Do you have enough life insurance? A quick coverage check-up

Life insurance tends to be purchased around a major milestone. Getting married, buying a home or having a child may prompt someone to take out a policy, choose a coverage amount and check the task off their financial to-do list. But while the life insurance policy may stay the same for years on end, the financial picture it was designed to protect rarely does.

Income can rise, mortgages and other debts can grow or shrink and families can take on new financial obligations over time. In turn, a life insurance policy that once seemed substantial may need to cover a much different set of expenses a few years later. On the other hand, some obligations may disappear as the years go by, changing how much protection makes sense.

In turn, periodically reviewing your life insurance tends to be an important part of a broader financial check-up. But rather than focusing on the dollar amount printed on your life insurance policy, it may help to look at what that money would actually need to accomplish if your family had to rely on it. So, how do you do that? That's what we'll examine below.

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There's no single coverage amount that's appropriate for every household. Rules of thumb, such as buying coverage equal to a certain multiple of your annual income, can provide a good starting point, but they don't account for the nuances that make each household's finances different. If you want to ensure that you have enough life insurance, it can help to check the following off your list:

Add up the income your household would need to replace

Start by considering how much of your income other people depend on and how long they would need financial support. If you're the primary earner with young children, for example, your life insurance coverage may need to replace years of income. If your spouse also earns a substantial income and your children are financially independent, the calculation could look very different.

Don't overlook the financial value of unpaid work, either. A stay-at-home parent may not bring home a paycheck, but replacing childcare, transportation and other household responsibilities could carry a significant cost. Those expenses can be worth accounting for when evaluating your coverage.

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Take inventory of your major financial obligations

You should also look at the large expenses your family could face without you. That may include a mortgage, certain debts, childcare costs, college expenses and final expenses, among other obligations.

The goal isn't necessarily to buy enough insurance to eliminate every future expense. Rather, you want to consider which costs could put the most pressure on your household and which ones you'd want the death benefit to help cover.

This is also where life stage matters. Someone who recently bought a home and had a child may have very different coverage needs than someone nearing retirement with a paid-off mortgage and significant savings.

Subtract the financial resources already available

Your life insurance doesn't necessarily have to shoulder the entire financial burden on its own. Savings, investments, existing life insurance policies and other assets could also help support your beneficiaries.

Suppose you determine that your family would need $1 million to replace income and address major financial obligations, but you already have $250,000 in assets earmarked for those needs. That could have an impact on the amount of additional insurance required.

Be careful about counting assets your family may need for other purposes, though. Draining retirement savings or an emergency fund to cover immediate expenses could create another financial shortfall later.

Check whether your coverage matches your current life stage

Major life changes can alter the equation, even if the amount of coverage you currently have once made sense. In turn, a regular review of your life insurance policy — as well as a check-up after major financial or family changes — can help identify coverage gaps before they become an issue.

For example, marriage, divorce, a new child, a home purchase, a significant raise, a career change or taking responsibility for an aging parent can all be reasons to revisit your policy. Your needs can change in the opposite direction, too. Paying off a mortgage, accumulating substantial assets or having children become financially independent could reduce some of the financial obligations your policy was originally intended to cover.

Consider whether the type of coverage still fits

The coverage amount tied to your life insurance policy isn't the only thing worth reviewing. It's also important to consider whether the type of policy you have still aligns with your goals.

Term life insurance, for example, generally provides coverage for a set period and can be useful for temporary needs, such as replacing income while children are young or covering a mortgage. Permanent policies, including whole life insurance, are designed to remain in force for life as long as required premiums are paid — and according to New York Life, may also accumulate cash value.

That doesn't make one option universally better than another. The right fit depends on what you're trying to accomplish, your budget and how life insurance fits alongside your savings, investments, retirement planning and other financial priorities. Some households may also use a combination of coverage types to address different needs.

The bottom line

Having a life insurance policy in place doesn't automatically mean you have the right amount of protection. Your coverage is designed to support financial needs that can shift substantially as your income, family, assets and obligations change over time, so a policy purchased years ago shouldn't necessarily be treated as a set-it-and-forget-it decision.

By periodically comparing your coverage with the income your household depends on, the expenses it could face and the resources already available, you can get a clearer picture of whether your current policy still fits into your broader financial plan.