Life Change? Update Your Life Insurance Policy

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I love my wife, my second wife. Not in the HBO Big Love sense, but through divorce and remarriage. The thing about second marriages is that it means there was a first marriage and with first marriages come exes. Once upon a time, you cared about enough to worry about their well-being if something were to happen to you.

The biggest problem with exes and the past is that they sometimes intrude on the present in unexpected ways. My story is nothing out of the ordinary, just another boy meets girl, boy marries girl, boy divorces girl and meets another girl who he marries. See? All neat and clean, right? Not exactly.

My first marriage produced more than a divorce: it produced two wonderful children. As a result, I purchased and continued to pay for life insurance that my ex was the beneficiary of long after we divorced. Paying it was a habit: the premium was always automatically deducted from my checking account and I never gave it a thought. Long after the divorce, I thought of my insurance as being for the benefit of my children, forgetting that, technically, my ex was the actual beneficiary.

The Day the Earth Stood Still

Cue the dramatic music. My wife was organizing important documents when she came across my old life insurance policy. To her credit, she did not freak out at the sight of wife number one’s name as beneficiary because she assumed she would find a completed change of beneficiary doc and all would be right with the world.

There was no change to be found and, when questioned, I confessed immediately that I had never thought about it. The premium was paid automatically and the coverage was simply intended to benefit my daughters. Not the best answer, what with my daughters both in their twenties. After a few harsh words and some finger wagging, it all worked out.

My embarrassment in sharing this story is not because of the all too common occurrence of having an ex as beneficiary on a life insurance policy – I share it because I didn’t heed my own advice. Advice I’ve given clients countless times over the years: Review everything annually!

What exactly does it mean to annually review? Sound financial practice says you should review all of your financial obligations and investments regularly to make sure everything is in order. It also lets you confirm that you have adequate coverage and that you are receiving the most advantageous rates for that coverage. For our purposes, I’m going to limit the conversation to life insurance.

An annual review of your life insurance policies means taking out all of your policies and assessing the principal points of the contracts, such as:

  • Beneficiary
  • Benefit Amount
  • Term
  • Loans and Cash Value

Axe the Ex

An annual review of life insurance policy beneficiaries can turn up a lot more than an ex: it might reveal deceased beneficiaries, children born in the last year who aren’t on the policy, or kids or grandkids who are now old enough to be named as beneficiaries in their own right. The point of life insurance is to provide for the needs of those left behind when you die.

The needs of your loved ones change over time. Your children will become adults, graduate and start families of their own. Marriages end and start. Grandchildren are born. As your family life evolves, the need to evaluate who receives what will be something you need to regularly evaluate.

When it comes to your term policy, the term itself is of particular importance – go figure. Some term policies convertible to permanent insurance on their anniversary and some are convertible at the end of their term. An annual review prevents term policy expirations from creeping up on you; that’s the sort of surprise you don’t want to deal with.

Whole life and universal life policies that build cash value and have the ability to be borrowed against should be reviewed to assure that you understand your current financial position. Outstanding loans against a policy’s cash value may reduce the death benefit, and while they are sometimes necessary, such loans will end up compromising the initial goal of your life policy: to provide for loved ones when you are gone.

Some policies, universal life in particular, allow let you use the cash value to reduce or eliminate premiums. An annual review will indicate whether or not you are in a position that would let you save some money and maintain the same level of coverage. Knowing that you are able to easily access a fast, undocumented loan when you unexpectedly need one can alleviate a lot of potential stress.

Life Changes

The most important part of an annual review of life insurance policies is a review of your total amount of coverage. Your life changes over time – bigger house, children, a business, etc. Your needs grow and change more than you realize until you take time to evaluate it. This is where the rubber meets the road in terms of your annual review because for insurance to truly be effective, you have to have enough.

The bottom line when it comes to annual insurance reviews is consistency. Like changing smoke detectors, consider making it a regular occurrence on a specific date. New Year’s Day, for instance, or perhaps Valentine’s day. After all, isn’t life insurance really an expression of love?

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