Although life insurance might be an uncomfortable topic, a policy tailored to your needs can be vital in leaving behind a legacy (or, at the very least, some financial security) for your loved ones. If you’re considering buying life insurance, you may want to meet with a licensed professional to decode the types of coverage and riders available. If so, here are eight questions that might put you on the right path for the right policy.
1. What kind of life insurance policy should I get?
Learning a bit about what kind of life insurance exists before meeting with your agent may help you and your agent speak the same metaphorical language when reviewing your options. Before you meet with your agent, know that the best life insurance policy is one that meets your needs and the needs of your beneficiaries when you pass away.
There are two main types of life insurance that you can purchase — term insurance and permanent insurance.
Term life insurance provides coverage for a specified number of years and will provide a death benefit if you pass away while your policy is active (as long as the other term provisions are met). Policy term lengths typically range from 10 to 30 years and are usually purchased with a goal in mind, like leaving behind financial support for a child or replacing your income to cover a mortgage payment. The death benefit of a term policy can remain the same amount throughout the term or decrease over time, depending on the type of policy you purchase.
On the other hand, permanent life insurance is intended to cover the policyholder for their entire life (as long as premiums are paid). Permanent insurance can be complex and has several variations, including whole, universal and variable universal. While traditional policies have an agreed-upon premium and death benefit upon purchase, forms of variable and universal policies can fluctuate depending on the market.
2. How much life insurance do I need?
One of the most common life insurance questions is “how much life insurance do I need?” The answer involves many factors. For instance, ask yourself how much your loved ones will need financially to maintain their current lifestyles. Another important consideration is how much debt you’re in and, if you have a mortgage, how long it will be until it’s paid off. Though your agent will work with you to figure out your coverage needs, using a life insurance calculator ahead of your meeting could also help you prepare.
Understanding your life insurance needs is crucial, especially for families with unusual debts, such as high medical bills.When you meet with your agent, they will likely ask you to assess your debts and ask about your financial goals to determine the amount that best meets your individual needs. Once you are sure your insurance agent is taking all of your current and future financial needs into consideration, you can better determine what type of policy to purchase.
3. How much does a life insurance policy cost?
The cost of your life insurance policy will depend on a variety of important factors. Your life insurance agent will need to know your age, gender, lifestyle, the type of life insurance you need and your medical status, which may require a physical examination from a medical doctor.
Your company then uses these factors to assess your risk level. Anything that could potentially impact your health — including your job, hobbies and smoking habits — can increase your risk level and influence your rate. If your life insurance company determines you are high risk, your life insurance premium will be more expensive.
While knowing how much coverage you need is important, you should also understand how much coverage you can comfortably afford. While life insurance rates can vary widely from person to person, generally speaking, permanent insurance policies cost more than term insurance policies.
4. Will my life insurance provide living benefits?
There is a common misconception that life insurance only provides death benefits. You may be surprised to learn that many life insurance policies also provide living benefits such as borrowing against the policy’s cash value.
Living benefits vary by life insurance company and may be available to the insured party while they are still alive. Common living benefits available under some life insurance policies include:
Terminal illness: This is a rider for the insured who has been diagnosed with a terminal illness and helps cover medical costs and care. Your policy and company determine the percentage of the benefit.
Long-term care: If the insured becomes unable to provide their own basic care and will require assisted living, the long-term care benefit may allow them to use their life insurance policy to help pay for that care.
Short-term care: If the insured is injured or has a temporary impairment, this benefit may help cover the short-term costs of care.
It is important to note that some of these benefits may be included in the life insurance policy, while other benefits can be added for an additional cost. If you’re interested in living benefits, be sure to mention it while you’re meeting with your agent so they can review your options.
5. What life insurance benefits are guaranteed?
Whether you have term or permanent life insurance coverage, if you pass away while your policy is active, your beneficiaries will receive your death benefit — most of the time. However, there are certain instances where a death benefit isn’t guaranteed. For example, your life insurance company could deny your life insurance claim if you die by suicide within your policy’s contestability period (which is usually the first two or three years after policy inception). Your claim could also be denied if your company determined that you misrepresented your health during the application process.
Most permanent life insurance policies also come with a cash value component, but depending on the type of permanent policy you have, that cash value may or may not grow — it’s not guaranteed. That’s because the cash value portion of some permanent policies (indexed universal, for example) can fluctuate based on the current market since your policy’s cash value is invested in fixed index stocks and options.
6. When can I expect returns?
If you are considering a term life insurance policy, this question will not apply to you. If considering a permanent life policy, you should be prepared to wait several years before your policy will generate positive returns. It’s also important to note that cash value growth is not guaranteed on all types of permanent life insurance.
Permanent life insurance policies are considered long-term investments and are generally purchased as a safety net for unexpected life occurrences rather than financial growth. For the first several years, payments are applied directly to the policy’s premium, so it may take time for your policy to accumulate a cash value or generate a positive return. Furthermore, growth may be minimal and when you borrow against your life insurance policy, the amount you borrow may reduce your death benefit until you pay it back.
7. What if my health changes?
Unless you are buying a guaranteed life insurance policy or purchasing life insurance through your employer, you will probably have to undergo a medical exam. Throughout your policy, your health could change for better or worse. In some cases, you may be able to undergo another medical exam and underwriting process that could potentially decrease your premium — such as if you no longer smoke or you have quit a dangerous job.
Policyholders, especially those with term life insurance, should also ask their agent what could happen if they become disabled. It may be worth purchasing a convertible term policy should your health decline during your policy term and you, later on, have an ongoing need for life insurance coverage.
Some life insurance policies provide benefits for policyholders who become disabled even if you do not purchase a disability rider. This benefit may include waiving premiums in the event of a disability. Since every company may define “disabled” differently, it is essential to discuss with your life insurance agent what additional riders should be purchased.
8. What if I need more coverage in the future?
Your life insurance needs may change as you age. The terms and conditions of your life insurance policy might need to change as well. With a term life insurance policy, the idea is that your need for insurance should go away or be reduced by the end of the policy term. However, if you foresee needing to extend your life insurance coverage after your term expires, you may want to consider adding a term conversion rider when you purchase your policy.
Even if you think you don’t need life insurance right now, it’s important to consider your future. Although some carriers offer life insurance for seniors, purchasing the right life insurance policy when you’re young and healthy could save you money. In other words, you’re likely to pay higher premiums if you wait to buy your policy when you’re older and have loved ones that depend on your income.