Life insurance is an essential part of planning for your family’s financial security. But if you don’t have adequate life insurance coverage, your family could suffer financially if you die.
To ensure that doesn’t happen, your life insurance policy needs to have the right coverage amount and your policy’s term length needs to be long enough to meet your needs.
If your needs shift later on due to a change in financial situation or because you’ve experienced a big life event, you’ll have the flexibility to add a supplemental policy or reduce or end your existing coverage.
Do you need additional life insurance?
Whenever your financial obligations change or a major life event happens, it’s a good idea to review your life insurance coverage to ensure that if you died, those financial obligations would be adequately covered by your life insurance death benefit.
Some common reasons to increase life insurance coverage include:
Co-signing or taking out any loans
Buying or refinancing a house
For example, many people first buy life insurance when they buy a home in order to cover the mortgage payment if they were to die. If you’re getting life insurance to help pay off a mortgage, you’ll want to make sure the term lasts at least as long as the mortgage.
How much additional life insurance do you need?
To evaluate how much life insurance you need, add up all of your current expenses and debts (childcare, bills, a mortgage) — along with your future obligations (your child’s college tuition, a spouse’s retirement) — to determine exactly what your loved ones will need and how long your coverage should last.
A 20-year mortgage would require a 20-year term policy to ensure that if you were to die before the loan was paid off, your spouse would receive enough of a death benefit to pay the balance due.
Similarly, if you have kids whom you plan to support for the next 18 years, you want a policy that lasts at least long enough to cover their expenses if you die.
If you can, you also want to provide a cushion for any unexpected life events. For example, it’s very common to refinance a home or upgrade to a larger and more expensive home.
Either scenario may mean that your original term policy might not provide enough protection to cover your entire debt, in which case you would want to add coverage or buy a new policy.
If your financial obligations and policy’s term length don’t match up, or if there’s no cushion to plan for the unexpected, you need to purchase more coverage so that you have a long enough term length.
How to add life insurance coverage
You have two options to make sure your coverage is adequate: converting your term life insurance policy to a whole life insurance policy or purchasing a new life insurance policy altogether.
Converting your term coverage to whole coverage
You can’t increase the coverage amount of your term policy, but you may be able to increase the term length by converting the policy to a permanent policy.
While your monthly premiums with a permanent life policy would be significantly higher, your coverage would last for the rest of your life
If you’re older or have had health problems since you first applied for life insurance, or if you have dependents that are still relying on you for coverage, converting to a permanent policy may be a way to ensure that you still have coverage.
The term conversion option could be a good backup if you’re unable to purchase another affordable term life policy.
If you decide to convert your policy, do so at least six months before your term length expires to avoid a coverage gap. If your insurer doesn’t offer a term conversion rider, budget enough time to purchase a new policy before your current policy’s term ends.
Applying for a new life insurance policy
If you’re unable to convert your term life insurance policy (or the premiums are too costly to do so) applying for a new life insurance policy may be the best option to get the coverage you need.
This policy could replace your original policy or it could be stacked on top of your current policy by using the ladder strategy.
The ladder strategy is a way to save money on premiums by giving you maximum coverage now, and having that coverage taper off and expire as your financial obligations decrease.
There are some things to keep in mind if you’re shopping for life insurance a second time:
1. You’ll go through underwriting
When you apply for a new policy, you’ll have to go through underwriting again. This includes taking the medical exam that’s a standard part of the life insurance application process, as it’s only good for about six months after your first application.
The good news is that the whole application process should be less stressful this time, as you’ll already know what to expect.
2. Don’t immediately cancel your current policy
An important thing for second-time shoppers to do is hold on to your coverage. Your new policy isn’t in force until your policy ’s effective date, which is when you’ve paid your premiums, signed your contract, and received confirmation from your insurer.
Canceling your original policy before that happens could leave you without coverage and if you die, your beneficiaries won’t get the death benefit. Don’t cancel your old policy until your new one is in force.
3. Have your first policy’s details handy
When you apply for a new policy, the agent will ask you about current policies and amounts. It’s important to have details about your current coverage ready when you apply to save time and avoid additional paperwork.
Insurance is carefully regulated, and the underwriter will want to make sure you’re not overinsured.
4. Be prepared for higher premiums
If it’s been several years since you first applied for life insurance, the premiums you’re offered this time around will probably come back much higher than the first time you applied.
Policy premiums increase based on age alone, about 4% to 9% every year you age, and changes in your health can have an additional impact on how much you pay. (An exception may be if your health has improved significantly or you quit smoking— in that case, your premiums could actually go down.)
The good news is the process is exactly the same as if you were buying a term life policy for the first time — there are no extra hurdles to jump through.
You’ll compare quotes, fill out an application and go through the underwriting process, and then have your new policy and peace of mind.
Buying additional life insurance when you have group life insurance
If you have group life insurance through your employer, you have two options to increase your coverage: You can buy supplemental life insurance through your employer-sponsored group plan or you can purchase a private term life policy.
Supplemental life insurance (also known as voluntary life insurance) is employer-offered coverage made available on top of your group life insurance at an additional cost. This policy can be risky as your coverage won’t follow you if you change jobs.
Purchasing your own term life insurance policy is the best option for most people because it’ s often cheaper than supplemental life insurance and you can keep your coverage if you leave your job.
If you need more coverage, you can convert your existing term life insurance policy to a permanent policy or buy a new policy entirely. A financial advisor can help you figure out how much coverage you need and which type of coverage to buy.