Why you need to routinely update your life insurance policy
Much like other insurance policies, the terms and stipulations of life insurance are constantly changing. It's crucial for individuals to regularly reevaluate their life insurance policy to determine if coverage is still adequate for their needs.Posted — Updated
When running the gamut of insurance coverage, life insurance is often thought of as a one-time decision.
While other types of insurance policies may change yearly, once you've picked a suitable life insurance policy, you may feel as if you're set for decades. But in reality, it's not quite as simple as that. In fact, life insurance policies can be changed just as often as their counterparts — which is why it's so crucial to regularly assess the adequacy of your coverage and consider all options available.
"The problem is, too many insurance agents push only one or two companies," said Peter J. D'Arruda, president and founding principal of Capital Financial USA. "Wouldn't it be great to compare what you have to everything else that exists? If there was a better deal, then wouldn't you want to know about it? Knowing the differences, or at least knowing a fiduciary planning team that does, could save you money and help you map out a proper plan and strategy."
Purchasing life insurance offers individuals a way to financially protect and provide for their families, even when they are no longer around, which is why it's so crucial to know exactly what you might be entitled to. Payouts for life insurance vary based on one's specific policy and what their provider offers, but amounts often range anywhere from $25,000 to $10 million.
Taking into account ever-changing market conditions and life circumstances, D'Arruda said individuals should reconsider their life insurance policy on a regular basis. After all, the coverage and benefits that were adequate when you were 23 years old may not work as well when you're 30 years old — in fact, they may not even work when you're 25 years old.
"People don't take into account that interest rates change, market vehicles change, policies change. They get better, some get worse — you always need to stay up-to-date," said Parker Holland, a chief wealth strategist at Capital Financial. "Reviewing your policy can be a bit like reviewing legal documents. You always need to make sure you're staying on top of them because you don't know what you don't know, and understanding it all is a full-time job in this industry. That's why it's crucial to work with someone on a yearly basis that can make sure your plan or product is still the best option for you."
Holland finished, "Oftentimes, I see people coming in that do not have updated wills, power of attorney, trusts of that sort, or they move between different states and haven't made those updates. A lot of people may not realize this, but state laws dictate more than they think."
Aside from ever-changing interest rates, market conditions and variations by state, there are several life events that may constitute an alteration in policy, including family changes such as marriage, divorce, new children, a new job, salary increase or decrease, purchasing a home, or entering retirement.
With so many factors to consider when choosing a life insurance policy, monthly cost is just one small piece of the puzzle. While it's important not to choose a policy outside of your price range, a more expensive policy with more comprehensive coverage may be worth it in the end.
"Some of the new policies let you use the death benefit tax-free while you are living to pay for nursing homes. Some policies also build a cash value that may be available as a tax-free stream of income in retirement," Holland said. "By doing a simple review, many have been able to increase their death benefit, reduce their yearly costs, and also get some of the new benefits on their policy, like that ability to use the death benefit tax-free to pay for long-term care expenses."
As new terms are introduced and old policies are altered, simply signing off on the same life insurance policy you've previously chosen may not cut it and you may miss out on major benefits by doing so. Additionally, personal health can be unpredictable. While no one ever hopes for the worst, it's important to be prepared and know your options while you still have the opportunity to do so.
"There is no greater equity than your health. Do not put off life insurance planning or getting an audit and review of your current policy," D'Arruda said. "We never know when the day will come that our health won't allow us to buy what we want."
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