing evidence of insurability.
Because it’s an option, you’ll have to notify the insurance company if you want to exercise your right. The same goes for the return of premium rider mentioned above.
Convert to permanent insurance
Every term insurance policy has a feature that lets you convert to permanent insurance, such as whole life and universal life. The benefit is that you can exercise this option without evidence of insurability. So even if your health declined but you need coverage for life, you can convert your term policy to permanent.
The premium for the new permanent policy is based on your age at the time of conversion. Because permanent insurance is more expensive than term, you can choose to convert only as much as you need.
For example, say you have a $500,000 term policy. Instead of converting the entire amount, you can convert a smaller portion, like $50,000, and leave the remaining $450,000 as term insurance.
Switch to a longer term
Term-10 is the cheapest life insurance policy you can buy. The premium is guaranteed for 10 years and then renews in the 11th year for a much higher premium. Sometimes, the premium can be 3-10 times more expensive than the first 10 years! That’s why you don’t want to renew term insurance.
Lots of people buy term-10 for the affordable premiums in the first 10 years but can’t afford to renew it at the higher rates. They end up canceling the insurance and are left without any coverage.
Do they have another option?
Instead of keeping the term-10, some insurance companies let you switch to a longer term like term-15 or term-20. This locks in your premium for the next 15 to 20 years. The catch is that you have to do it within the first 5 years of buying the term-10 policy. Also, the premium is based on your age when you make the switch.
It’s a great option if your budget is tight in the beginning but you expect better cash flow a few years down the road.
Change life insurance beneficiary
When you buy life insurance, you can name a primary and secondary (also known as contingent) beneficiary. The contingent beneficiary gets the death benefit if the primary beneficiary predeceases him/her.
Of course, life changes, and sometimes you no longer want the same beneficiaries to receive the death benefit. A primary example of this is divorce, although you might still need to maintain the coverage to fulfill your legal duty of providing spousal support as part of the separation agreement.
Nevertheless, you shouldn’t feel like the beneficiary designation is set in stone. As the owner, you can change the beneficiary at any time.
Change ownership of life insurance policy
You can buy permanent life insurance on the lives of your children or grandchildren as an investment. This is called the wealth transfer strategy. It’s a tax-efficient way of passing your wealth to your children and grandchildren.
As the owner, you pay the premiums and the excess funds grow tax-sheltered inside the policy. When they grow up, you can transfer ownership of the policy to them tax-free. Any cash withdrawals they make will be taxed in their hands.
You can also transfer ownership to other parties. However, the tax-free transfer is only available in special cases like using the wealth transfer strategy.
Change investment options
With universal life policies, you can invest any funds you deposit in excess of the cost of insurance. These funds grow tax-sheltered over time. You can either use it during your life or have it paid out with the death benefit when you die.
You have a wide variety of funds to choose from. Depending on your risk tolerance, you can put the money in an interest account on one end of the risk spectrum to growth funds all the way on the other end.
To make an informed decision, head over to the insurance company’s website. This is where you can see the management fees, past performance, and asset holdings of the funds.
Stop paying premiums
Have enough money inside the policy to pay for the premiums? Take a premium holiday and let the accumulated growth inside the policy pay for the cost of insurance.
Of course, choosing this option will lower your cash value in the future. But it’s a good way to hit the pause button on your premium payments while you’re going through some financial difficulty.
This option is only available for permanent life insurance policies with cash value like whole life and universal life.
Reinstate a lapsed policy
You have a grace period of 31 days after the due date to pay the premium. If you don’t pay by then, your policy lapses and coverage ends.
But lapsing your coverage might not be your intention. Maybe you moved and didn’t update your address so you missed the renewal notice. Or maybe life got too busy and you forgot. Regardless, you want your policy back.
That’s why insurance companies give you the option to reinstate the policy within 2 years after it lapses. Here are the requirements for reinstatement:
- Submit evidence of insurability – If your health and lifestyle deteriorated, the insurance company won’t accept the reinstatement request.
- Pay the unpaid premium plus interest – The unpaid premium is from the initial due date until the reinstatement date.
After reinstatement, the 2-year suicide exclusion period starts again. The insurance company can also contest the policy for misrepresentation for 2 years.
Changing not enough? Consider a new policy
As a last resort, you can replace your policy. You should only do this if there’s nothing you can change with your existing policy to fit your needs.
When you buy a new life insurance policy to replace your old one, you have to complete the life insurance replacement declaration (LIRD). This form ensures that you know the difference between the old and new policies. More importantly, it makes sure you know why the new policy is better than the old one.
Now It's Your Turn
Are you looking to make any changes to your policy? Maybe you want to change beneficiaries, or maybe you want to increase your coverage.
In any case, you should discuss it with your family and a qualified insurance advisor. With some policy changes, there’s no going back. You’ll want to make sure it’s the right move before you make the change.
While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
