How to Adjust a Life Insurance Policy

iQuanti: Many aspects of personal finance change over time. Savings goals often change as a family grows, and investments may be re-allocated to take on more or less risk. But often, those with a life insurance policy don't know that it can also be adjusted to reflect a changing life situation.   

If you've been thinking about changing your life insurance policy, here's what you need to know.   

What Can You Change About a Life Insurance Policy?   

There are two main types of life insurance policies, term life and permanent life insurance. A term policy pays out a death benefit if the policyholder passes away during the policy's designated term. A whole life insurance policy has a death benefit that never expires as long as premiums are paid, but it also has a cash value option that can be used later in life*.  

The adjustments you can make vary based on the type of life insurance policy and may include:   

• Beneficiary designations: Keeping beneficiaries updated means the right people will benefit if you pass away with a life insurance policy in effect. As people come to depend on you financially or no longer do, you may find a need to adjust beneficiaries. The good news is, beneficiary changes can be done at any time.  
• The death benefit amount: With certain life changes, which we'll explore below, you may find a need to increase or decrease your life insurance policy's death benefit. Some life insurance policies allow you to adjust the death benefit, but with most policies you may have to buy additional life insurance or go through underwriting again if you want increased coverage. 
• The policy's term length: If you have a term life insurance policy, you may seek to shorten or extend the term as life circumstances change. For example, if you received a sudden windfall and paid off a small business loan early, you may choose to shorten the term of a policy by letting it lapse. On the other hand, if you just had another child, you may look to extend the term to cover until that child has graduated college, although you may have to go through underwriting again and your premiums may change.   

When It Makes Sense to Adjust Life Insurance  

Several situations may warrant an adjustment to your life insurance policy, including when you have:  

• A shifting family dynamic: There are two instances when life insurance adjustments are likely: as new children or grandchildren come into the world and when older children leave the nest and begin to provide for themselves financially.  
• An evolving financial situation: If you receive a big raise at work or take a significant pay cut, you may want your life insurance policy to reflect your new income. Your finances may also change according to your debt burden. If you took out a policy to cover the cost of a mortgage and you've now paid it off or traded it in for a larger one, your policy may need to change accordingly.   
• Changes in health: If you quit smoking or have made dramatic changes to improve your health, you may be able to lock in a better life insurance rate. The life insurance company will likely look at the past several years of medical history before making an assessment. . However, it may require purchasing a new policy.  

How to Change a Life Insurance Policy   

Adjusting a life insurance policy may not require taking out an entirely new policy (but sometimes it will). Specific changes like beneficiary designations can be completed by you at any time. But requesting an increase in coverage or modifying the cash value of a whole life policy is a more complex process that may require additional paperwork and approval. For that reason, it's best to talk to your life insurance agent about making a policy change as the process and rules can vary per insurer.   

The Bottom Line   

Sometimes life circumstances warrant adjusting your life insurance policy. For example, changes in the family dynamic, financial situation, and health are great reasons to work with your life insurance agent to make changes as needed. By making changes as life situations arise, you'll ensure that the right protection is in place if and when your loved ones need it most. 

*Using cash values through policy loans, surrenders, or cash withdrawals will reduce benefits and may affect other aspects of your plan.