When Was the Last Time You Reviewed Your Life Insurance Policy?

Sandra bought her life insurance policy the year she and her husband closed on their first house. That was 16 years, one divorce, and two children ago. Sandra, now age 47, had not thought about the policy in years, assuming that buying it had checked the box permanently.

When a colleague mentioned reviewing her own coverage after a job change, Sandra pulled out her policy documents for the first time in over a decade and realized almost everything about her life had changed except the paperwork sitting in her filing cabinet.

Sandra’s experience points to a pattern that comes up among families and the financial professionals who work with them: treating life insurance as a one-time purchase rather than a policy that needs to keep pace with a life that keeps changing.

Life Events That Should Prompt a Review

Certain milestones are natural checkpoints for revisiting a policy. Marriage and divorce both affect who should be named as a beneficiary. In certain states, divorce can leave an ex-spouse listed as the recipient of a death benefit if the paperwork is never updated, since beneficiary designations are not automatically changed by a divorce decree.

The birth or adoption of a child can change both the amount of coverage a family needs and who should be named as primary and contingent beneficiaries. A significant change in income, whether a raise, a new job, or starting a business, can mean an old coverage amount no longer reflects what a family would need to replace. Paying off a mortgage, or taking on a new one, shifts the math in the opposite direction for each.

Health changes matter too, though not always in the way people expect. A policyholder who improves a health condition, such as quitting smoking or losing a significant amount of weight under medical supervision, may become eligible for a better rate class on a new policy, sometimes enough to make replacing an older policy worth exploring, even after accounting for the cost of changing policies.

The Term Policy Trap

A common and costly oversight is letting a term policy reach the end of its level premium period without a plan.

A 20-year term policy purchased at age 35 can offer a predictable premium for two decades. However, once that term ends, many policies allow renewal at a dramatically higher annual rate, based on the policyholder’s age at renewal rather than at the time of original purchase.

Policyholders who do not track their term end date can be caught off guard by a premium that has multiplied several times over. Valuable coverage might lapse simply because the renewal cost arrived as a surprise.  That’s why it’s a conversation worth beginning at least a year in advance of a term policy ending.

What a Review Actually Covers

A policy review is not simply confirming that a policy still exists. It should assess how well your coverage holds up to your current income, debt, and dependent needs.

A review should also

• Check that primary and contingent beneficiary designations are correct
• Determine whether the policy type still serves its original purpose
• Evaluate if any riders in the policy, including living benefits, waiver of premium, or child term riders, are still relevant or underutilized.

For permanent policies, a review should also assess how the cash value has performed relative to original projections, since some permanent products can underperform the illustrations shown at the time of purchase, which may affect how long a policy is projected to remain in force.

“A policy review usually takes less time than people expect, and it routinely turns up something that needs attention, an outdated beneficiary, a term period ending sooner than the client remembered, or coverage that no longer matches their income,” says Martin Walcoe, President and CEO of David Lerner Associates.

“Neglecting these issues can leave your family in a tougher situation than necessary both financially and emotionally.”

How Often Is Often Enough

There is no single mandated schedule for reviewing a life insurance policy, but a reasonable default is every 2 to 3 years, with an immediate review following any major life event rather than waiting for the next scheduled check-in.

For policyholders approaching the end of a term period, reviewing 12 to 18 months before that date provides enough time to compare renewal costs against a new policy, explore conversion options many term policies include, or make a considered decision rather than a rushed one.

What Sandra Found

Sandra’s review turned up two issues worth fixing. Her ex-husband was still listed as her primary beneficiary, a detail her divorce attorney had assumed the insurance company would handle automatically, and her coverage amount, sized to her household income from 16 years earlier, was now roughly half of what her current family needed. Both were corrected within a single meeting with an Investment Counselor. Sandra’s policy itself had been fine all along. What needed updating was everything around it.

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Material contained in this article is provided for information purposes only. It is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. These materials are provided for general information and educational purposes, based on publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. The subject of this article is fictitious and created for illustrative purposes only. It is based on events of a similar nature and should not be interpreted as a direct depiction of any specific individual, organization, or incident. Any resemblance to actual persons, living or deceased, or actual events is purely coincidental.