Thinking of buying life insurance? You’re ahead of the curve. It’s not an expense that many of us are happy to incur, either because we think it’s too expensive or we don’t fully understand it. (That’s okay; insurance policies can be complicated.) As we get older, however, it becomes more important. It’s a way to protect our loved ones from having to pay off our debts and help them out financially when we are — as everyone will inevitably be — no longer here.
No matter how you want to use life insurance, it’s important that you ask the right questions when it’s time to purchase a plan. To help you get started, we reached out to several financial experts for advice.
If you want to know what kind of life insurance plan is best, you can either speak with a financial advisor or do your own research. “Choosing who will help you through the life insurance process is not a decision to be taken lightly,” says Mark Williams, CEO of Brokers International. “To sign up for life coverage, your best bet is to find a financial professional who understands life insurance and types of policies available, and get their advice. But if you’re a DIYer, numerous resources (including online life-insurance calculators) can help you determine the amount of life coverage you need and what type of policy may be best for you.”
Once you’ve decided how you’re going to find the right plan, you’ll need to ask yourself, your advisor, and your insurance company several important questions.
How To Know if You Need Life Insurance, and How Much
- Why should I buy life insurance? “The most common purpose of life insurance is to provide money for your family if something happens to you,” says Marchand Bozarth, senior financial specialist at Country Financial. “When you purchase a policy, you select a death benefit your beneficiary will get if you pass away. Depending on the type of policy you buy, your policy may also build cash value, which can be used for things like education costs, paying off the mortgage and other debts, supplementing your retirement income, or as a source of emergency funds in the future.”
- Who is relying on my income after I die? “If no one is relying on your income, then you may be able to skip buying life insurance,” says Dr. Jay Zigmont, financial expert and founder of Childfree Wealth. “For example, with my childfree and permanently childless clients, there tends to be very little need for life insurance.”
- What job do I want the life insurance to do? “For most people, term life insurance is the only life insurance they should buy,” says Dr. Zigmont. “Term life insurance provides payment when you die (which covers your lost income), but that’s it.”
- Do I already have life insurance coverage through my employer? “For the traditionally employed, life insurance can be a part of your employer’s benefit package,” says Tommy Thompson Jr, Certified Financial Planner with Innovative Financial Group. “It’s important to review the offerings at open enrollment. In some instances, you may have the opportunity to purchase additional coverage beyond the amount provided without a medical exam. This type of insurance, however, is often not portable and can terminate when your employment terminates.”
Determining the Best Insurance Policy for You
- What types of life insurance are available? There are two main categories: term life and permanent life insurance. Within term and permanent life insurance are other plan options.
- Term life insurance “typically provides the highest coverage amount for the lowest price,” explains Bozarth. “It may be a good choice if you only need coverage for a certain length of time (10, 15, 20, or 30 years), like while you’re raising kids or paying off a mortgage.”
- Permanent life insurance is a policy that lasts your entire lifetime. It usually has a cash value feature, which you can withdraw from or borrow against while you are still alive.
- Should I sign up for term life coverage or permanent insurance? “Asking about term life insurance is a good way of gauging where the financial professional — who you’re trusting to guide you — stands,” says Mark Williams, CEO of Brokers International. “Term life insurance is cheaper because the coverage ends after a certain period. Through term insurance, you’re essentially ‘renting’ the death benefit for the pre-determined length of the coverage. On the other hand, permanent insurance remains active until you die. Make sure to clarify with your financial professional about what type of life insurance you prefer.”
- Is there a “right” economic time to buy life insurance? If you’re buying term life insurance, yes. “Depending on the type of policy you’re purchasing, rising interest rates can be beneficial for life insurance,” says Williams. “Permanent policies accumulate cash value, unlike term policies. The cash value inside the policy grows tax-deferred.” (Tax-deferred means the cash value of your whole life insurance policy will not be taxed while it’s growing. Thus, your money will grow faster because it’s not being reduced by taxes each year.) “Depending on the type of policy, the interest your policy earns could be directly affected by the current interest rates,” Williams continues. “An insurance company uses the premium a policy owner is paying and invests it. Many of those investments are interest-rate sensitive, and as the interest rates rise, so does the amount the insurance company is earning … Therefore, more interest is credited to the policy owners’ cash value.”
- Will the death benefit coverage accomplish everything I need it to do if I am not here tomorrow? “I believe the most important aspect of a life insurance policy is the amount of coverage the death benefit will provide,” says Thompson. “There are plenty of ‘guidelines’ for how much insurance a person needs, the most popular being a multiple of your annual income. I advise my clients that the best way to determine your life insurance need is to list out the things you want done if you are not here tomorrow.”
- Examples: “Some people want the mortgage paid off,” Thompson suggests. “Some will want their children’s college education funded. Others will want just enough for burial expenses. Some want to leave enough money so that their heirs can assume the care of their beloved pet cat. It doesn’t matter how many features the whole life or term coverage has if it can’t pay for the legacy you want to leave behind.”
- Should I gain or lose weight before I apply for life insurance? “Life insurance premium ratings take your smoker status and BMI into consideration,” says Thompson. “Better classification could mean lower premiums. But you shouldn’t try to outsmart the system and crash diet for your medical exam. It’s unhealthy, plus it won’t impact your rating. The medical questionnaires will often ask if your weight has fluctuated more than 10 pounds in the past year. If it has, you may not get full credit for the changes in your weight. Lying about your weight could constitute fraud and nullify the death benefit coverage. Some companies offer the option to revise your underwriting classification after a year (you’ll likely need a new medical exam to verify your weight changes).”
- Will I need to take a medical exam? “Your insurance provider may require a paramedical exam to determine your ‘rating classification,'” says Thompson. “It typically involves a urinalysis, blood sample, vitals, and a medical questionnaire. It’s conducted by a third-party diagnostic technician, and generally, the insurance company will not allow an exam from your physician. The good news: The insurance company pays for the exam. Schedule this exam promptly, and be prepared with the names of your physicians and any medications you take. Also, some companies can offer express underwriting where you don’t have to complete the physical exam. A telephone interview will be conducted, and the company will likely request medical records from your physician to verify the results from the telephone interview.”
- How much does it cost? “Think about how much money you are willing to invest in your premiums, monthly or annually,” says Susana Zinn, independent life insurance agent. “Your agent should help you find a balance between what you need and how much you can afford.”
- Can my premium change? “It can. You just need to know when and by how much,” says Thompson. “Premium changes aren’t necessarily bad, as long as you are aware of them beforehand. Some permanent policies can be tied to the stock market. If the stock market goes up, your premium might go down. If you have a 10-year term policy, the premium will likely change in year 11 — if you choose to continue the coverage. Which means you should also ask: ‘Does this policy offer flexibility?’ ‘What if my life changes 10 years from now?’ ‘If I need more or less coverage, can I make those kinds of changes?'”
Getting the answers to these questions will help guide you to the life insurance policy that’s right for you. What type of coverage are you considering? Let us know in the comments below.