When Should We Review Our Life Insurance Coverage?

From time to time, there are certain changes in our lives that may have a significant impact on our insurance needs. We should think of it as a checkup. Most of us go for medical checkup once a year. It might be a simple blood test or a full body examination. Our financial security also need preventive medicine as maintenance. Needs change over time, sometimes it is much more rapidly than we realize. These below circumstances shall trigger us to revise our wealth protection needs.

Change in Human Economic Value

How do we calculate our human economic value? There are a few formulas but all the equations are tied to our earning capability.

1. When we earn more

After the yearly performance review, some of us will get promoted to a higher rank with more handsome pay. When your company is doing well for the pass year, you will most likely get an increment too. If your annual income has increased by 10% or more since you last updated your protection coverage, this is the right time to revise it. A key purpose of life insurance is to replace lost income. Please make sure your current coverage is in line with your needs. For example, the critical illness coverage need is about three time of our annual income. We shall increase our protection to meet our earning power.

2. When there is significant changes in our health

Most people only feel the needs to get insured when they detect deterioration of health. But isn’t it too late already? When this happens, the proposer is regarded as sub-standard life. The insurance company may impose loading or exclusion clause to be fair to those who are standard healthy lives in the same pool. The best time to get insured is when you are in great health condition, haven’t been hospitalized before or advised to take any long term medication. Get help from an experience insurance agent who can advice and help you to come up with a good proposal.

3. When we get bonus from inheritance

Getting extra inheritance means our net worth has just increased. This will normally resulted in increased passive income such as rental collectable and dividends from stock. When this happens, either we earn more and increase our cash flow, or we spend even more to fulfill our instant gratification. Either way will still affect our insurance needs.

4. When there is a shift in income

Such changes happen when we or our spouse resumed or discontinued work. This create shifts in income. The rule of thumb is to insure more on the person who earns more. However, don’t look down on housewives, or male home maker. Without them, we still need to hire baby sitters, maid, and even home tuition teacher to be able to comply with all the works previously taken care of by our spouse.

Change in Life Commitment & Responsibility

1. When we take up more debt

This occurs when we purchase a new home, or taking up more business loan to expand our business. Life insurance is a great tool to cancel your liability in the event of death, disability or even disease. Since we are paying interest for the mortgage or loan, we shall treat the insurance premium to cover the debt as part of the interest charges we pay. If the interest rate is 5%, we pay an extra 2% annually to get an adequate life insurance coverage. Total of interest now become 7%. Although we are paying more and reducing our positive cash flow, the return is significant at the event of unexpected disaster. We are actually using the bank’s money to insure our life and our assets indirectly! Life insurance is cheap!

Image: Marriage is a new beginning
Photo Credit: Christopher Potter

2. When we get married

When a person marries their life insurance needs change as they have a partner to consider. It’s important to think about how our death may impact our spouse’s financial future and set our insurance policy at a level that will allow them a comfortable future. Love is not only shown by our words. Action says the words.

Sum assured equals level of love.

3. When we got kids

When a couple welcomes a new baby into their family their financial situation changes and it’s important to consider the fact that their life insurance now needs to cover additional expenses. We may also be thinking about our desire to provide college funding for their future. Life insurance can help to provide for educational expenses if we die prematurely. There is also more needs if we intend to create a child incentive living trust to manage the risk of double tragedy.

4. After divorce

Unfortunately this happens every day all around the world. I have clients used to be couple, but then divorce and still remains as my clients separately. The first thing they do in the policies review is to change the nominees. If they had joint life insurance policies it’s wise to revert back to an individual policy and have the beneficiary changed as well if it was their former spouse.

5. When we are taking on the financial responsibility of an aging parent

Taking care of an aging or ill parent is one of the toughest
responsibilities some people will ever face. So many caregivers feel overwhelmed. It is better to take the preventive precautions rather than solving the financial problems when it is too late. Buy medical insurance for our parents when they are still insurable.

6. When we are entering retirement

Some of our insurance plans include cash value that can be accessed to supplement other retirement income, while the coverage can be used to provide additional income to a surviving spouse, pay off debt, pay any resulting estate taxes or income taxes, or create a charitable gift at the time of our death. But most likely our commitment is lowered because most children have grown up and independent. Annuity that can provide a stable income stream might be the next insurance product we are looking for.

Change of Risk in Life

1. When we change occupation

Actually, there are time before medical insurance coverage from our new employer begins. We should always have a personal hospitalization and surgical benefit covered at all time regardless of being employed, or self-employed. When we change job functions, we might be exposed to higher risk. For example, one of my client is an auditor. He takes flights quite often nowadays compare to his previous job. Topping up his coverage is a must.

2. When we pursue risky interest

Did you ever think of doing that exciting bungee jump? or deep sea diving? or car racing? Dangerous sports incur more risk and the insurance company would like to access our condition again.

Image: Please stop smoking
Photo Credit: Miles Eliason

3. When we stop smoking

It’s a well known fact that individuals who smoke pay higher life insurance premiums than non-smokers. If you have stopped smoking for a length of time you may be eligible for a reduced life insurance premium.

If life is a journey and not a destination, then we will have a number of different paths to travel throughout our lives. Along the way, we’ll experience blessings, challenges and changes that will change our financial priorities and needs. There are at least one of the above situation changes happen in our life every few years. The best time to review our life insurance policies is at the moment we expect it is going to happen. Contact your insurance agent or financial planner to have your policies reviewed.

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