iQuanti: Many aspects of personal finance change over time. Savings goals often change as the family grows, and investments can be reallocated to take on more or less risk. But often those who have a life insurance policy are unaware that it can also be adjusted to reflect a changing life situation.
If you’re thinking about changing your life insurance policy, here’s what you need to know.
What can you change about a life insurance policy?
There are two main types of life insurance policies, term life insurance and permanent life insurance. A term policy pays a death benefit if the policyholder dies during the designated term of the policy. A whole life insurance policy has a death benefit that never expires as long as the premiums are paid, but it also has a cash value option that can be used later in life*.
The adjustments you can make vary depending on the type of life insurance policy and may include:
- Beneficiary designations: Keeping beneficiaries informed means the right people will benefit if you die with an in-force life insurance policy. As people become financially dependent on you or no longer do so, you may need to adjust the beneficiaries. The good news is that beneficiary changes can be made at any time.
- The amount of the death benefit: With certain life changes, which we’ll explore below, you may need to increase or decrease the death benefit on your life insurance policy. Some life insurance policies allow you to adjust the death benefit, but with most policies you may need to purchase additional life insurance or re-apply if you want increased coverage.
- The duration of the contract : If you have a term life insurance policy, you may seek to shorten or extend the term as life circumstances change. For example, if you received a sudden windfall and paid off a small business loan early, you may choose to shorten the term of a policy by letting it expire. On the other hand, if you have just had another child, you may consider extending the length of coverage until that child has graduated from college, although you may need to re-enroll and your premiums may change.
When it makes sense to adjust life insurance
Several situations may justify an adjustment to your life insurance policy, in particular when you have:
- Changing family dynamics: There are two instances when life insurance adjustments are likely: when new children or grandchildren come into the world, and when older children leave the nest and begin to support themselves financially.
- An evolving financial situation: If you get a big raise at work or take a big pay cut, you may want your life insurance policy to reflect your new income. Your finances can also change depending on your debt load. If you took out a policy to cover the cost of a mortgage and have now paid it off or exchanged it for a larger one, your policy may need to be changed accordingly.
- Health Changes: If you quit smoking or have made dramatic changes to improve your health, you may be eligible for a better life insurance rate. The life insurance company will likely review medical history for the past few years before making an assessment. . However, this may require purchasing a new font.
How to change a life insurance policy
Adjusting a life insurance policy may not require taking out an entirely new policy (but sometimes it does). Specific changes such as beneficiary designations can be made by you at any time. But requesting an increase in coverage or changing the cash value of a whole life insurance policy is a more complex process that may require additional paperwork and approval. For this reason, it’s best to talk to your life insurance agent about changing your policy, as the process and rules may vary from insurer to insurer.
Sometimes life circumstances warrant an adjustment to your life insurance policy. For example, changes in family dynamics, financial situation, and health are great reasons to work with your life insurance agent to make the necessary changes. By making changes as life situations arise, you will ensure that the right protection is in place if and when your loved ones need it most.
*Using cash values through policy loans, surrenders or cash withdrawals will reduce benefits and may affect other aspects of your plan.