Do Changes in Your Life Require More Life Insurance?

By Kristi Vaughan

Has your financial life changed in the past 10 years? Probably so. But has your life insurance kept up?

If today's financial picture is significantly different from that which existed when you took out your life insurance policy, then it is time for a life insurance checkup.

Start with the changes

What is different in your life? Have you gotten married, or divorced? Do you now have children? Have your children left the nest? How about your mortgage and college expenses? Are they on the upswing or going away? Have you changed jobs and does your new employer offer the same coverage?

All of these factors, and more, are used to determine the amount of life insurance you need.

How much insurance?

Insurance specialists recommend looking at the amount of life insurance you need in two ways.

First, how much will be needed to cover immediate expenses upon death? These include uncovered medical costs, funeral expenses, final estate settlement costs, debt obligations such as a mortgage or personal loan and other lump sum expenses already incurred such as college tuition.

Next, how much will your heirs and dependents need to live on after your death? The main purpose of life insurance, after all, is to replace your lost income. This can be the harder amount to determine since you are deciding on a lump sum figure that can be invested to generate earnings roughly equivalent to your income. In coming up with this figure you will have to make certain assumptions on such matters as inflation and growth rate of the investment.

With these numbers in mind, you can begin calculating your life insurance needs. You'll probably also want to consider such factors as whether or not your spouse will be working, whether there will be new childcare needs, whether there is income or a lump sum distribution from other sources such as a company pension or retirement plan and whether your heirs are eligible for Social Security benefits. Many financial planners recommend that each wage earner have life insurance equal to five to seven times his gross earnings.

Life insurance needs calculators such as that offered by the Life and Health Insurance Foundation for Education can help you determine how much insurance coverage your current life situation requires.

Permanent or term?

Just as life events dictate how much insurance you need, so can they play a role in what insurance is most appropriate.

There are two basic types of life insurance: permanent and term. Term insurance tends to be less expensive as it is offered for only a set period of time. Permanent insurance offers coverage for as long as premiums are paid.

You might want to consider term insurance if:

You are seeking the most insurance for the lowest costs
You are covering needs that are declining and will go away at a set time, for example a mortgage or car loans

Some disadvantages to term insurance are:

Increased premiums when you are older
Potential termination of coverage at the end of the term if you get sick
No cash value

You might want to consider permanent insurance if:

You will be keeping the insurance for a long time
You want to build up a cash value that you can either collect later, use to pay premiums or borrow against

Some disadvantages to permanent insurance are:

It can be more costly
Required premium levels may make it hard to buy enough protection

Outside help

In making a final determination about whether you should change your life insurance, you may want to talk with an insurance agent, financial planner and tax advisor or estate planner.

You also can get information about life insurance through the National Insurance Consumer Helpline at 1-800-942-4242.