Buying a life insurance policy is a crucial first step, but it’s not a “set and forget” decision. The policy you purchased at 25 may no longer align with your financial goals or life situation by the time you reach 50. Life can change quickly—you might start a new job, switch careers, get married, or experience health challenges. These major shifts can impact the type of coverage you need, making it essential to manage your life insurance policy regularly.

This guide will walk you through key steps to effective management of your life insurance policy, ensuring it continues to meet your needs and those of your dependents at every stage of life. Let’s dive in!

Understand the Type of Life Insurance Policy You Have

The first and most important step to ensuring that your life insurance policy continues to serve your needs is to understand the type of policy you have and how it works. Generally, we can categorize life insurance policies into two main types — permanent life insurance and term life insurance. Let’s briefly look at each so you can understand how they work:

Permanent Life Insurance Policy

Permanent life insurance policies cover you for your entire life until you pass on. While more expensive than term life insurance, this policy has some of the best terms in regard to the benefits you and your beneficiaries get.

One of the standout features of permanent life is the cash value account that accumulates over time on a tax deferred basis. This account allows you to access the accumulated value over the course of your life through policy loans or cash withdrawals. Additionally, when you pass on, you’re guaranteed that your dependents will get an income tax free death benefit, no matter how long you live and as long as you pay your premiums.

There are several subcategories of permanent policies you can choose from, including:

Whole Life Insurance Policies

This is the most common and straightforward permanent life policy. Its premiums remain the same throughout the policy’s life, even as you age. Additionally, with whole life policies, your dependents get a fixed or set amount of death benefit when you pass on.

Whole life insurance also has a cash value component that grows at a guaranteed rate throughout the policyholder’s life. This guarantee lets you know exactly how your policy’s cash value will grow, so you can plan around the money for meeting certain financial obligations.

Universal Life Insurance

This permanent life insurance gives you the flexibility to adjust your premium payments depending on your financial situation. For instance, if you’re experiencing financial hardships and need to direct your income to other pressing expenses like rent or mortgage, you can skip or pay less in premiums. The opposite is also true for universal life insurance — should you get a windfall or an increase in income, you can increase your premium payments.

It’s worth noting, though, that you should approach the premium flexibility with caution. While you can pay less, this might mean that future payments may increase. And if you don’t make up for this, your policy may lapse.

As is with all permanent life insurance policies, universal life policies also have a cash value account that grows against guaranteed interest rates. However, because of the flexibility allowed for premium payments, the projected cash value amount at the end and during the life of the policy may change.

By the way, universal life also offers you the flexibility to withdraw funds from your cash value account and reinvest them in your policy to cover premium payments. However, you must be careful — if you withdraw too much from your cash value balance, your insurance policy could lapse.

Variable Life Insurance

Like most permanent life policies, variable life insurance has a death benefit and cash value component. Its distinguishing factor is that the cash value account gives you the freedom to allocate funds to investments such as stocks, mutual funds, and bonds. While this can increase your cash value balance when markets perform well, it can also expose you to losses should the markets underperform.

Depending on the insurance company you use, the fluctuations in the subaccounts connected to your life insurance policy may or may not affect the death policy. Some life insurance companies set a minimum level for your policy’s death benefit.

Term Life Insurance Policy

If your policy is term life, then you know that it’s the more affordable option of the two. As its name suggests, this life policy covers you and your dependents for a predetermined or set amount of years, usually ranging from 10 to 30 years.

If you die within the set time, your insurer will pay your beneficiaries an amount of money known as a death benefit. However, if you outlive your policy, you get nothing in return. If that happens, you can choose to renew your term life insurance or buy a new policy altogether.

Unlike permanent life policies, a term life insurance policy doesn’t have a cash value component you can leverage while the policy is still active.

Review Your Policy’s Terms and Conditions

Once you know the type of life insurance you have, it’s time to review the finer details of your policy. Understanding the terms and conditions of your life insurance policy is essential to keeping it active and meeting your unique needs and those of your dependents. Some components to review include:

Premium Costs and Payment Schedules

How much you pay in premiums and the frequency of the payments should match your current financial situation. Ask yourself, “Are the premium amounts manageable, or have they become a strain?” If you answer yes, it might be time to explore options like adjusting your premiums or canceling your policy and buying a new one with favorable terms.

For instance, if you have a universal life policy, you have the option to adjust your premiums if you feel they’re too expensive, with the option of increasing them once your financial situation improves. You can also adjust your payment frequencies, depending on the insurance company, to better align with your cash flow.

Policy Limits and Coverage Amounts

If your life has significantly changed since you first bought your life policy, it might be time to review your coverage amounts, in this case, the death benefits. If you were single and now you’re married with kids, your policy’s death benefit may not be sufficient to meet your family’s needs should you pass on unexpectedly.

Other events that may necessitate adjusting your death benefit include buying a house, divorce, and starting a business. For instance, taking a mortgage or any other type of debt may require you to increase your death benefit so that your dependents can easily meet these obligations.

Policy Maturity Date and Renewal Options

If you have a term life policy, reviewing when it will mature is essential so that you know how long your dependents have coverage. This is important because it helps you plan around the options you have.

Some life insurance companies let you renew your policy at the end of the term if you wish. If this isn’t possible, you can always purchase another policy using the same insurance company (or a different one) or buy a different type altogether. Should you choose to renew your policy, it’s worth noting that some insurers require a medical exam, which can increase your premiums.

Policy Exclusions and Conditions

Policy exclusions are the circumstances that may cause your insurer to withhold and not pay your beneficiaries the death benefit. Exclusions basically outline the causes of death your policy will not cover. Life insurance companies usually add exclusions to protect themselves from excessive risks and fraud.

Common life policy exclusions include:

• Suicide Exclusion: Suicide is one of the most common exclusions among insurance companies. Typically, suicide clauses last for about two years from the policy’s start date.
• Criminal Activity: If you die while engaging in illegal activities like robbery, the insurance company may refuse to pay your loved ones the death benefit.
• Dangerous Hobbies and High-Risk Activities: Activities like skydiving, scuba diving, motor racing, or mountaineering often fall under the category of “high-risk.” If you start engaging in these hobbies after purchasing your life policy, you can talk to your insurer about reviewing your policy’s exclusions to include them. This may involve increasing your premiums or buying add-ons.
• Substance Abuse: Another common exclusion usually included by insurance companies is death caused by substance abuse. If you die due to a drug overdose or complications resulting from alcohol abuse, your insurer can refuse to pay your death benefit.

Reviewing these exclusions is necessary to ensure that both you and your beneficiaries understand the limitations of your coverage. It’s also helpful to identify areas where you may need additional or specialized insurance if certain risks apply to you.

Riders

When you initially bought your life policy, the riders or add-ons you chose may have made sense at the time. However, as you age and go through life changes, the riders may or may not make sense. Therefore, it’s important to review them to ensure you’re paying for your money’s worth and benefits that meet your current needs.

For instance, say you purchased an accidental death benefit rider when you were younger because of your high-risk lifestyle or a physically demanding profession. If you changed careers or retired since then, this rider may no longer benefit you. In such a case, you may want to contact your life insurance company to have it struck off from your policy.

Cash Value Growth

Applicable to only permanent life policies, it’s imperative that you regularly assess your cash value account. Knowing how much you have in your cash value account can help you plan accordingly for both short-term and long-term financial goals. It lets you know how much you can rely on without unexpected surprises.

For some policies like variable universal life insurance that allow you to invest the cash value in different sub-accounts (e.g., stocks or bonds), carefully monitoring your cash value account is essential for ensuring you get the highest returns.

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Policy Lapses

Reviewing your policy regularly is essential to prevent it from lapsing. When your policy lapses, it means that your dependents are no longer covered should you pass on. Policy lapses can occur as a result of several reasons.

Missed premiums are one of the most common reasons why many life policies lapse. While most insurance companies have a grace period, which is typically 30 days, you must pay premiums as outlined in your policy contract. Failure to do so will cause your policy to lapse.

Another common reason is if you have an outstanding loan against the policy’s cash value. If your life insurance loan balance grows too high, it can reduce the cash value and cause the policy to lapse. It’s worth noting that if you die while your policy loan has an outstanding balance, the lump sum from the death benefit your dependents will receive will be less your policy loan’s balance.

Regularly Update Your Policy’s Beneficiary Designation

The sole reason why you purchase life insurance coverage is so that it can provide financial support for your beneficiaries, especially if you are the primary wage earner in your household. As such, regularly reviewing and updating your beneficiaries is important, especially with significant life changes.

There are several life changes that may require you to review your beneficiaries, including marriage or divorce, child adoption or birth, and death of a previously named beneficiary.

For instance, if you go through a divorce and had listed your ex-spouse as a primary beneficiary, you might want to remove them if you no longer wish to have ties with them. This is unless the divorce agreement requires you to list them as a beneficiary to ensure that you can still pay alimony and child support should you die.

Let’s explore the different types of beneficiaries there are when it comes to life policies:

Primary vs. Contingent Beneficiaries

As the name suggests, a primary beneficiary is an individual who receives the death benefit payout when you (the insured) dies. This could be a child, spouse, cousin, any loved one, or even a charitable organization. When designating primary beneficiaries, you can name multiple beneficiaries as long as you outline the share percentages.

On the other hand, a contingent beneficiary receives your benefit if the primary beneficiaries die before you.

Revocable vs. Irrevocable Beneficiaries

A revocable beneficiary designation means that you can change the beneficiary at any time without needing their permission. So, should relationships or family dynamics change, you have the flexibility to make adjustments.

As for irrevocable beneficiaries, you can’t remove them from benefiting from your death benefit payout without their consent. This setup is usually used in situations like divorce settlements or business agreements.

Know When to Replace or Cancel Your Life Policy

Life insurance can be expensive. However, that shouldn’t be the reason why you stick with a policy that no longer serves your needs. You have the option of either canceling or buying a new life insurance policy. But this isn’t the only situation that may call for a new policy or cancellation. Others include:

• You Want Permanent Life Insurance Coverage: If you have a term life policy that’s set to expire, your life insurance program might allow you to convert it to a permanent policy without the need for a new medical exam.
• Your Coverage Needs Have Change: Changes like marriage and childbirth may change your insurance needs. So, if your current policy doesn’t provide adequate coverage, replacing it with one that offers a higher death benefit or additional riders could be beneficial.
• You Can’t Afford the Premiums: If you lose your job or realize that you’re financially straining to pay premiums, you can cancel your life policy by simply stopping the payments or informing your insurance provider.

Typically, you can cancel a life insurance cover within the “free look” period, which lasts between 10 and 30 days, without any penalties. If you’re well past this period, you may have to review the terms of your policy regarding cancellations, such as penalties and surrender charges, and how the cancellation will affect your cash value.

Mistakes to Avoid for Effective Life Policy Management

On top of the components we’ve discussed to ensure that your life policy does the job of providing your loved ones with the much-needed financial support should you pass on, here are some mistakes you should avoid:

Ignoring Premium Increases

Some life insurance policies increase their premiums over time. For instance, if you want to renew a term life cover, your new premiums may be higher than the previous ones. This is because factors like age and health play a role in the premiums you pay.

Higher premiums than what you may comfortably pay can lead to missed payments and policy lapses, so you must pay attention to changes in premiums.

Using Cash Value Without Understanding Consequences

Pulling cash from your cash value without a plan can have severe consequences for your policy. Your policy may lapse, and if you die with outstanding policy loans, it can reduce the death benefit amount your beneficiaries receive.

Additionally, when you take a loan or make a partial withdrawal, it often reduces the amount available for compounding growth within the policy. This reduction can slow down your policy’s ability to build cash value.

Waiting Too Long to Adjust Coverage

Immediately after you go through a major life change, you should start the process of adjusting your coverage. They don’t say, “Death comes like a thief at night,” for no reason.

You could fail to make adjustments when you have the chance to do so today then in a few days or months, you pass on unexpectedly without having made the adjustments you intended to make.

Failing to Consult a Financial Advisor or Insurance Agent

Even with so much information about life insurance available online and offline, a financial advisor or insurance agent are your best bet for making informed decisions. They have the experience and expertise needed to navigate the complex world of insurance.

For instance, a life insurance agent can help compare insurance companies when purchasing a new policy so you can get the best deals. You might think you’re saving money, but the mistakes you make may end up costing you far more than had you just hired one.

Secure Your Loved Ones’ Future With Life Insurance

Being the breadwinner for your family and beneficiaries can make you worry about how they’ll survive financially should you pass on. Luckily, with life insurance, you can support and watch over them even after you’re gone, so they don’t have to decrease their living standard.

At Fidelity Life, we can help you protect your beneficiaries through life insurance. Recognized as one of the best insurance companies in America, we offer the best rates for permanent and term life insurance coverage so you can live life without looking over your shoulder.

Get a free quote for your life insurance needs today.

Frequently Asked Questions (FAQs)

How often should I review my life insurance policy?

While there’s no hard fast rule to how often you should review your policy, you should do it at least once every year. However, we also recommend that you review your life policy every time you go through a significant life change, such as marriage, job changes, childbirth, or divorce.

Can I change my life insurance policy beneficiaries at any time?

Yes and no. Changing your beneficiaries depends on the type. For instance, you can’t remove an irrevocable beneficiary from your policy without their consent. Additionally, if life insurance was part of a divorce settlement, you may need the court’s go-ahead before removing beneficiaries.

What happens if I miss a premium payment?

If you miss a premium payment, don’t panic. Most insurers have a grace period, usually 30 days, before your policy lapses. If the 30 days pass, you can try to reinstate your policy, but this may come with additional costs, such as higher premium costs.

Is it better to keep an old life insurance policy or buy a new one?

It depends on your circumstances and needs. If your current policy doesn’t have any problems and meets your needs, then there’s no need to buy a new one. However, if you want to, for example, change from term life to permanent for better coverage, you may need to buy a new policy.

At Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible. We encourage you to speak with your insurance representative if you have additional questions and make sure you read your policy contract to fully understand your coverage.