Your life insurance needs may change—even if your policy doesn’t

A first life insurance policy is usually purchased to deal with the present reality.

Maybe you recently started a family and wanted to replace your income if something happened to you. Perhaps you had taken on a mortgage or other debt. At that stage, term insurance may have offered an affordable way to provide protection during the years your family needed it most.

Then the policy was filed away—and life moved on.

And that’s where problems may arise, according to experts.

“A life insurance policy shouldn’t be a document that simply gets put in a desk drawer and forgotten,” said Jimmy Harmon, an insurance specialist with BOK Financial Advisors. “Bring it out each year, dust it off and make sure it’s adequate for your family’s needs.”

Life insurance can be an uncomfortable subject, he added. However, postponing a review can make additional coverage more difficult or expensive to obtain later, particularly if your health changes.

The policy may stay the same. Life doesn’t.

People treat life insurance as a one-time decision for a simple reason, Harmon said: They bought insurance, so they assume they’re covered.

They are—but for the needs and circumstances they had at that moment.

Then children are born. Families move into bigger homes. Incomes, debts and financial responsibilities grow.

Health can change, too, and waiting until a serious health issue develops can make additional coverage more expensive or difficult to obtain.

That's why Harmon recommends reviewing your life insurance every year.

Not only can it help you determine whether you still have enough coverage, it also provides an excellent opportunity to examine the policy itself, he said.

If the insured person’s health has taken a downturn, for example, a professional can help figure out what options may be available to keep the existing policy in force. There could also be opportunities to add coverage without new evidence of insurability, he explained. A term policy may also include an option to convert some or all of the coverage to permanent insurance.

The details—and deadlines for exercising those options—vary by policy. That's one reason an existing policy should always be reviewed before it's replaced, allowed to lapse or canceled, Harmon said.

A review doesn’t necessarily mean replacing what you have

Alternatively, a review may affirm that the coverage still meets your needs or just needs a simple change like updating beneficiaries.

Depending on the state and type of policy, divorce may affect whether a former spouse remains entitled to the benefit, even if that person’s name is still on the original designation.

In other cases, ownership of the policy may need to be reconsidered as part of a broader estate plan, Harmon said.

Some people may benefit from layering policies purchased at different life stages, with each policy addressing a particular responsibility or period, Harmon said.

With this in mind, Harmon said a useful review should look at questions such as:
• Who depends on your income, financial support or unpaid contributions to the household?
• Have your income, debts or family responsibilities changed?
• Are your beneficiaries and policy ownership arrangements still appropriate?
• What renewal, conversion or other options does your existing policy provide?

Before canceling, consider what else the policy might do

Once children become financially independent, mortgages are paid off and retirement nears, it can be tempting to assume life insurance is no longer necessary.

But replacing income during the working years is only one potential use for life insurance, Harmon said.

For instance, life insurance can provide cash at a time when an estate or family may own substantial assets but have limited money readily available. That money could help cover funeral expenses, medical bills, taxes, professional fees or travel costs.

Additionally, when structured as part of an estate plan, coverage may help create a legacy for family members or charitable organizations. It can be particularly useful when an estate includes property that cannot be divided easily, according to Harmon.

“Nothing divides more easily than a dollar,” he said. “Not land, houses, cars, mineral interests, equipment or businesses.”

A potential retirement-income gap

Life insurance may also help address the income change that sometimes follows a spouse's death.

With the loss of income, the household may not see a comparable decline in its expenses. Housing, utilities, insurance, property taxes and other costs remain.

Life insurance proceeds may help offset some of that lost income, Harmon said.

Furthermore, in some cases, some permanent policies accumulate cash value that the policyholder may be able to access during life. That value may help supplement retirement income or address other financial needs.

However, later-life uses don’t mean everyone should keep every policy indefinitely, Harmon said. What they do mean is that a policy should not be canceled based solely on the notion that paying off the mortgage or reaching retirement has made it unnecessary.

Peace of mind

In sum, life insurance is not a "set-it-and-forget-it" decision, Harmon said. A policy that made sense at 30 may still be useful at 50, 60 or beyond—but maybe for a different reason.

The goal, he added, is to make sure your coverage still protects the people, assets and plans that matter to you.

"Life insurance is about peace of mind," Harmon said. "What I’ve found is that most people buy life insurance for one of two reasons and probably both: They love someone or they owe money to someone. Which of these do you fall into?"