Buying a life insurance policy is an essential way that we can secure the financial future of those we care about. Different types of policies — as well as their prices — can vary widely, but the basic gist is the same: You pay the insurance company a monthly fee called a premium, and if tragedy were to strike while the policy is active, the insurance company would pay your designated beneficiaries the death benefit laid out in the insurance contract.
Though this is simple in concept, when it happens, it can get complicated fast. Here are a few things to look out for and keep in mind while you’re going through the sometimes-complicated process of purchasing life insurance.
What Can You Afford To Pay Long-Term?
Any life insurance policy is going to require regular payments of premiums for the policy’s duration. Those payments will vary based on what kind of policy it is and how large the death benefit included is. Often, those payments will have scheduled increases over time.
You need to make sure that you’ll be able to make those payments for the full length of the policy. Of course, the future is unknowable, but using a reasonable projection of what your financial situation will be over the entire course of the policy, you need to confirm that you’ll be able to afford those premiums.
What Do You Need?
You’re presumably buying this policy in order to secure the financial future of people you care about. So what will they need in order to survive if you’re gone? One rough estimate many people use is that your life insurance should be approximately twice your annual pay, but this varies widely depending on your personal situation.
Answering this question precisely means cracking out the calculators. What are your family's yearly expenses? Add that up over however many years you hope your death benefit will tide them over. How much money do you make, or what is the value of the household labor you provide? Add that up over that same number of years. Subtract the second number from the first, and you should have the coverage number you’d ideally like to purchase.
The above is a quick and dirty sort of accounting, and there are ways to get a lot better, more exact answers, such as talking to a life insurance agent. Speaking of:
Consider Hiring An Agent
A life insurance agent can walk you through the whole process by helping you understand your needs and options. A good agent will not only help you find the right policy, but they’ll also help you get a better deal financially and help you navigate what can be a complicated application process.
But there’s a catch. Not all agents are good, and some are more interested in upselling or hitting numbers than they are in making sure their clients are taken care of. And you should be aware that some agents work directly for a specific insurer, and will only sell that company’s products. If you have an agent you already know and trust, go right ahead. Otherwise, make sure you do your due diligence. Shop around, get references and read reviews so you canmake an informed decision.
If you go without an agent, here are some more things to think about.
What Kind of Policy Is Right For You?
Life insurance policies come in two main categories: term life and whole life. Term life is the simpler one. You pay a premium every month, and the insurer agrees to cover you for a set number of years. When the policy expires, you’ll have to purchase a new policy if you want to continue coverage.
Whole life, on the other hand, never expires. Whole life policies also usually include an investment component — as you pay premiums, the cash value of your policy grows. You’ll have the option to borrow money against your policy or even to cash in the policy. This makes them more complex, and they’re usually part of a larger retirement investment strategy.
This means that you have important long-term choices to make. There are very different levels of cost associated with these policies, and one or the other will make much more sense for people in different situations. Investigate carefully, and get help before making a decision if you’re not sure you fully understand the costs and benefits involved.
Are You Getting Insurance Through Your Job?
If you’ve already purchased a life insurance policy through your employer, that doesn’t mean you should be out of the market for an additional plan. Many insurance companies offer supplemental policies that can provide more coverage for very good prices. It’s one of the cheaper ways you can further secure your family’s financial future.
What Does The Insurer Think About Your Lifestyle?
That question sounds silly, right? But it matters. The way life insurance companies decide how much to charge for a policy is by trying to estimate how likely you are to die during the period of coverage. They do this by considering every piece of information about your health and lifestyle they can get their hands on, including age, gender, weight, alcohol and tobacco consumption, medical history and more. They also consider factors like whether you drive a motorcycle or engage in potentially dangerous personal activities.
Based on those factors, they might decide that your risk of dying is higher, and that therefore they need to charge you more in monthly premiums. But of course, not every insurer is going to calculate these factors the same way. Two different insurers might give you significantly different premium quotes, so make sure to shop around. Just because one insurer has a problem with your rock-climbing hobby doesn’t mean they all do.
Got Patience For The Fine Print?
Nobody’s idea of a perfect day includes sitting and reading dense legal documents. But doing that work before you sign on the dotted line is the best way to prevent any nasty surprises, and to maximize the potential value in your policy.
That’s because life insurance policies have gotten more complicated over time, and now include features, options, “riders” and potential pitfalls that didn’t exist in the past. Stuff like conversions, automatic payments, living benefits, non-immediate payouts (all topics you should google once you finish reading this) can all have major impacts on whether you’ll be able to get full value out of the money you’re spending on premiums.
Buying life insurance is no fun, but it’s often the best way we have to protect our families. Do your due diligence, and you have a good chance of getting the right policy for you and your family. For questions, contact one of us today.