Review life insurance against income needs, dependents and available resources. Compare keeping, changing or ending coverage before taking action.
May 6, 2024 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of May 6, 2024.
A life insurance policy can remain in a drawer long after the reason you bought it has changed. Children become independent, a mortgage shrinks, a spouse leaves work, or someone in the family begins relying on you in a new way. The right question is whether the protection still fits those responsibilities.
Reviewing coverage does not automatically mean buying more or canceling what you have. Start with the financial gap a death would create, the resources available to fill it and the length of time the need may last. Then compare that need with the actual policy, including what it costs to keep.
Identify the responsibility behind the amount
An income-replacement need is different from a specific debt or a legacy goal. If someone depends on your earnings, consider the spending that would continue, income that would remain and the time needed to adjust. If the goal is to pay a mortgage or support education, identify that obligation separately.
Include the economic value of unpaid work. A spouse or partner who provides childcare, transportation or care for a relative may not receive a paycheck, but replacing that work could cost money. A calculation based only on salary can overlook the household's actual needs.
Also identify the resources available without assuming every asset is spendable. A home may be valuable but difficult to use for monthly bills without selling or borrowing. Retirement savings may already be needed for the surviving person's later years. Counting the same asset toward several obligations can make the coverage gap appear smaller than it is.
Work through the gap before selecting a policy
In this example, Marcus and Elena are a hypothetical couple with two children. They estimate that, after a death, the surviving household would need an additional $3,000 monthly for ten years while the children are younger. That simple, undiscounted total is $360,000: $3,000 multiplied by 12 months and ten years.
They also identify $140,000 of separate debt and education goals, bringing the illustrated need to $500,000. They set aside $100,000 of assets that could genuinely be used for those purposes without counting their emergency reserve or the surviving spouse's retirement savings. That leaves an initial $400,000 gap. If only $60,000 of those assets is truly available, the illustrated gap rises to $440,000. Availability matters as much as the account balance.
This is a planning illustration, not a precise insurance recommendation. It ignores investment returns, inflation, changing taxes and the possibility that support is needed for a different length of time. It is useful because the couple can explain every part of the number and challenge the assumptions.
Suppose Marcus has $250,000 of individual coverage and $150,000 through work. Together those amounts appear to cover the estimated gap. But if he expects to change jobs, they need to confirm whether the employer coverage can continue, on what terms and at what cost. Coverage that may end when employment changes should not silently be treated as permanent.[1]
They could investigate additional individual coverage, revise the amount or duration of the need, or retain the current arrangement if its terms remain suitable. They should not cancel an existing policy while a replacement is merely being quoted. Health, underwriting and the final contract may change what is available.[1]
Compare keeping, changing and ending coverage
Term insurance generally covers a specified period. Permanent coverage can provide longer-lasting protection when its requirements are met and may include cash value. These are broad categories; actual guarantees, premiums, expenses and policy performance depend on the contract.[2]
A temporary need may fit a temporary form of coverage. A continuing need, such as support for a dependent who may never be financially independent, deserves a different discussion. Neither situation can be resolved by declaring one product category best for everyone.
For existing permanent insurance, ask for an updated illustration and identify which values are guaranteed and which depend on assumptions. Ask the insurer to explain the effect of any outstanding loans or planned withdrawals under your actual contract, including whether they could affect coverage. A current cash value does not, by itself, tell you whether future coverage is secure.[2]
Ending coverage can be reasonable when the need has disappeared and the remaining costs no longer serve a purpose. But review surrender charges, potential tax consequences and the ability to replace coverage later before acting. The premiums already paid are not a sufficient reason to keep an unsuitable policy; the future costs and benefits are the relevant comparison.
Make the review useful to the people protected
Confirm the owner, insured person and beneficiaries, including any contingent beneficiaries. Make sure someone you trust knows that the coverage exists and where the records are kept. They do not need unrestricted access to your finances to know whom to contact when help is needed.
For Marcus and Elena, the immediate task is to request the employer coverage terms and an updated summary of the individual policy. That resolves the largest uncertainty in their example before they discuss a new purchase. Their review could lead to a change, but it could also establish that the current protection still works.
Set another review when a meaningful responsibility changes: a new child, a business obligation, a paid-off debt, retirement or a major change in health or family support. The purpose is not to keep increasing coverage. It is to keep the protection connected to the people and commitments it is meant to support.
Related reading
- Your Annual Insurance Review Should Start With What Changed
- Review Coverage Before a Small Gap Becomes a Big Expense
Have more questions about whether your life insurance still fits your responsibilities? Complete the Financial Forte questionnaire to get started on connecting with an advisor who can help answer your questions and explore next steps.
The contact invitation is current; it does not imply this contact path existed on the historical reference date.
Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
