Do you have enough coverage?
Do you have the right type of coverage?
Are you paying the lowest possible premium?
If you can’t answer these three simple questions with a resounding “Yes!” then you might want to conduct a quick life insurance review to make sure you’ve got exactly what you need, nothing more or nothing less.
If you’re considering making changes to an existing policy or replacing a policy, read below first to make sure you do it right.
10 Steps to Conducting A Thorough Life Insurance Review
The key to making sure you have the perfect policy in the event you need to make a claim is to undergo a life insurance review. There are several things you’ll want to check, including how much of a death benefit you need, correct and updated beneficiary and contact information, and you may as well price shop while you’re at it to be certain you’re paying the lowest premiums available to you.
Taking an inventory of what assets and liabilities you have help you figure out where there might be gaps in your financial plan should something happen to you. A positive net worth may mean you can own less life insurance, whereas a person with more debts and obligations may require significantly more. Until you take an inventory of what you have and don’t have, you won’t be as accurate as you could be in figuring your correct coverage amount.
What’s the reason for your policy? Establishing a specific purpose for why you need a life insurance policy not only solidifies your purchase psychologically, but it aids in choosing the right policy. Certain items requiring life insurance will have different time periods in which they need covered. The purpose of the life insurance is probably the most essential part of the life insurance review.
3. Contact Information
You might think this is an unnecessary step, but having all the contact information handy for both yourself and your beneficiaries is an important one in a life insurance review. Phone numbers, birth dates and even social security numbers are pieces of information required of you when you apply.
4. Income Needs
If something happened to you, how much of your income will you family need on an annual basis? If you’re young, you might figure more years of your income, like 10-15 years. If you’re older and only have a few working years left, use that number instead. If you’re unsure, a rule of thumb for income replacement is 7-10x income.
Once you have those first four key items, you can move to the first specific step in the life insurance review to identifying the correct product, calculating the death benefit. Add together the following:
- Debts (from inventory)
- Burial Cost (estimate $7-$10,000)
- Income Replacement (step 4)
- Legacy (if you want to leave extra for someone)
Now subtract the next few items:
- Cash/Cash Equivalents
- Current Insurance Owned
- Other Liquid Assets
Put them together and you’ll get a total need. If you come up with a positive number, this is the amount of insurance you still need, or your insurance gap. If you have a negative, it means you can decrease the coverage amount you already have.
Moving forward with your life insurance review, now that you have the amount, it’s time to find an applicable duration. Life insurance can be for as little as one year, and as long as a lifetime. If you will need insurance to cover a debt for 20 years, you might want to consider a 20 year policy. If you have a need for only 5-10 years, then just do that. The more years you need to lock a policy in for, the higher your premium.
*If you need more than one policy, that’s perfectly fine! It’s allowed!
The life insurance review is almost over, but first you have to plan how you would allocate the funds if need be. For example, if you have a certain portion of your death benefit amount specifically for income, make sure you designate it. If the purpose is to pay off a mortgage, make sure you do exactly that. Unfortunately, some people just pick the amount, but don’t plan ahead how each dollar will be used. This leads to confusion for the beneficiaries.
8. Price Shop
Once you have your plan set, your amount has been figured, and you have a pretty good idea of how long you’ll need the life insurance for, you can get to the fun part of the life insurance review. Start to look around to see if you can either save money on your current policy, or be sure you have the cheapest policy when you make your first purchase. Click the link below and we’ll show you how incredibly easy this part is!
9. Designate Beneficiaries
When you find the right policy, or if you decide to keep your current, update the beneficiaries if needed. It might be adding a trust if you’ve set up a family trust, or it may be changing persons altogether. Choosing a person of at least age 18 is recommended, although it’s not mandatory. If you can’t think of a person right now, you can always change it later, but at least make your estate the beneficiary for now.
10. Repeat Annually
Once a year, maybe when you do your taxes, pull out your policy and redo this. It’s pretty simple, and it’s always a good way to make sure your family will be protected. Even better, as your obligations decrease, you can slowly drop your coverage amount and lower your premiums!
That’s it, that’s your life insurance review! While you’re doing this, you may as well look over your health, car, and even home owner’s insurance. Knock ’em all out at once and you can forget it until next year.