Life insurance is an important financial tool. Like most tools, it can be used effectively or ineffectively. You use a hammer to drive or remove a nail. You use a screw driver to advance or reverse a screw. Mix those two up, and you won’t like the results. The same is true with life insurance.
When you bought life insurance it was hopefully purchased to meet a specific need based on your specific situation in life. You gave thought to where you were, where you were going and what amount and structure of insurance made sense. As you’ve grown older, your family and financial situation may have changed. So it’s only logical to assume that your need for insurance may have also changed. Additionally, the life insurance industry changes policy options and pricing which might be advantageous to you.
The Primary Reasons to Change Life Insurance Are:
- Your life circumstances change
- Your financial situation changes
- You need to change or add beneficiaries
- There is a better type of policy which meets your needs
- You find a cheaper life insurance policy which truly replaces your existing policy
Your Life Circumstances Rarely Remain The Same
When you first bought life insurance, you based that decision on your family at the time. As your family has expanded and/or as the costs of meeting your family’s needs have increased, your insurance may not be right for your current situation. Periodically, you need to reassess who you’re trying to protect financially should something happen to you. You also need to reassess whether it will cost more to protect them. If you’ve added another child, you now have one more person to protect.
Your Financial Situation Also Changes
Regardless of whether your family circumstances have changed, your financial situation may well have improved. If you’re earning more than when you bought your insurance, and if you’re now blessed to be able to enjoy a better lifestyle, you might want to make sure your family can continue enjoying that new living standard in your absence. This isn’t a justification for spoiling the kids or for enabling someone’s showy lifestyle. We assume your living standard is reasonable. It’s just important to realize that a “reasonable” living standard for a 50-year old in mid-career is different than a “reasonable” living standard for a 20-something couple just starting out.
In some specialized situations, you may also have started or become involved in a business venture which would be compromised in your absence. Protecting the value of your involvement in this venture creates different insurance needs than before you were involved.
Hopefully, at some point your financial situation improves to the point where you don’t need life insurance. Simply stated, if you’ve accumulated enough of an investment portfolio to sustain your family in your absence, then much of the need for insurance has disappeared. The vast majority of insurance “needs” are temporary, but most people buy insurance and then forget about it, eventually paying for a product they don’t need.
Who Do You Want To Receive A Benefit If You’re Gone
Your insurance policy contains beneficiary designations – essentially instructions to the insurance company about who should be paid if you die. Over time, the needs of the individuals in your family may change. In the early years, you may want your spouse to receive 100% of the benefit. In later years, you may decide to direct benefits to the kids specifically for college. And even later, you may find one child is doing so well that they don’t need anything from you while another child is struggling. There’s also the possibility that you may want to direct the death benefit to an irrevocable trust to pay for estate taxes. These are just a few examples of needed changes. The specifics of your family members’ individual needs will dictate what changes, if any, you should make to the beneficiary designations.
The Right Insurance Structure Makes All The Difference
Alright, what if you didn’t make the best decision way back when? Or, what if your circumstances have changed and your insurance no longer gives you the coverage you need? The 3 basic types of insurance are:
- Term insurance
- Whole life insurance
- Universal life insurance
Each is appropriate to certain needs and wholly inappropriate for other needs. Since insurance policies can be complicated to understand, it’s possible you didn’t understand how to fit your needs with the right type of insurance. Unfortunately, it’s also possible that differences in commission rates motivated an insurance agent to push you into a product which wasn’t in your best interest. Unless you routinely review your needs and the benefits of each type of policy, you won’t know if you’re properly insured.
Should You Change Your Existing Life Insurance Policy With A Cheaper One?
Everyone wants to save money. There are times when you can literally replace your existing insurance with the same type/amount of insurance for less premium cost. Medical services are improving and life spans are increasing. In response, the “cost” of insurance to the insurance companies has been decreasing gradually, and many have reduced premium rates over time. It is possible that you might be able to buy new insurance for less than you’re paying now.
You have to be careful about changing life insurance for this reason because it is often difficult to make an apples-to-apples comparison. Given the influence of commission rates mentioned above, an unscrupulous insurance agent might be tempted to tell you that a new policy is the same as your existing one – only cheaper – when in fact the new policy is different in significant ways which are harmful to your situation.
Before You Make The Change
Explaining the legitimate reasons to change insurance coverage has been relatively easy. Actually determining what change is appropriate takes a lot more work. We highly recommend you get advice from someone who does not benefit from the change. Make sure your advisor does not collect a commission from the change or that he/she is not being paid a finder’s or referral fee. You need objective advice for a decision this important.
You also need to know that you can change your coverage. If you’re considering changing policies, make sure that you purchase the new insurance before you drop the old coverage. Once you drop your old coverage and get beyond any reinstatement period, your old policy is, for all intents and purposes, gone. If you drop the old policy before the new one is active, you might not qualify for the new coverage. This would truly be jumping from the frying pan into the fire.
Be careful, get objective advice and assess your specific needs on a regular basis. Insurance is a great tool if it’s the right policy for you. To learn more about the different types of life insurance available to you, read our blog on Understanding Life Insurance.