5 'life events' that change your life insurance needs

Chris Kissell

Life has a way of throwing curveballs - be it a surprise pregnancy or being diagnosed with a rare, serious illness.

When these events occur, many things change, including life insurance needs.

Here are five life events and how they may require you to re-evaluate your life insurance strategy.

Having children

"Your need for life insurance is generally the greatest when you have young children ," says Tara Reynolds, a vice president at MassMutual . That's because you have a family to support, making your income needs greater than at any other time of life.

Fortunately, the cost of life insurance is at its lowest when you are young. Since most new parents are in their 20s and 30s, they can expect a price break at this time.

Talk with an agent to make sure you have enough insurance to take care of your child's basic needs - everything from putting food on the table to providing them with cash for college tuition.

Reynolds recommends disability insurance to protect your income if you become ill or injured and can't work. Disability insurance is separate from life insurance.

Remember to account for stay-at-home parents and their economic value when calculating insurance needs, says Brian Bulakites, a vice president at Genworth Financial. An agent can help you put a price tag on all that cooking, cleaning and running children to soccer practice.

Getting divorced

Divorce can be among life's most painful experiences. The greatest toll is on your emotions, but finances can take a hit, too.

" The way that life insurance is affected really depends on the laws of each state," says Sonali Virendra, a vice president at New York Life.

If you live in a community property state - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin - any life insurance that spouses bought during their union typically will be divided if it was purchased using "community property funds," such as salary earned during the marriage, Virendra says.

In such states, each spouse is entitled half of the death benefit, she says.

In states that are not community property states, courts often look at both the relative size of marital assets and the anticipated earnings of the spouses when deciding how to treat life insurance in a divorce case, Bulakites says.

The court may decide that the entire life insurance policy be given to one party. Also, as part of an alimony agreement, a parent who' s paying child support may be required to take out a policy on his or her life, then designate the other parent who has custody of any children as the policy' s beneficiary.

" Quite often, the court orders that life insurance be continued for the length of time spousal support is owed," Bulakites says.

If you aren't required to maintain insurance for the benefit of your ex-spouse, Virendra urges you to take one other action in the wake of a divorce : "Remember to change beneficiaries when a divorce happens to avoid the ex-spouse receiving benefits you don't want them to get ."

Changing jobs or being laid off

In today' s day and age, few people remain with the same employer for long. Perhaps you take an offer from another company or you get laid off . Either way, an employment change may alter your life insurance plans.

" New jobs bring new benefits, and an opportunity to reassess financial strategies ," Reynolds says.

She recommends finding out whether the new employer offers group life insurance coverage. "
This type of coverage is usually available in multiples of the employee's salary ," Reynolds says

It's important to read the fine print on these policies. For example, Reynolds says, a company may offer life insurance of up to five times an employee's annual salary, but cap the overall amount at $250,000.That means an employee who makes $80,000 should not expect to receive five times his or her salary - which would be $400,000 - but instead will collect just $250,000.

Bulakites suggests looking beyond your company's coverage and buying your own plan - a plan that's always yours.

" Coverage you buy through your company can be more expensive than what is available outside the workplace," he says. " Owning individual life coverage outside of your employer-sponsored plan provides flexibility and options."

Inheriting a business

Inheriting a business can have a dramatic effect on your life insurance needs. "

Life insurance can play a key role in protecting the business in the event of the death of the owner or a key employee," Reynolds says.

Bulakites says the role that life insurance plays in these situations varies. For example, if you hold a key job in your new company, you may want to consider life insurance in the form of what's known as "k ey person insurance."

In this way, life insurance can be used to soften the blow to the business after you die if you have unique talents or skills that would need to be replaced.

" The life insurance proceeds would then be available to hire an employee to provide those talents to the business for its continuation," Bulakites says.

Life insurance also can be used to create a succession plan for the business after you die, Bulakites says.

" Once you inherit a business, you have to start thinking about who is going to take it over after you have retired or died," he says. " Life insurance is commonly used to fund the buyout of a deceased business owner's interest."

Being diagnosed with a serious illness

If you're diagnosed with a serious disease, you may not be able to obtain any coverage in the individual market, Bulakites says.

" Unfortunately, some conditions are uninsurable, either for a period of time or for a lifetime," he says. Those conditions may include cancer, diabetes and heart disease.

Still, there may be other ways to secure coverage. If you'r e declined for individual life insurance but you have a job, see whether your employer offers coverage through a group life insurance plan, Virendra says.

" Often these plans are issued on a guaranteed basis, meaning no proof of insurability is required ," she says. " Take advantage of these plans."

If you're unemployed or your company doesn' t offer coverage, Reynolds says, it' s a mistake to assume that a serious illness automatically makes you ineligible for coverage through an individual life insurance policy. "

There is no need to completely give up hope," she says.

That's especially true if your disease is being successfully treated. Today, many insurers have overhauled underwriting guidelines in the light of recent research showing that treatment advancements are increasing life spans.

" People who have had cancer, heart disease and other conditions that are well-controlled are more likely than ever before to be eligible for life insurance coverage," Reynolds says.

However, a history of such illness means you likely will fork over more money for your coverage.