10 Important Questions to Ask Yourself Before Buying Life Insurance
Most people have no idea where to start when buying life insurance. Through our website and blog, we try to provide consumers with the information they need to make the process of buying life insurance easier. Sometimes the best way to figure out your goals for life insurance is to ask yourself these 10 important questions before you consider a policy. You can do this yourself or you can discuss them with an agent who can help you build a strategy that is right for you. Here are 10 important questions to ask yourself before buying life insurance.
- Why do I Need Life Insurance? The first and most obvious question, your need for life insurance will usually depend on whether or not you have financial dependents like a family. If there are people who depend on you for financial support, your death could cause a financial hardship for them. A simple term policy could provide coverage until they can provide for themselves. This is probably the most common need for life insurance. There are also other cases when life insurance could prove to be a valuable planning tool such as business continuity planning, estate planning, retirement planning and charitable giving to name a few.
- Who or What do I Want to Protect? You could use life insurance to protect your loved ones if you were to die unexpectedly with a level term policy. You could use life insurance to protect your business interest with a key man policy or a buy-sell agreement. You could also use life insurance to leave a bequest to your favorite charity. The point is that life insurance is a versatile financial planning tool that can be used to meet many different objectives.
- How Much Coverage is enough? There are many different ways to calculate life your insurance needs. Some suggest using a multiple of your income or simply adding up all of your debts. The main reason why people buy life insurance is to replace income if they die unexpectedly and to pay certain debts. The best way to calculate your life insurance needs is to use a comprehensive needs calculator that looks at multiple factors to get a more accurate idea of your needs.
- How Much Premium Can I Afford? Life insurance should fit comfortably into your budget. The reason why this question is important is because you never want to be in a position where you are stretching your budget to pay your premiums. There are many cases where people buy a more expensive permanent product because they like the idea of lifetime coverage only to find out that they can’t keep up with premiums and the policy lapses leaving them with no coverage. If you have a permanent policy that lapses in the first couple of years, you will likely get nothing back. The point is that affordability is important considering the fact that life insurance premiums will have to be paid for many years.
- Do I Need Coverage to Last My Lifetime or a Specific Period of Time? For most people, life insurance is used to replace income that would be lost in the event of an unexpected death. This is most important when you have financial obligations such as raising a family, paying off a mortgage and saving for retirement. Once you retire, it is most likely that your children will be self-supporting, you’ve saved a retirement nest egg, you can start collecting social security and you will no longer have a mortgage. If you pass away at this point, it is more than likely to have a minimal financial impact on your beneficiaries. That is not to say that lifetime coverage isn’t a good fit for some. Lifetime coverage could be useful if you wish to provide care for a special needs child after you pass away, if you anticipate a potential estate tax obligation or if you would like to cover final expenses or leave a bequest to loved ones.
- Do I only Need a Death Benefit? Life insurance is not just a death benefit product. Permanent products such as whole life and universal life allow you to accumulate cash value that can be accessed in the future. You can also add valuable living benefit riders such as a long term care rider, critical illness rider and chronic illness rider that offer protection while you are still alive. Some term policies even offer living benefits as well. If you are looking for products that only offer death benefit protection and affordable premiums, level premium term life insurance and guaranteed universal life insurance are your best bet.
- Would I Like My Policy to Build Cash Value? Some people like the option of building cash value in their policy. Permanent products such as whole life and universal life offer policyholders the ability to build cash value on a tax-deferred basis. These policies cost more than term coverage because coverage lasts your entire lifetime and a portion of your premium is used to fund your cash value account. You can access the funds in your cash value account in the future if needed. If you prefer a term policy and still want access to cash in the future, you have the option of return of premium term coverage. You won’t build cash value similar to a permanent policy, but a return of premium policy will pay back all of your premiums when your term coverage expires.
- Will I need to Access My Cash Value in the Future? If you choose a permanent policy to meet your needs, you can access the cash value in your policy. This could come in handy in retirement or if you have an unexpected financial obligation. There are also cases where you can structure your policy to pay a stream of income in retirement, supplementing social security income and income from retirement accounts like a 401k or IRA as well.
- What Guarantees are Important to Me? Level premium term policies are simple to understand. Your premiums and death benefit are guaranteed during the term of your policy. Once your term is over, your premiums will increase but chances are, if you chose a term length that was adequate, you will no longer need coverage. Whole life policies, on the other hand, come with valuable premium, cash value and death benefit guarantees. That is why whole life is the most expensive type of permanent coverage. Universal life policies offer a little more premium and death benefit flexibility, but if your policy doesn’t perform to a certain level or if the expenses in your policy increase too much over time, you might have to increase your premiums or your policy will lapse.
- What Kind of Risk can I Handle? Depending on the type of permanent policy you purchase, your cash value can be invested in a few different ways. Whole life policies literally lay out your premium, death benefit and cash value in a ledger year by year so that you know exactly what the value of each will be each year. If you have a participating policy, you can also receive dividends as well. This is probably the most conservative approach to growing your cash value. Universal life offers three main types of policies with an investment component: current assumption universal life, variable universal life and indexed universal life. Current assumption universal life simply credits your cash value with a stated interest rate that is set annually by the insurance company. It is the most conservative universal life product. Indexed universal life allows you to participate in the gains of the market with a cap on upside returns but limits your losses using a floor. It is slightly more aggressive than current assumption universal life but still somewhat conservative. Variable universal life invests your cash value directly in the stock market making it the most aggressive of the three main universal life products.
Talk to an Agent – It is best to discuss these questions with an agent who can help you determine your ultimate goals for life insurance coverage. This is especially important if you have health issues that might need additional underwriting consideration. Buying life insurance doesn’t have to be difficult. Once you start to answer these questions it should become clear which product will best meet your needs. If you would like to discuss these questions, we can help. We would be happy to help you determine the right product fit for your needs. We shop over 40 of the top life insurance companies to find our clients the best products to meet their needs. If you have any questions, please call us at 888-687-9444 or email us at info@archstoneagency.com.
About Us
Archstone Insurance Services, LLC is an independent agency that shops over 40 of the top life insurance carriers to provide huge savings on life insurance coverage for our clients. We are happy to answer any questions you might have about any of the insurance products we offer, your planning needs or your existing coverage. Feel free to call us directly at (888) 687-9444 or email us at info@archstoneagency.com.
