The One Change You Need to Make in Your Life Insurance Plan

Life insurance policies provide crucial protections in case of an untimely death. Without life insurance, surviving dependents could be left wondering how to cover their bills without the deceased person putting income into a shared checking account.

Anyone who is buying life insurance will need to make sure they get the right amount of coverage to fully protect their loved ones left behind -- and should consider increasing their policy when taking on new obligations. But, while it's a good idea to update the amount of the death benefit in appropriate situations, that's not the most important modification a policyholder may need to make.

There's one change that is absolutely crucial to make ASAP to avoid major problems that could undermine the entire purpose of life insurance.

This life insurance change should be made right away

The one life insurance modification that everyone needs to make immediately is changing their beneficiaries. This needs to be done right away whenever life circumstances change.

In almost all situations, a life insurance policy will be paid out to whomever is listed as a beneficiary -- and the policy will only pay out to those individuals or entities.

It doesn't matter if a deceased person's will says something different if they made up a last will and testament. And, with limited exceptions, it doesn't matter if it is pretty obvious the deceased would have wanted something different. Whoever is designated as beneficiary is typically going to get the funds. This could be a big problem if the policyholder doesn't change their beneficiary ASAP in many situations.

Say, for example, that a policyholder had life insurance and wanted the death benefit to be split between his children (let's call them Sam, Tom, and Joe). But, what if another child, Kim, was born and then the policyholder died? If the policy was not changed before the death, Kim would be left out and Sam, Tom, and Joe would get all the funds. Kim would need to hope her brothers were generous enough to share voluntarily or she'd be left without funds she might need.

Not changing a beneficiary immediately could also be a problem if the person named as beneficiary dies and no secondary beneficiaries are named or if a policyholder has a breakup or falling out with the beneficiary. While some states automatically remove a spouse as a beneficiary after a divorce, that's not the case everywhere -- so an ex could end up with the payout from a life insurance policy if the beneficiary wasn't changed.

Don't wait to change a beneficiary when appropriate

The minute that a policyholder decides they need a different beneficiary, this change to a life insurance policy should be made right away. No one knows when tragedy will strike, and when it does, it would be a double tragedy if a life insurance policy purchased to provide for loved ones wasn't paid out to the right people.

Since this can be hard to remember, especially for insurance policies purchased years ago, it's a good idea to have a system in place to help prompt a review of the beneficiary designation at the right time.

This could be as simple as keeping a Post-it note in a wallet or other visible place saying "remember life insurance beneficiary." That way, when the new baby is born, or the breakup happens, or the new marriage occurs, or a child is adopted, or the current beneficiary dies, the policyholder won't forget to immediately change their beneficiary to protect those they love before it's too late.