Life Insurance Policy Review: 15 Questions to Ask This September

A life insurance policy review is one of the simplest ways to determine whether coverage purchased years ago still protects the people and responsibilities that matter today. September’s focus on life-insurance awareness makes it a natural time to examine existing policies, beneficiary designations and financial obligations.

An annual life insurance policy review does not automatically mean buying another policy. It may confirm that existing coverage remains appropriate. It may also uncover an outdated beneficiary, an approaching term expiration, a growing policy loan or permanent insurance that is performing differently from its original illustration.

Life rarely remains unchanged after a policy is issued. Families grow, relationships change, mortgages are refinanced, businesses expand and retirement plans evolve. A regular life insurance policy review helps ensure that coverage evolves with those changes.

The objective is clarity—not fear or pressure. These 15 questions can make the process practical, organized and useful.

Why a Life Insurance Policy Review Matters

Life insurance is intended to provide money to named beneficiaries after the insured person’s death. The National Association of Insurance Commissioners explains that coverage generally falls into two broad categories: term insurance and cash-value insurance.

Term insurance provides coverage for a specified period. Permanent policies, including whole life and forms of universal life, are intended for longer-term protection and may accumulate cash value.

A life insurance policy review should compare the policy with the purpose for which it was originally purchased.

A policy bought after the birth of a first child may not reflect the needs of a larger family. Coverage purchased to protect a mortgage may need to be reconsidered after refinancing, downsizing or paying off the home. A business policy may no longer match the company’s current value or ownership.

The NAIC recommends reviewing coverage after births, adoptions, marriages, divorces, remarriages, deaths, new jobs and new mortgages. Even when nothing dramatic has happened, a life insurance policy review provides an opportunity to confirm that premiums are current and coverage remains active.

1. Why Was the Policy Originally Purchased?

Begin by identifying the original purpose of the coverage.

Was it intended to:

• Replace income for a spouse or children?
• Pay a mortgage or other debts?
• Fund a child’s education?
• Provide final-expense money?
• Protect a business?
• Fund a buy-sell agreement?
• Equalize an inheritance?
• Leave money to a charity?
• Provide permanent estate liquidity?

The policy should be evaluated against that objective and the family’s current needs. If the purpose has changed, the coverage amount, policy type, ownership or beneficiary arrangement may require attention.

A life insurance policy review may reveal that the original need was temporary but another need has developed. For example, coverage initially purchased for young children may now be needed to protect a spouse’s retirement or provide final-expense money.

A changed objective does not automatically justify replacing the policy. Existing coverage may contain valuable guarantees, pricing or conversion rights that should be understood first.

2. Is the Coverage Amount Still Appropriate?

A life insurance policy review should compare the current death benefit with the financial responsibilities beneficiaries could face.

Consider:

• Income that would need to be replaced
• Mortgage and other debts
• Childcare
• Education goals
• Final expenses
• Emergency reserves
• Support for dependent parents
• Business obligations
• Existing savings
• Retirement accounts
• Social Security survivor benefits
• Other life-insurance coverage

Avoid relying only on a simple income multiple. Two households with identical incomes can have very different debts, savings, family structures and objectives.

Coverage needs may also decrease. The mortgage may be smaller, children may be financially independent or retirement assets may now provide greater security.

The goal is not automatically to maximize coverage. It is to identify a reasonable amount based on current responsibilities and available resources.

3. Are the Beneficiaries Correct?

Beneficiary designations control who receives policy proceeds. They should be checked carefully during every life insurance policy review.

Verify all primary and contingent beneficiaries. Confirm that names are accurate and percentage allocations total 100% within each beneficiary level.

Review beneficiary designations after:

• Marriage
• Divorce
• Remarriage
• Birth or adoption
• Death of a beneficiary
• Estrangement
• Establishment of a trust
• Changes in charitable intentions

Do not assume a will automatically overrides the beneficiary designation recorded by the insurer. Life insurance is generally paid according to the insurer’s records, subject to applicable law.

A thorough life insurance policy review should also confirm that contingent beneficiaries are named. Contingent beneficiaries may receive proceeds if the primary beneficiaries do not survive the insured.

Naming a minor child directly may create complications because insurers generally cannot pay substantial proceeds directly to minors. An attorney can explain trusts, custodial arrangements and other options.

4. Does the Insurer Have Current Contact Information?

Confirm the policyowner’s mailing address, email address and telephone number.

Outdated information could cause premium notices, annual statements or lapse warnings to be missed. Confirm whether another trusted person can receive lapse notices, if the policy and state law permit it.

Tell trusted family members that the policy exists and where basic records are kept. They do not need unrestricted access to private financial information, but beneficiaries should be able to identify the insurer and begin a claim.

A life insurance policy review should also identify the company currently servicing the contract. The issuing company may have changed its name, merged or transferred policy administration.

5. Is the Policy Active?

A life insurance policy review should confirm the policy’s current status directly with the insurer.

Check:

• Premium due dates
• Automatic-payment instructions
• Grace-period provisions
• Outstanding premium notices
• Current death benefit
• Any reductions in coverage
• Whether a term policy remains within its original term
• Whether flexible premiums remain sufficient

Do not assume a policy remains active simply because premiums were paid in the past.

Flexible-premium universal life insurance may require additional funding when interest credits are lower than illustrated, policy expenses increase or loans reduce available value.

Request written confirmation if the policy’s status is unclear.

6. When Does the Term Period End?

For term insurance, identify:

• The end of the guaranteed level-premium period
• The date coverage terminates
• Whether it can be renewed
• The cost of renewal
• Whether conversion is available
• The conversion deadline
• Which permanent products are available for conversion

Some term policies remain renewable after the original term, but premiums can rise substantially.

A conversion provision may allow coverage to be changed to permanent insurance without new medical underwriting, subject to contractual requirements. Conversion deadlines can arrive before the policy’s final expiration.

A timely life insurance policy review can prevent a valuable conversion deadline from being missed. Do not cancel existing coverage until any replacement policy has been approved, delivered, accepted and reviewed.

7. Have Premiums or Charges Changed?

A life insurance policy review should document current premiums and whether they are guaranteed.

For term insurance, determine whether the premium remains level and when it is scheduled to increase.

For permanent insurance, review:

• Premiums paid
• Planned future premiums
• Cost-of-insurance charges
• Administrative expenses
• Rider charges
• Interest or dividend performance
• Current cash value
• Cash-surrender value
• Current death benefit

A flexible premium does not mean any premium amount will maintain coverage indefinitely. Lower interest credits, withdrawals, loans or increasing insurance costs may require additional funding.

Request a current in-force illustration when reviewing universal or indexed universal life insurance.

8. How Is a Permanent Policy Performing?

Permanent insurance requires more than confirming that a payment was made. A life insurance policy review should compare the original illustration with current values while recognizing that most illustrated results were not guaranteed.

For indexed universal life, examine:

• Current crediting strategies
• Crediting floors
• Caps
• Participation rates
• Spreads
• Policy expenses
• Current and projected cash value
• Loan balances and interest
• The premium needed to maintain coverage

A 0% index-crediting floor does not necessarily prevent the policy’s net cash value from declining. Policy charges continue even when the index credit is zero.

Caps, participation rates and other nonguaranteed elements may change within contractual limits. The policyowner does not directly own shares of the referenced index.

A conservative life insurance policy review should request projections using lower crediting assumptions. A policy that works only under favorable illustrated conditions may need more funding or a revised distribution strategy.

9. Are There Outstanding Loans or Withdrawals?

Policy loans and withdrawals can reduce cash value and the amount beneficiaries receive.

During the life insurance policy review, document:

• Outstanding loan principal
• Accrued loan interest
• Current loan rate
• How borrowed value is credited
• Effect on the death benefit
• Effect on policy sustainability
• Available repayment options

A growing loan can place a policy at risk of lapse. A lapse or surrender with an outstanding loan may also create taxable income in some circumstances.

The IRS explains that surrender proceeds exceeding the policyowner’s investment in the contract may be taxable.

Tax treatment depends on the policy and individual circumstances. Consult a qualified tax professional before surrendering coverage or taking significant distributions.

10. Are the Riders Still Useful?

A rider modifies or supplements the base policy.

Examples may include:

• Waiver-of-premium coverage
• Accelerated death benefits
• Chronic-illness benefits
• Child or spouse riders
• Accidental-death benefits
• Guaranteed-insurability options
• Term riders
• Long-term-care benefits

A life insurance policy review should identify what each rider provides, what it costs and whether it remains useful.

Rider definitions vary by insurer and state. Benefits may require medical certification or satisfaction of specific contractual conditions.

Do not assume that phrases such as “living benefits” have the same meaning across policies. Review exclusions, waiting periods, benefit triggers and effects on the remaining death benefit.

11. Does Workplace Coverage Provide Enough Protection?

Employer-provided group life insurance can be valuable, but it may not provide enough coverage by itself.

Ask:

• How much coverage does the employer provide?
• Is supplemental coverage available?
• Who pays the premium?
• What happens after leaving the job?
• Can coverage be converted or continued?
• What deadlines apply?
• Will premiums change?

Workplace coverage may be tied to employment. A job change, retirement or reduction in hours could affect it.

A life insurance policy review should consider whether individually owned coverage is needed to supplement workplace benefits. Individual coverage may provide greater portability, although eligibility and pricing depend on underwriting.

12. Have Debts or Income Needs Changed?

A life insurance policy review should examine the obligations beneficiaries would inherit or continue paying.

These may include:

• Mortgage payments
• Car loans
• Credit cards
• Student loans
• Business debt
• Childcare
• Health-insurance costs
• Household services
• Education
• Support for aging parents
• Retirement savings for a surviving spouse

Also consider resources such as savings, retirement accounts, other insurance and Social Security survivor benefits.

Social Security may provide eligible family members with monthly survivor benefits, but eligibility and payment amounts vary. It should not be assumed to replace every dollar of lost income.

13. Have Business Responsibilities Changed?

Business owners should include company obligations in their life insurance policy review.

Possible needs include:

• Buy-sell agreement funding
• Key-person protection
• Business-loan coverage
• Income replacement
• Ownership-transition expenses
• Equalization among family members
• Retention or compensation arrangements

Confirm that policy ownership and beneficiary designations remain consistent with current agreements.

A business may have grown, changed ownership or taken on new debt since the policy was issued. A policy designed for a need that no longer exists may also require reconsideration.

Business-owned insurance can involve legal, tax, notice and consent requirements. Coordinate changes with qualified professionals.

14. Would Replacing the Policy Actually Help?

A life insurance policy review should not assume that a new policy is better simply because its illustration appears more attractive.

Replacement can involve:

• New underwriting
• New contestability periods
• New suicide-exclusion periods under applicable law
• New surrender charges
• Higher premiums due to age
• Loss of existing guarantees
• Loss of favorable riders
• Tax consequences
• A new accumulation period

Compare guaranteed and nonguaranteed values, expenses, surrender periods, insurer strength and the reason for the proposed change.

Never cancel existing coverage before replacement coverage is approved, delivered, accepted and reviewed. Follow all applicable state replacement requirements.

The life insurance policy review may determine that adjusting the existing policy is more appropriate than replacing it. Any recommendation should be documented and based on the policyowner’s interests.

15. Does the Family Know What to Do?

The final practical step in a life insurance policy review is making the coverage usable.

A trusted family member should know:

• That the policy exists
• The insurer’s name
• Where policy records are stored
• How to contact the insurance professional
• Who owns the policy
• Who the beneficiaries are
• How to begin a claim

Beneficiaries generally need to contact the insurer and provide required claim documentation.

The IRS states that proceeds paid to a beneficiary because of the insured person’s death are generally not included in gross income. Interest and certain special situations may receive different treatment.

Make a Life Insurance Policy Review an Annual Habit

Choose a repeatable month for an annual life insurance policy review. September is a natural choice, but a birthday, anniversary or the beginning of the year can work equally well.

Collect:

• Current policy statements
• Original illustrations
• Beneficiary confirmations
• Loan information
• Premium records
• Employer-benefit statements
• Updated debt balances
• Income and savings information
• Trust or business documents affecting the policy

Write down questions before meeting with an insurance professional. Request plain-language explanations and obtain updated values directly from the insurer.

A life insurance policy review does not need to result in a sale or policy change. Confirmation that existing coverage remains suitable is a valid and useful outcome.

A Practical Review Checklist

Use this abbreviated life insurance policy review checklist before meeting with an insurance professional:

1. Confirm every policy is active.
2. Record current death benefits and premiums.
3. Check primary and contingent beneficiaries.
4. Identify term-expiration and conversion dates.
5. Request current permanent-policy values.
6. Review loans, withdrawals and interest.
7. Confirm that riders remain useful.
8. Recalculate debts and income needs.
9. Review workplace coverage.
10. Document questions and proposed changes.

Do not sign replacement or surrender paperwork until the consequences are understood.

The Bottom Line on a Life Insurance Policy Review

A life insurance policy review can reveal outdated beneficiaries, inadequate coverage, unnecessary coverage, approaching term deadlines, growing loans or permanent insurance that is not performing as expected.

It may also confirm that the existing policy remains appropriate and no changes are needed.

Life insurance should evolve with the family, business or purpose it was designed to protect. A consistent life insurance policy review can prevent small administrative issues from becoming serious problems later.

To learn more about available coverage, visit the Gibbs Insurance life-insurance information page or read about Jay Cohen’s insurance experience.

When you are ready, contact Gibbs Insurance & Financial Services to schedule a personalized life insurance policy review of your current coverage and changing protection needs.

This article provides general educational information and is not individualized insurance, investment, legal or tax advice. Policy provisions, availability and requirements vary by insurer and state. Consult qualified professionals before replacing, surrendering, borrowing from or materially changing a life-insurance policy.