Reviewing your life insurance every few years

Life insurance is bought once and then forgotten, which means most people carry coverage designed for a life they no longer lead.

When to review

After any of these, and otherwise every three to five years.

Marriage or partnership. Divorce. A birth or adoption. Buying a home or taking on significant debt. A substantial income change. Starting a business. A child becoming independent. A death in the family, particularly of a beneficiary. Retirement. Any change in health. Any change of employer.

The amount

Recalculate the need rather than assuming the original figure still applies.

Income replacement for the period it is needed. Outstanding debt including the mortgage. Education costs. Final expenses. The replacement cost of unpaid work in the household.

Less existing savings, existing coverage and any survivor benefits.

The need generally rises through the years of young children and mortgage debt, then declines as both resolve.

Which means someone in their fifties may need less coverage than they carry, and someone in their thirties with a new house and a new child frequently needs considerably more.

The term

Check when the policy expires.

A twenty-year term bought at thirty-two expires at fifty-two, potentially while a mortgage remains and while a child is still in education.

Replacing it at fifty-two costs substantially more and depends on health.

If the term will end before the need does, address it now — either by adding a new policy while you are younger and healthier, or by exercising a conversion option.

Note conversion deadlines, which are frequently earlier than the end of the term.

The beneficiaries

The item most often out of date and with the most serious consequences.

Check primary and contingent beneficiaries on every policy, including employer coverage, which does not transfer between jobs.

Check that percentages total correctly.

Check that no minor is named directly, which creates a guardianship problem.

Check per stirpes or per capita designation.

Check that no former spouse remains named, since designations override wills and state revocation statutes do not cover every plan type.

Do the same for retirement accounts, annuities and payable-on-death accounts, which pass the same way.

The policy's health

For permanent policies specifically.

Request an in-force illustration from the insurer, showing current values and projections on both guaranteed and current bases.

Compare it against the original illustration.

Many universal life policies sold when credited rates were high have underperformed as rates fell, and require higher premiums than originally projected to sustain the death benefit.

A policy heading toward lapse is discoverable years in advance and fixable — by increasing premium, reducing the death benefit, or converting to a paid-up policy.

Discovering it at eighty, when the options have narrowed, is much worse.

Do this every few years on any permanent policy. It is free.

The insurer

Check financial strength ratings, which change.

Also check for demutualizations, mergers and reinsurance transfers, which mean your policy may now be with a different company.

You are entitled to know who holds the obligation.

Whether rates have improved

Term rates have generally declined over long periods as mortality has improved.

Someone in good health may find that a new policy today costs less than one purchased fifteen years ago, despite being older.

This is worth checking, and it is one of the legitimate reasons to consider replacement — subject to the cautions about contestability periods and new underwriting.

Never cancel existing coverage before new coverage is issued and in force.

Coverage on both partners

Frequently one partner is insured and the other is not, on the basis that only one earns income.

The unpaid work has a replacement cost — childcare, household management, care of relatives — and its loss imposes real financial consequences on the survivor.

Both partners generally need coverage, though not necessarily equal amounts.

The document nobody leaves

Separate from the policies.

A single page listing every policy: insurer, policy number, coverage amount, agent contact, and where the documents are.

Unclaimed life insurance benefits are a real problem, arising almost entirely because beneficiaries did not know a policy existed.

Tell someone. Keep it updated.

The evening

Gather every policy including employer coverage. Recalculate the need. Check terms and expiry dates. Check every beneficiary designation. Request in-force illustrations on permanent policies. Get quotes to compare current rates. Write the summary document.

Then do it again in three years.

General information about insurance, not insurance, financial or legal advice. Policy provisions and beneficiary rules vary. Consult a licensed advisor and, for beneficiary and estate matters, a qualified attorney.