Review Your Life Insurance and Income Protection to Avoid Being Underinsured

Is it time for you to consider a review of your life insurance or income cover?

If you have taken out a life insurance policy, then you are well on your way to successfully securing your family’s future, and avoiding the financial burden which can come with your death, and make the grieving process all the more difficult. However, while taking out life insurance is an important first step, a life insurance policy is not a set and forget type of product. Instead, just as your life changes and moves forward, so too must your life insurance change as well, which is why you need to regularly review and update your policy to account for and cover these changes.

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Why do I need to Review my Life Insurance?

There are few financial products that you can simply set and forget – you should regularly review your home loan to find new features and a better interest rate, your share portfolio is fluid, and your retirement savings should constantly be adjusted to reflect the number of years before you need them. Life insurance is no different, because as you go through life, your insurance needs change, and you want to make sure you’re getting the most value from your insurance products.

There are many reasons you need to review your policy, such as:

  • The Australian insurance market is competitive. There are a number of insurers out there vying for your business, and as such they are releasing new specials and deals all the time to entice you to their products. Therefore, as you undertake a regular review of your life insurance needs, also take the time to look at the offers now out there from the Australian insurers.
  • Improvements to insurance policies. Insurers and industry bodies are constantly responding to customer feedback and trends, to tailor products to better suit Australians’ needs. Therefore, if you took out life insurance 12 month ago, there could be a new product available that is even better suited to your needs.
  • Your life changes and so should your life insurance. Life insurance is insuring possibly one of the most fluid things in the world. Just because it seems as though you trudge out to the same daily grind day after day, or you manage the house and herd the kids around the same way week after week, you are moving forward. For example, you may have gotten a promotion at work, and bought a new car. Or your daughter may have started her last year of high school and be looking at tertiary education options. Even something as simple as joining a gym could affect your life insurance. As your life changes, think of the new commitments you’re adding, and just how your family would be able to pay for this new lifestyle if you weren’t there, and whether they’d have to go back to the life you were living two, three or four years ago when you chose a life insurance benefit amount.
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Tips to Review Your Life Insurance Policy

No one knows the changes occurring in your life better than you do, but that doesn’t mean you have to take on the full time job of monitoring your life insurance policy alone. Your goal when reviewing your life insurance is to ensure that you maintain enough coverage as you get married, have kids or take out a mortgage. However, there are also other aspects of your life insurance that need to be reviewed, and this is where your estate planner, accountant or attorney will also need to be reviewing your policy, to make sure your policy avoids taxes being attached to your estate when the benefit is paid out, and how your policy is performing as an investment.

  • Review Level of Cover and Beneficiaries

Even though you are regularly paying premiums to maintain your policy, it should still be viewed primarily as an asset, with the face amount of the policy being reviewed every two to three years. The face value of the policy is the amount paid as a benefit, and this review helps to ensure it matches your family’s current needs should you die. This means considering whether the coverage amount is correct, as well as looking at who your beneficiaries are.

  • Type of Cover and Features In Place

You should also be looking at the type of life insurance policy you have when you review your coverage. A review of your life insurance is also a chance to look at the features you have on your policy and whether you still need all of these extras. As you review your policy, consider your age, your lifestyle, your health, your status and your income, and how any or all of these have changed since you first applied for your life insurance.

  • Reviewing Doesn't Have to Be a Complicated Process

Reviewing your life insurance policy doesn’t have to be a chore, some insurers will post you a summary of your coverage each year for you to quickly and easily review. However, it can be as simple as contacting your insurer over the phone. Just remember that if you change aspects of your life insurance, your premiums will likely be affected.

Even if your circumstances haven’t changed significantly or you don’t need to make any changes to your policy, it can still give you and your family peace of mind that you have reviewed your life insurance.

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Creating a Policy Summary for Reviewing your Life Insurance, Made Easy

You may think that you’re too busy living your life, to worry about checking over your life insurance needs. While it may be true that your life is running at a fast pace, you are never too busy to take care of your family’s future, so use this simple tool to make reviewing your life insurance quicker and easier – a policy summary.

It is a good idea to have a policy summary for each insurance product you have, so you can review them all at the same time, and adjust them to your changing needs. A policy summary is simply a one page document you’ve created which contains:

  • The basics of the policy
  • The amount of coverage
  • The benefits of the policy
  • Any restrictions on the policy.

Some insurers will include a policy summary with your other policy documents when you sign up with them, but if you have to make your own, don’t worry. You can type out or have handwritten notes on your life insurance policy, and keep them filed together, so that there is no excuse for having a policy that doesn’t match your needs.

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Know the Basic Features of your Life Insurance Policy to Review

As you review your policy summary to make sure that your life insurance is still the best for your needs, these are the features you should be thinking about:

  • The insurer: Think about the provider you’re insured with, and how they have been operating since you last reviewed the policy. Are you happy with their customer service, have they been reported as paying out claims, and are they still operating solidly, have they been bought by another company and are they still Australian owned?
  • The date of issue: This is especially important if you have a term life insurance policy, which has an expiry date. Otherwise the date of issue is simply when your policy renews for the coming year.
  • The premium: If you have opted for a life insurance policy with level premiums, you pay the same amount each year, with small increase for inflation and cost of living rises if you have chosen that option. However, if you have a policy with stepped premiums, you will be paying more and more each year, so make sure when you review your policy, you also review your budget to check affordability.
  • Your beneficiaries: The beneficiaries of the policy can change over time, for example if you get married or divorced, you have children, or your children move out of home and you want to reduce their benefit amount.
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Benefits of Reviewing Your Life Insurance

Life insurance is a very valuable asset to help you protect the future security of your family, and make sure they are looked after even when you’re not there. However, a life insurance policy that doesn’t meet your family’s needs isn’t of any value, and this is why it is so important to regularly review your life insurance. In addition to making sure your family are properly taken care of, reviewing your life insurance can also have a number of other benefits:

  • Cash value life insurance asset. A cash value life insurance policy is an investment asset and its performance should be monitored in the same way you watch and adjust your other assets such as equities and bonds. The value of your policy will depend on how well the policy performs, and if the performance isn’t strong, then the death benefit and the cash value of the policy may not be enough to cover your family’s needs.
  • Adjusting for changes in the economy. There was a time when many universal life insurance policies could be earning interest rates of around 10%, however, today many of those policies are only earning around 4% to 5%. This drop in earning capacity is due to the struggling economy and the drop in interest rates, and as a result the cash rate in a policy may not be enough to maintain the policy, and it terminates before you expected it would. For example, a policy that was originally quoted as being able to last until you were 100, may only last you until you are 80 years old, or even younger. This is because policies that were issued 20 or more years ago were issued with the best underwriting class that was available at the time, however, there are now more competitively priced classes available today. Plus, all insurers issuing policies today are using the 2001 mortality table that directly reflects our trend of living longer. Therefore, these changes make it very important and beneficial to review your life insurance regularly.
  • Review the owner and beneficiaries of the policy. Also remember that mistakes can be made in any process, and when you go to review your life insurance policy, you may find that the wrong trust is named as the owner of the policy for example, which can mean significant tax consequences if not rectified before a claim. Your life will also always be changing and moving ahead, so it is important to review that the beneficiaries you named when you took out the policy are still relevant, as you may have married, divorced or had children. Just remember that if you are naming a minor child as a beneficiary you should establish a trust as the beneficiary and designate a guardian to look after your children and a custodian to oversee the funds in the trust. Without a trust, the court can name an adult to act as guardian, and this may not be the same person you would have chosen.
  • Free to review. It costs you nothing to take some time to consider how your circumstances have changed since you took out or last reviewed your life insurance policy. Spending just a little time making sure your insurance is still relevant will give you peace of mind and can save you – or your family – thousands of dollars.
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Times that You Might Consider Reviewing Your Life Insurance

Of course, you don’t want to go calling in your lawyer and accountant and changing things in your policy without any real need. Instead, here are some events in your life that you might think of reviewing your policy:

  • Your income has changed. Your income is one of the main factors you will use to determine how much you insure your life for in the first place, so if there is a change to your income, it is time to review your life insurance policy and make the necessary changes. For example, if your income increases, you may move to a bigger house, send your kids to a private school, and generally adjust your lifestyle to reflect your new level of cash flow. As a result, this new, more expensive lifestyle would be harder for your family to maintain if you were to die, and your old life insurance amount to cover your old income may not be enough. On the other hand, if your income went down because you switched to part time work to look after the kids or you went back to study, then you could be paying higher premiums for a higher level of cover, when you have adjusted your lifestyle to live on a lower income.
  • New financial obligations. You don’t just have to have gotten a raise or a new job to make the move to a bigger home, or add a second or third car to the driveway. Therefore, if you have taken on new financial obligations, then you need to make sure that your life insurance benefit amount is enough to cover these new costs.
  • Buying a new home. When you buy a new home there are a lot of costs involved in the process, so it can be tempting to put off reviewing your life insurance at this point, in the hopes of avoiding yet another expense. However, many lenders will require that you have home insurance and sometimes even income protection insurance before approving your loan, as they want to make sure that you can replace your home and contents in case of a disaster, and that you can meet your loan repayments in case you lose your job. Therefore, now is the perfect time to also make sure that your family will be able to maintain the safety and security of their own home, if you were to die with the mortgage outstanding.
  • Having children. There is no doubt that raising children is an expensive exercise, and it all begins long before the child is even born with a renovation to the nursery, doctors and hospital bills, not to mention all of the new furniture, gadgets and equipment. Then as your child grows they will not only need new clothes, and will contribute to the growing food bill, but you’ll also need to think about their education and their activities, for example if they play a sport, take up a craft or learn an instrument. The expenses of having a child are far reaching into your future, and it is important that your life insurance can cover all f those expenses in case you’re not there yourself. Also remember to update your policy again when you have another child, or another, because while you may be able to reuse the stroller and some of the uniforms, the costs for raising multiple children need to be included in your policy too.
  • Getting married. When you get married you will be looking at all of the above in your future – new house, new car and new family members. However, you may also want to review the beneficiaries of your life insurance policy when you get married too, to make sure your new spouse is named in the policy, and is looked after when you’re gone.
  • Getting divorced. Unfortunately divorce is a fact of life for many people and among the other paperwork you need to organise, you should also look once again at your life insurance coverage and beneficiaries. You will likely want to remove your ex-spouse as a beneficiary, and perhaps add a new partner to the policy, and don’t forget to keep your dependent children on your policy too. You may also find your expenses have dropped, or increased with the divorce, and your benefit amount will need to reflect that.
  • New assets. If a relative dies and bequeaths you new assets, or your own investments are growing strongly, you will want to make sure that when you die, your assets are distributed in the way you want. Unfortunately, settlement of your estate can be expensive for your beneficiaries and this cost can eat into the assets you are leaving them, however, life insurance can be put in place to cover future estate taxes, and be structured in a way that insurance proceeds won’t attract any estate tax.
  • Removing beneficiaries. If your children have turned 18 then they are no longer going to need a trust or a guardian named in your life insurance policy, and it is important that you update this information to save any hassles or confusion at the time of your death. Also, if your spouse or another beneficiary dies, you will need to remove them as a beneficiary – if they were helping to contribute to the living costs of the family then you will also want to increase your life insurance benefit to make sure your other beneficiaries are taken care of when you’re not there, if the beneficiary who has passed away was your only beneficiary, then the cost of your insurance will likely decrease.
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How to make Changes to your Life Insurance Policy

If you have reviewed your life insurance policy and found that changes need to be made to reflect your new circumstances, there are certain changes you can make yourself, and others that you need to make with the help of your lawyer or accountant. For example, as the owner of the life insurance policy you can contact your insurer to change:

  • The beneficiaries. If you have had children, adopted a child or gotten married or divorced, then you may want to change the beneficiaries listed to receive a benefit payment from your life insurance policy. If you think that you will get around to making the change to your beneficiaries, and don’t do so in any rush when you have children, or when your marriage dissolves, then you need to realise that at your death, your current life insurance policy is a binding legal document. Therefore, the beneficiaries who are named at the time of your death are the ones who will receive the benefit payout from the policy regardless of whether you have fallen out of favour – with an ex-spouse for example. There is no other document that can be accepted in place of a life insurance policy, or that can change the beneficiaries of an insurance policy after your death, and there is no document that will be accepted as proof that you wanted to change your policy. Therefore, make sure that your life insurance policy is kept updated at all times, and that any changes are made correctly. Contact your insurance agent to change beneficiaries on your policy, to ensure you complete the correct legal documents. Make sure you also receive a copy of the documents, and of your newly updated policy that includes the changes.
  • Your personal details. The basic information in your life insurance policy needs to be maintained current at all times. Therefore, make sure you contact your insurer if you change your name, your phone number or your address. Also always check carefully to ensure that all details have been entered correctly by your insurance agent, and that you have any spelling errors corrected.

Regardless of the type of life insurance policy you have, the size of your home or your family unit, it is important that as your life changes, your life insurance keeps up. As you and your family grow and your needs change, you adapt your lifestyle – maybe by sleeping less, working more, working less or cutting back on expenses such as a second car. However, no matter how much your life and your family changes, it would still be financially devastating for your dependents if you were to die, but if your life insurance can change and adapt too, you can at least know you have reduced the financial burden at an already difficult time.

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