Over the last several weeks I’ve received a number of questions from readers of my blog asking about replacing their life insurance. Jim asked about changing his whole life policy because he couldn’t afford it anymore. I got another email from Nancy. Because her husband passed away, she wondered if she needed to bump up her existing coverage. The circumstances that surround these individuals are different of course. But there are distinct life events that should trigger a review of your life insurance.
Here are the top 5 events:
1. Births, deaths, divorces and marriages: Whenever there is a significant life event in your family it makes sense to review your life insurance coverage. That’s because these changes usually shift the reality of your finances big time. In the example above, when Nancy’s husband died, she suddenly became responsible for the entire family. Even though she is in her 50s, she absolutely needed more life insurance.
Keep in mind that this cuts both ways. For example, when your children become independent, your financial burdens are reduced and you might not need as much life insurance. Likewise, if your spouse lands a great job, that might also reduce your need for life insurance.
2. Change in financial situation: In the introduction, I spoke about Jim. He lost his job and life insurance coverage, too. On top of that, he didn’t have the income to keep up the premiums on his existing coverage. So he needed more insurance, but he also needed to cut his premiums. He switched from whole life insurance to term in order to achieve both these goals. In his case, he really had no other alternative.
But other changes in your financial situation might mean you need less life insurance. If you sell a property or business for example, you might suddenly have so much liquid cash that you really don’t need life insurance.
3. Retirement: If your retirement plan works, you will enough money to retire from passive income generated by investments and pensions. Depending on your situation, that might mean you don’t need life insurance anymore. On the other hand, if your spouse wouldn’t have enough to income if you were to pass away after you retire, you might actually need more life insurance.
4. Tax-law changes: Right now, very few people need to worry about estate taxes, but that could change anytime. If you end up having a taxable estate, life insurance is a wonderful way to solve that problem.
5. Every two years: If you read between the lines, you can see that many of these triggering events are impossible to predict. And even if you know something is going to happen, you can’t guarantee that you’ll be insurable when they do.
That’s why the most important trigger is time. Insurance is meant to protect your family against possible future risks. Nobody is going to sell you life insurance when you are in an ambulance or lying in a hospital bed. Sure you can buy life insurance without having a physical, but there are limits. That’s why it’s important to have the right coverage in place against foreseeable risks. By all means, if one of these trigger events happens to you, re-evaluate your life insurance coverage. But better yet, reassess your needs every two years just to be on the safe side.