6 Questions To Consider Before Buying A Life Insurance Policy
Posted on Thu, Sep 29, 2011
Before buying a life insurance policy there are some important questions you should consider, and discuss with your insurance agent.
1. Do I need to buy a life insurance policy?
If you and your spouse or partner have made financial commitments that rely on your income, a life insurance policy is the most cost-effective way to provide the benefits your survivors would need. The proceeds from a life insurance policy also enable your estate to pay what it owes after your death. Here are some examples of purposes for life insurance:
- To provide my spouse with income for life
- To create funds for my children to go to college
- To pay off my mortgage
- To pay estate taxes and minimize the erosion of my estate
- To pay off other debt
- To bury me
2. Won’t the life insurance benefits I receive from my employer be enough?
Maybe, but probably not. Group life insurance policies—often offered to employees by their employers—generally pay out a dollar amount equal to one year of the employee’s salary, much less than what your survivors would need over time. If that’s the only insurance you have, what about if you lost your job, quit or retired? In most cases, that insurance disappears.
3. Can I count on my survivors getting Social Security benefits?
U.S. Social Security survivor benefits are available only if the surviving spouse has dependent children under the age of 18, or if the surviving spouse is aged 60 or over, so there may be a lengthy period where, in fact, he or she would not receive any benefits at all. Even when children and spouses are eligible for Social Security survivor benefits, the federal government caps them at a “family maximum,” which is likely to fall far short of what the survivors need.
4. How much life insurance coverage do I need?
The amount of insurance you need will vary depending upon what your purpose for the insurance is.
If you are trying to provide for your spouse for the next 20 years then you’ll probably need more than someone only worried about having enough to bury themselves and pay off some outstanding liabilities.
There’s no hard and fast rule regarding how much you need, but here’s a simple formula from LIFE (Life and Health Insurance Foundation for Education):
If you’re unclear about this, speak with your insurance agent. They can ask the right questions to help you determine the amount appropriate for your situation.
5. Should I purchase a term or permanent life policy?
Term insurance is a form of life insurance that pays out only if the policyholder’s death occurs during the “term” of the policy, which is usually anywhere from one to 30 years. The premium rates for term policies are lower than for permanent life policies. Permanent policies, such as whole life, universal life, variable life and variable universal life, remain in force as long as the premium is paid, and some policies accumulate a cash value.
The answer to what type of insurance you should purchase depends on the purpose for getting the insurance and how long you want it to last. If you’re concerned about using life insurance for estate planning purposes you probably need something more than term insurance. If you’re only concerned about protecting your life for 20 years until the kids go off to college then a term product is probably right for you. The best way to determine what type to buy is to consult with your insurance agent.
6. How can I save money on life insurance?
Life insurance premium rates, especially for term life policies, are now at virtually their lowest levels in history. However, there are a number of things you can do to keep the cost even lower, whether you are purchasing a term or permanent life insurance policy. For example, buy policies with face-value amounts that reflect “quantity discounts.” It’s possible that a $500,000 life insurance policy will cost less than one valued at $450,000 because the larger policy might offer a discount for reaching the $500,000 milestone. You can also save by paying premiums annually, rather than on a monthly, or quarterly, basis.
But the most important question to ask about price is “How much will it cost your survivors if you do not buy life insurance at all?”