Life Insurance: What Should You Have in Place?
Life insurance can help provide money to the people or organizations you name as beneficiaries after your death. The important questions are not simply whether you own a policy, but why you have it, whether the amount still fits your responsibilities and whether the right beneficiaries are listed.
This page provides general educational information. Life insurance products, costs, underwriting and policy terms vary. Review the actual policy and consult appropriately licensed professionals when making insurance, legal, tax or financial decisions.
Know these six things.
A useful policy review starts with the basics.
- Why the coverage exists
- Who depends on the insured person financially
- The current death benefit
- How long the coverage is expected to last
- Who the primary and contingent beneficiaries are
- Where the policy and insurer contact information can be found
What problem is the policy supposed to solve?
Life insurance is generally designed to provide a death benefit to named beneficiaries. The right coverage for one household may be very different from another because income, debt, dependents, housing, business obligations and long-term goals are different.
Instead of starting with a policy type or a large dollar amount, begin with the financial responsibilities that could remain if the insured person died.
Beneficiaries, household income, debt, retirement accounts, estate planning and family responsibilities can all affect the role life insurance plays in a broader financial plan.
Life insurance is usually tied to a financial responsibility.
A policy may serve one or several purposes. Knowing the intended purpose makes it much easier to judge whether existing coverage still fits.
Replace Income
Provide financial support when a household depends on income that would stop after death.
Protect Dependents
Help support children, a spouse, an adult dependent or another person who relies on the insured financially.
Cover Major Obligations
Help address a mortgage, other debts or significant financial responsibilities that could remain.
Support Final or Legacy Goals
Provide funds for final expenses, charitable intentions, business needs or other planned purposes.
Term and permanent coverage work differently.
Life insurance policies generally fall into two broad categories: term coverage and policies designed to provide longer-lasting or permanent coverage that may also include cash-value features.
Neither category is automatically right for everyone. The useful question is which features match the reason you need coverage.
Coverage for a set period.
Term policies provide coverage for a specific term. If the insured person dies while the policy is in force during that term, the policy can pay the death benefit to the named beneficiaries.
- Designed around a defined coverage period
- Often used for temporary financial responsibilities
- Renewal terms and future premiums may change
- Review what happens when the initial term ends
Designed for longer-term coverage.
Permanent policies are designed to remain in force longer when policy requirements are met and may include a cash-value component. Whole life, universal life and variable life are examples of policies within this broader category.
- May provide lifetime or long-duration coverage
- Can include savings or investment-related features
- Premium and policy structures vary considerably
- Loans, withdrawals or policy changes can affect benefits
Life changes can make old coverage assumptions outdated.
You do not need to wait until a policy renewal or major problem to review coverage. A change in responsibilities is often enough reason to look again.
A new household may create shared income, debt or housing responsibilities.
Dependents can change both the amount of protection needed and beneficiary planning.
A mortgage or other housing obligation may increase what another household member would need to manage.
Employer-sponsored coverage may change or end when employment changes.
Business debt, partners, employees or succession plans may create additional insurance considerations.
Beneficiaries, financial obligations and existing policy ownership may need careful review.
Income replacement needs and financial obligations can change substantially as retirement approaches.
Beneficiary designations and the original purpose of coverage may no longer fit.
Start with responsibilities, not a generic multiplier.
Rules of thumb can be convenient, but they cannot account for every household. A more useful starting point is to identify what the death benefit may need to help cover and what financial resources would already be available.
Possible Financial Needs
What resources already exist?
Existing savings, investments, retirement assets, other insurance and surviving household income can affect how much additional protection may be useful.
That is why the planned Life Insurance Needs Worksheet will focus on the gap between responsibilities and resources rather than using one universal formula.
Life Insurance Needs Worksheet →The policy is only part of the job.
Life insurance generally pays the death benefit to the beneficiaries named on the policy. That makes beneficiary information one of the most important details to keep current.
Use Beneficiary Review Checklist →- Confirm the primary beneficiary designation.
- Review contingent or backup beneficiaries.
- Check beneficiary information after marriage, divorce, birth, adoption or death.
- Do not assume a will automatically changes beneficiary designations.
- Review special situations involving minors, trusts or dependent adults with appropriate professional guidance.
- Keep records showing which insurer holds the policy and where policy information can be found.
Employer coverage deserves its own review.
Many people receive some life insurance through work. That coverage can be valuable, but it should not automatically be treated as identical to personally owned coverage.
Know what the employer provides.
Check the benefit amount, beneficiary designation and whether additional voluntary coverage is available.
Confirm whether the coverage changes when employment ends, retirement begins or work status changes.
Do not let a job change surprise you.
When changing employers, review life insurance alongside health insurance, retirement accounts and other workplace benefits.
Keep copies of important benefit records before access to an old employer portal ends.
Ask questions that expose how the coverage actually works.
Policy names alone do not tell you enough. Read the policy details and ask about the features that could materially affect cost, duration and benefits.
For term insurance, understand the initial term and what happens afterward.
Ask what is guaranteed and what could increase later.
Understand premium requirements and any policy conditions that affect continuation.
If so, understand how the cash value works and how loans or withdrawals may affect the policy.
Do not assume renewal or conversion options exist without checking the contract.
Separate guaranteed policy features from projections, illustrations or non-guaranteed assumptions.
Coverage should change when responsibilities change.
Getting Married
Review beneficiaries, shared debts, income dependence and household responsibilities.
Having a Child
Revisit dependent support, beneficiaries and the amount of protection available to the household.
Changing Jobs
Check what happens to employer-sponsored life insurance when employment changes.
Retirement
Review whether the original need for coverage still exists and how retirement changes the household picture.
Turn the insurance review into an action.
Beneficiary Review Checklist
Check primary and contingent beneficiaries across life insurance, retirement plans and other eligible accounts.
Review Beneficiaries →Annual Life Review
Review insurance alongside the other major areas of your life once a year.
Start Annual Review →Prepared Life Checklist
See how insurance fits alongside money, family, documents, health, housing and legal planning.
Start Prepared Life Checklist →Go to the source when policy details matter.
Insurance rules, products and policy provisions vary. These resources can help with general consumer education and tax information.
Consumer information about life insurance, policy types and questions to consider.
Visit NAIC →Overview of term life insurance and cash-value or permanent insurance.
Review Policy Types →Federal tax information about life-insurance proceeds and circumstances that may affect taxation.
Visit IRS →Questions worth understanding before you move on.
What is the main purpose of life insurance?
Life insurance generally provides a death benefit to named beneficiaries when the insured person dies while qualifying coverage is in force. The money can help beneficiaries address financial responsibilities such as income needs, housing, debt or other planned purposes.
What is the difference between term and permanent life insurance?
Term insurance provides coverage for a defined period. Permanent or cash-value policies are designed for longer-term coverage and may include cash-value features. Costs, guarantees and policy structures can vary substantially.
Is life insurance through work enough?
It depends on the amount of employer coverage, household needs and what happens to the benefit when employment changes. Employer coverage should be reviewed as part of the overall insurance picture rather than automatically assumed to be sufficient.
When should I review my beneficiaries?
Review beneficiary designations after major life events such as marriage, divorce, birth or adoption, the death of a beneficiary, job changes and significant estate-planning updates.
Are life-insurance death benefits taxable?
The IRS states that life-insurance proceeds received by a beneficiary because of the insured person's death are generally not included in gross income, although exceptions and taxable interest can apply. Specific tax situations should be reviewed using current IRS guidance or qualified tax advice.
Start by confirming who your policy is meant to protect.
Then review the benefit amount, policy duration and beneficiary designations. If those four things still match the life you are living, you already know much more about your coverage than simply knowing that a policy exists.