Some people buy life insurance and have a ‘set it and forget it’ attitude, opting never to look at their policy again. After all, they’ve done their research, and are certain they have the most suitable policy. Why should they have to change anything? The reason of course is that life is never static. Circumstances change – sometimes abruptly – which may call for a life insurance review. You may find yourself wondering if you have enough coverage, or if you should renew the term or not, among other similarly tough decisions. It’s recommended that you perform a life insurance review whenever the following events occurs.
Change in family structure
Marriage: When you say your vows, you unite yourself with your partner for life. Besides your responsibility to always love your spouse, you are also responsible for his financial well being and vice versa. This means that if you are the primary breadwinner of the family, you have the obligation of having life insurance on your life so that your spouse will be ‘taken care of’. ‘Taken care of’ is subjective; for some it may mean paying off the mortgage and providing income for a few years, while others may never want their spouse to have to worry about money again. You should conduct a review at this time to discuss with your spouse the amount of coverage you need.
Birth: The birth of a baby changes your family structure and should trigger a life insurance review. Besides your spouse, you now have to ensure that the newborn will be taken care of should you pass away prematurely. This includes providing income until the child reaches adulthood and setting up an education fund.
Separation or divorce: If marriage prompts you to wonder if you have enough coverage, a separation or divorce should do the opposite. You may no longer see the need to provide for your former spouse once you’re divorced. If this is the case, then the coverage you bought when you were together is unnecessary. Before doing anything drastic like canceling the policy, consider this: if you remarry, will you be able to be accepted at the same rating as you were for the initial policy? Or has your health declined so much that any new policy issued to you will be rated or declined? Life insurance needs are always changing, and you shouldn’t take your ability to be accepted at a standard or preferred rate for granted.
Death: Similar to how separation of divorce is the opposite of marriage, death is the opposite of birth. Since there is one less person to support, your financial burden is reduced and so are your life insurance needs. Some policies allow you to lower your coverage, decreasing your premium proportionately.
Change in employment
Raise or demotion: If your risk management goal includes providing a percentage of your income to your survivor, a raise means that you have to increase your coverage. Likewise, a demotion means that you can decrease your coverage to maintain the same percentage of income for your survivors.
Loss of employment: Nobody knows how long your unemployment will last. If you’ve depleted your emergency funds and are still feeling the pinch, you may be tempted to cancel your life insurance as well. This would be a huge mistake as your obligation to your family doesn’t end when you lose your job. The timing also could not be worse because you will lose your group coverage as well if you did not convert it to an independent policy upon termination. Your family will still need the life insurance proceeds if you pass away, so consider cutting back on other expenses instead of canceling your life insurance coverage.
Change in net worth
Mortgage: If you’ve taken out a mortgage to purchase a home, consider increasing your life insurance coverage by the amount of the debt. For most people, a mortgage represents the most significant financial commitment of their lives. Your family should not be burdened with this commitment should you pass away prematurely. If you are unsure of what kind of insurance to purchase, there are policies where coverage is specifically designed to mimic the balance of the mortgage. Whatever you do, don’t buy mortgage life insurance from your creditor. With mortgage life insurance, rates are not guaranteed, underwriting is done post-claim and the beneficiary is always your creditor. These are just a few reasons to avoid mortgage life insurance.
Windfall: Depending on the size of the windfall, you may no longer need any life insurance. Keep in mind that reserves earmarked as insurance funds should be kept in liquid conservative investments, such as cashable GICs or a saving account. You don’t want to risk the funds designated for your children’s education in something volatile like small cap Chinese IPOs.
Change in health
Illness of self: Will your illness preclude you from being accepted for life insurance in the future? If so and if you have a term policy, you can consider converting some to permanent insurance, especially if you have a permanent need. Term policies can be converted without evidence of insurability, so all it takes is for you to fill out a form and you will have permanent life insurance.
Illness of family member: Typically in a dual-income family, the survivor will require a percentage of the family income. His own salary is subtracted from the total to produce the income shortfall. For example, the income shortfall of a survivor who earns $40,000 and requires $60,000 is $20,000. If your spouse is disabled long-term, his income will cease and shouldn’t be relied upon after your death. Using the above example, your life insurance proceeds will now need to be able to generate $60,000 annually, instead of $20,000. Similarly, you will need to support your disabled children into adulthood, assuming they will never be capable of independence.
Change in risk management goals
Risk management goals, like other financial planning goals, are not static. When you first bought your life insurance policy, you may have thought that your survivors could survive on half your income. As your family grows and priorities change, you may find that your family now needs 75% of your income to get by comfortably. You may also have planned to provide income for only five years after your death. Upon review, your goal may change to providing income until your spouse’s retirement or life expectancy.
You may also come across a charity that you feel very strongly about and want to help its growth. For example, here in BC, many people who have had their children treated at the BC Children’s Hospital name it as the beneficiary of their insurance policies. It’s important that you talk to your family about your risk management goals and to ensure that your insurance policies match these goals.
There are many decisions to make upon review of your life insurance policy. You may want to replace it entirely, like we would suggest if you had mortgage life insurance. You may want to top up your coverage by applying for another policy. If you have the guaranteed insurability option, you can apply to increase your coverage on your existing policy without medical evidence. On the other hand, you may feel like you have too much coverage and want to decrease it. If you need help with your options, talk to a professional life insurance advisor to determine your best course of action.
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