5 Questions To Ask Before Buying Life Insurance
One in three households would have immediate trouble paying living expenses if the primary wage earner died, according to the 2016 Insurance Barometer Study by Life Happens and LIMRA.
85% of survey respondents said most people need life insurance, yet only 62% have coverage. Many people do not purchase life insurance due to misconceptions – they think it’s too expensive, it’s not right for their needs, or they don’t understand the available options. In honor of Life Insurance Awareness Month, here are five questions to ask before buying life insurance.
1. How much does it cost?
Many consumers tend to overestimate the price of life insurance, especially Millennials and Gen Xers.
When surveyed about the annual price for a 20-year, $250,000 term life insurance policy for a healthy 30-year-old, millennials thought it cost $600, while the actual cost was $160.
There are several factors that affect life insurance costs:
- Health history
2. How much do I need?
There are several popular “rules of thumb” about how much life insurance you need, but determining your level of coverage is subjective.
How much life insurance you’ll need often involves two major factors:
- How much it will take to pay off your debts off
- How much your dependents will need to maintain the same lifestyle after you’re gone
Apps like the Life Insurance Needs Calculator from Life Happens may also help you better define your life insurance needs.
3. What type of policy should I buy?
There are two common types of life insurance:
Term life insurance
Term life insurance provides a specific death benefit and protects you for a specific amount of time, typically 5-year, 10-year, 20-year or 30-year periods.
If you are alive at the end of the contract period, the insurance company does not provide payment to you or your heirs.
If you are looking for maximum coverage at the lowest possible cost for a fixed time period, term life insurance might work for you.
Whole life insurance
Also called permanent life insurance, whole life insurance provides lifelong protection and accumulates cash value. Your full benefit will be paid as long as you pay the premiums and do not take any loans, withdrawals or surrenders.
Whole life insurance is ideal for people who have health issues or for high earners who struggle to save money.
4. What are the advantages to life insurance?
It can help with end-of-life expenses
Who is going to pick up the tab for your remaining debts, mortgage, funeral expenses, car and other responsibilities? Fox Business estimates the average funeral service costs close to $6,600.
Life insurance can cover these remaining expenses so your finances don’t become someone else’s burden when you die.
It can protect your loan cosigners.
Do you have student loan debt? What if a family member cosigned your loan or took out loans in their name to help you out? That family member will be responsible for the debt if you die. Although federal loans are canceled upon death, most private ones are not.
Term life insurance can help. Presumably, you will have paid off most, if not all, of the loan by the time the policy term ends.
It can work as a savings component.
If you always have a reason to dig into your savings accounts, consider purchasing a life insurance policy as a savings component.
Often-forgotten uses for life insurance include:
- To instantly create an estate
- To be used as a source of cash flow in retirement
- To address needs such as long term care and long term disability
5. When is the best time to buy life insurance?
It is best to buy a life insurance policy when you’re young and healthy.
You can still buy life insurance if you’re older, but it becomes more difficult as you age. The cutoff age to buy term life insurance is age 70 or 75 with most insurance companies.
Premiums also increase significantly as you age since your risk of mortality is greater.