Modifying life insurance based on evolving needs

By Paresh B. Shah

Financial planning requires a complete understanding of a person’s life. This is not new for advisors, but we can lose sight that our recommendations are shaped by what we learn about a client’s goals, responsibilities and changing financial circumstances.

How can that information help advisors determine when a life insurance policy may need to be modified?

Everything stems from understanding your client’s situation better. Regular reviews of a client’s financial plan are crucial to creating an insurance strategy that is specific to the client’s evolving needs.

Three key considerations

Reviewing a financial plan starts with revisiting three core areas: income, expenses and savings:

• Income: Has their income changed since you last reviewed?
• Expenses: What is the total cost of ongoing financial responsibilities (housing costs, daily needs, education and more); has that changed?
• Savings: Where are they in their savings goals?

This is the basis of all financial advice. You must review all three buckets regularly to build a plan that evolves alongside your client’s life.

When it comes specifically to life insurance policies, these three areas tell you where the client may benefit from changes in coverage. For example, understanding their income and expenses helps you to know how much coverage they would need to support the family over time.

From there, learning about their current savings and their long-term goals will inform you of what type of coverage may be best for the client.

What does change mean?

After discussing the core areas of their financial plan, you will be able to tell if their needs have shifted since the last iteration of their plan. Sometimes, the coverage is still a fit and you can see even more clearly how it will benefit them. In other cases, their current coverage isn’t quite aligned with their goals and needs.

A clear indicator that a policy needs to be reevaluated is a change in income. As income increases, the amount of coverage needed to replace that income may also increase. But there are also more nuanced changes that come as a client follows the ups and downs of life.

As families grow, new responsibilities (and expenses) arise. Education costs are often a consideration for parents, as well as expanded costs for daily needs as children are added to the picture. Some clients may have children who are grown, but face challenges being financially independent.

The client may need to review their policies if their financial responsibilities differ from what they had planned for. In both cases, the client has experienced change in one or more of the three core areas of a financial plan.

The goal of life insurance is to cover the potential loss of income so the client’s family can continue to operate in a situation of loss. Seeing changes in expenses and incomes will answer the question: does the client’s current coverage remain on pace with their updated needs?

If the answer is no, it may be time to recommend what changes, if any, may better fit the client’s needs.

Adjusting the policy

Now that you have reviewed income, expenses and savings changes, you can take a critical look at the current policy to determine if it still meets the client’s needs.

My approach starts with prioritizing protection first, then reviewing savings, and then how the client can increase income and build toward the future. Protection means that I first want to ensure the policy covers the income their family depends on. With a policy that matches income, the family would still be able to manage expenses in a situation where income is lost.

If income and savings capacity have increased, they may be able to convert a portion of term coverage into permanent life insurance while maintaining the overall protection they need. In this situation, the client is not necessarily replacing coverage.

Instead, part of the existing coverage can be converted into permanent insurance, allowing the client to maintain protection while also building cash value over time. This can help maintain the protection they need while also building cash value for future financial needs.

Using the income, expense and savings information gathered, you can build a recommendation to see if the client wants to explore modifying their existing policy or even adding coverage.

These recommendations should always be rooted in what your client needs to protect themselves and their family.

Life insurance should evolve alongside your clients’ needs. As life changes, so do income, expenses and savings. Regularly reviewing both the client’s evolving needs and their current financial picture helps ensure their policies remain aligned with their needs.

The goal is to make sure life insurance continues to reflect the client’s financial plan, rather than allowing the policy to drive the planning decisions.

About the MDRT member
Paresh Shah is the founder of PareShah Partners, specializing in the financial needs of businesses and professional families. Shah is a 19-year MDRT member with seven Top of the Table and 14 Court of the Table qualifications.