The title of this post makes a very big assumption.
It assumes you are actually reviewing your life insurance plans!
Life insurance seems to hit the gag reflex for most folks. It’s just not something desirable they care to review, make plans for or discuss.
And yet, it’s one of those necessary evils.
Your life insurance plans should be reviewed at least annually, and perhaps more often if you are experiencing life changes throughout the year.
For example, becoming a parent or having another child is a major life event that should cause you to review your life insurance plan well before your annual life insurance review.
So today we want to cover four things that you need to consider when reviewing your life insurance plan:
Type of Life Insurance Plan
Ok, this seems pretty basic, but I sense there is a lot of confusion out in the world regarding the types of life insurance out there.
There are two main types of life insurance: term and permanent.
Permanent insurance is designed to last as long as you live, no matter how long you live. These can be whole life, universal life, variable universal life and a newer version of a universal life that is nicknamed permanent term.
All these life insurance plans have one thing in common – they try to make sure your life insurance is their for you when you really need it – at your death.
You will generally pay higher premiums because you are insuring yourself for a longer period of time and because many of these policies build up cash value, a savings portion of the insurance.
Term insurance plans on the other hand insure individuals for a set period of time, or a term. This could be one year (not recommended) or it could be 10, 15 or 20 years depending on the plan you choose.
If you do not die within that period of time, then your beneficiaries get nothing. You would have to buy another policy at that time.
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Term is great for those looking to keep premiums inexpensive. Since you are only insuring yourself for as set period of time, the premiums for these life insurance plans are generally much less.
So, which type of insurance plan is right for you? It’s a question you’ll need to consider when you review your life insurance!
Amount of Life Insurance Plan
This one makes sense right? How much life insurance do I have and how much life insurance do I need? Pretty simple.
The difficulty comes in when really trying to figure out how much life insurance you need.
I generally like to keep things simple, so here is a good way to think about it:
- Current and future financial obligations
- minus (-)
- Existing resources (includes savings, existing life insurance and survivor’s earnings)
- equals (=)
- Life insurance needed.
Premiums of Your Life Insurance Plan
Many folks confuse the cost of insurance with premiums.
Cost of insurance refers to the cost it takes to insure you as determined by the insurance company.
Your premiums may be higher than this amount if you have a permanent insurance policy because most of those have the built-in-savings portion called cash value.
In order to build cash value, you have to put in an amount much higher than the cost of insurance.
What I refer to here is the out of pocket cost for your life insurance, or your premiums.
You’ll want to review your premiums especially with your permanent insurance because if you didn’t put enough in to begin with, your insurance company will want a higher amount to keep this type of policy going strong.
With term insurance, you need to review the premiums because you don’t want to come to the end of your term and automatically renew at a much higher premium.
I’ve heard of people getting a higher bill for their term insurance because it was at the end of its renewal period and just paying it because they didn’t review what it should be.
Beneficiaries of your Life Insurance
Beneficiaries should be reviewed annually as well.
I’ve heard horror stories of folks forgetting to change their beneficiaries after a divorce only to leave their “ex” with a nice little chunk of change upon their death.
This could also apply if you created a trust and were supposed to put life insurance proceeds into the trust!
There are big ramifications for having wrong beneficiaries selected so be sure to review this regularly, if for nothing else than peace of mind.
What Else Do You Consider When Reviewing Your Life Insurance Plan?
Share your thoughts below!
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{ 5 comments… read them below or add one }
Don’t be afraid to shop around for your policy. Speak to an insurance broker who can compare policies from a few different companies. Shopping for the lowest premium makes sense for a term plan but may not for a permanent or whole life plan.
Also check when you bought your insurance and review new policies proposals to compare. The mortality tables changed not too long ago and made a huge difference in price for a lot of people.
Another point to review is the investments inside the policy as well as the health of the company that issued the plan.
Kim, all great points! Thanks for the input!
Mark, good points as well. Price is definitely a factor, but not the only factor.
I recently got married and my wife and I decided it was time to get life insurance. I had heard that term life insurance was cheaper, so we ended up at a site our friend recommended, http://buytermlife.com/. They had a term life insurance calculator that was very helpful. We ended up finding a package that was very affordable. I would recommend them as a good place to start your search.