Beware of Changing Needs With Life Insurance

By Richard A. McGrath, CIC, LIA

As your life changes, so should your life insurance.

It is worth reviewing your life insurance policy not only periodically, but whenever there is a major change in your life.  Anything that changes your financial status will likely affect your life insurance needs.  Marriage or divorce, a new job or retirement, the birth of a child or death of a loved one, the purchase or sale of a home, or a major illness are just some of the events that may make it prudent to review your coverage.

Think about why you have life insurance.  It’s most important purpose, of course, is to provide your family or other beneficiaries with income if something were to happen to you.  Before you are married and have a family to support, you won’t need much life insurance.  As your family grows, and as your career advances, your need for life insurance will increase.

Depending on your circumstances, you may want to change the type of life insurance you have, the amount of coverage or even your beneficiaries.

Changing Coverage

The type of policy you own should depend not only on your needs, but on what you can afford.

The two major types of life insurance are term and cash-value.  Term insurance provides protection for a specific period of time.  If you die during your term of coverage, your beneficiary or beneficiaries will receive a death benefit as specified by the policy.  If you are still alive when the term expires, your beneficiaries receive nothing.

Cash-value life insurance provides coverage throughout your life, as long as you do not cancel the policy and continue to pay your premiums.  Cash-value insurance costs more than term insurance, but term insurance becomes more expensive as you get older.

For many young couples, the purchase of term life insurance is sufficient to protect their family while their children are young and it is often all they can afford.  They may, for example, buy insurance for a term that ends when their children graduate from college.  At that point, they may no longer need as much protection, so they may allow the policy to lapse or they may replace it with a smaller policy.

Conversely, it may also be a good time to plan your legacy.  Cash-value life insurance is often used to pass on wealth to children or grandchildren, or to make charitable donations.  When life insurance is held in a trust, it typically is not subject to income taxes or estate taxes.

Life insurance is also used in business succession planning.  It can, for example, be used to provide funds to buy out the ownership interest of a deceased partner.  The deceased partner’s family benefits and the business can continue operating without a financial hardship.

The amount of life insurance coverage purchased also is typically based on income, since the benefit is designed to replace income.  Ideally, you should be able to invest the death benefit and live off of the income it produces, so that you don’t run out of money in the future.  Experts recommend purchasing coverage of at least 10 times current annual income.  For example, if your income is $100,000 a year, consider buying a policy with a $1 million benefit.

If your income has increased significantly since you initially purchased insurance, consider increasing the benefit or buying a policy that can better meet your current needs.

When deciding on which type of insurance and the amount of coverage to buy, keep in mind that the younger you are when you purchase coverage, the lower your annual premiums will be.  You may not think you need life insurance when you are young, but buying it at an early age will enable you to lock in lower premiums.

Changing Beneficiaries

Even when you have the right amount of the right insurance, it can only serve its true purpose if the benefit goes to the right beneficiaries.

It is especially important to consider who your beneficiaries should be when there is a major change in your family.  Assume, for example, that you purchase life insurance after your first child is born and you make the child a beneficiary.  If you then have additional children, you will need to change your policy if you want them to also be beneficiaries.

You may want to name your children as equal beneficiaries, with the intent that their families benefit equally.  However, if one of your children dies before you do, that person’s family will not automatically become beneficiaries.

What if you divorce and your ex-spouse is a beneficiary?  In most states, your ex-spouse will remain a beneficiary unless you change your policy.

If your parents depend on you for financial help, you may need life insurance that provides them with income in case of your untimely death.  You can add them as beneficiaries to your policy or you may want to purchase a separate policy with your parents as beneficiaries.

Other Considerations

Another reason to review your life insurance is to make certain you are getting the coverage you need at a reasonable price.  The life insurance market is very competitive, so it may be possible to lower your premiums or purchase more coverage.

If you decide to change your coverage, be certain that you never cancel an old policy until your new policy is active.  Otherwise, you could end up being without coverage until your new policy is active.  Even worse, you may find that your health status has changed, and you may be rejected for coverage or you may end up paying higher premiums.

Before purchasing new life insurance, be certain to have your insurance representative conduct an analysis to ensure that you have the protection you need and to make certain you are not buying coverage you don’t need.

Even if you haven’t experienced any major changes in your life, it still makes sense to review your life insurance regularly.  Even if you find that you have the coverage you need, if will cost you nothing to periodically review your needs.

Richard A. McGrath, CIC, LIA is President and CEO of McGrath Insurance Group, Inc. of Sturbridge, Mass.  He can be reached at

This article is written for informational purposes only and should not be construed as providing legal advice.