If you have a life insurance policy you haven't reviewed recently, it may no longer reflect your current situation. Your financial responsibilities shift over time, and your coverage should keep pace. Periodic reviews are a practical way to stay on top of this.
A few important notes before we go further: several factors affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder may also pay surrender charges and face income tax implications. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.
Some assume that once you secure a life insurance policy, you can set it and forget it. But life insurance is not static. Changes in your life can directly affect the role you want life insurance to play. Periodic reviews help keep your coverage in step with your evolving situation.
One practical framework for assessing your life insurance needs is the DIME method. It involves adding up four categories:
Debt — Consider all outstanding debts, excluding your mortgage. This could include credit card debt, personal loans, or car loans.
Income — Calculate approximately ten years of your income. This helps you understand what financial gaps may arise for your family.
Mortgage — Add the amount required to pay off your mortgage. Using life insurance proceeds to retire a mortgage may help your family keep its home.
Education — Estimate the cost of your children's college education. Use a range, since costs vary from school to school.
Certain events can alter your needs and responsibilities in ways that make a coverage review worthwhile:
Change in marital status — Marriage or divorce can change your financial situation and affect factors such as your policy's beneficiary.
Birth of a child — A new child may increase the financial responsibilities you want your policy to address.
Change in employment — A new job or a change in income may cause you to reconsider your benefit amount.
Changes to your home — Buying, selling, or paying off a mortgage can alter your coverage needs and overall strategy.
These steps provide a general starting point, but a financial professional can help you assess your specific situation, answer your questions, and review how particular policies are structured. Life insurance is not a one-size-fits-all product. Reviewing it periodically can help confirm that your coverage still fits your life.
If you have questions about your life insurance coverage, let's talk.
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Brent Forrest & Associates, LLC. dba Wela Financial Advisory (Wela) is a registered investment adviser. The information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. This article and images may have been enhanced by utilizing artificial intelligence (AI). Wela may discuss and display, charts, graphs, formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions.
