8 Smart Steps for Buying Life Insurance

Verify whether you need Life Insurance coverage

Life insurance is valuable, but it is only necessary for some. Consider purchasing a policy if any of these conditions apply to your situation:

• Someone depends on you financially and would still need significant financial resources after your death.
• Your estate will need more liquid assets (cash, investments, property, or other saleable items) to cover its taxes and debt, eroding the inheritance you plan to leave behind.
• You wish to cover your funeral and burial expenses at least so that your assets remain intact for your legacy and heirs.

Otherwise, it is possible you don’t need life insurance. Life insurance is also a viable strategy to leave a charitable legacy for a cause you support.

Calculate how much Life Insurance coverage you need

This part of the process can be daunting, but it need not be. Take a quick snapshot of your finances and answer the following three crucial questions:

1. What financial resources will be available to your survivors or heirs after your death? Look at three primary categories of resources:

• Social security and other retirement-related survivor benefits;
• Group life insurance (e.g., a policy you may have through an employer), and
• Other assets and financial resources

2. When will these resources become available? For example, social security survivor benefits are immediately payable to a surviving spouse if dependent children are present. If not, social security may only be available to your spouse after age 60.

3. Determine what your survivor’s financial needs may be after your death. For simplicity, you might focus on three categories of requirements: final expenses, debts, and income needs.

Next, subtract your survivors’ financial resources from their financial needs to determine how much coverage to buy. Many people need to be more insured because they skip these steps or take shortcuts (such as simply buying a multiple of annual income).

Decide on your financial goals for your Life Insurance

The overall reason for buying life insurance is to leave behind financial resources for whom or what is important to you. Premium payments to the insurance company go toward the death benefit, the financial payout after your death. Many people plan for this money to take care of their final arrangements, cover living expenses for loved ones, or support a favorite cause. However, you can also use a life insurance policy to accumulate savings, maximizing the income you will have for your retirement or providing an income stream after your death for your survivors.

Determine what type of Life Insurance best meets your financial needs

You may have heard about various categories of life insurance, including term life, whole life, and universal life. Each of these comes with fundamental distinctions. Consider how these differences might work for you.

Term Life policies offer payment of a specified death benefit for a specific term of your life, such as five, ten, 15, or 20 years. Term life insurance coverage for most people tends to involve lower premiums; however, the longer the term, the more expensive your premiums may be. A term life policy may be a good fit if you want insurance coverage for only a specific period or are on a limited budget.

However, what if you want to purchase insurance coverage for several decades until your death? Or, perhaps you’d like to use some of your premiums to accumulate savings? A Whole or Universal policy might be a good option in either of these cases. Basic whole life insurance involves a fixed premium and promises a minimum rate of return on the dollars invested, which builds the policy’s cash value. A universal life insurance policy may offer the potential to increase the death benefit or adjust premium payments.

Find out if you need to add any “riders” to the policy

Life insurance policies offer primary benefits depending on the type you purchase. However, your coverage can be expanded or personalized through riders, optional additions to a life insurance policy that provide supplemental coverage or benefits you wouldn’t receive with a standard policy. Adding some riders may increase your premiums, while others might be free.

You may want to consider two riders: waiver of premium and guaranteed insurability. Some policies include one or both in the basic contract, but if not, it is generally a good idea to add them. Waiver of the premium pays the life insurance policy premium for you if you are disabled. Guaranteed insurability permits you to add to the death benefit without providing additional evidence that you are in acceptable health.

Shop around to find the best life insurance coverage for you

There are many ways to save money when buying life insurance, but they don’t always entail paying a lower premium immediately. Nonetheless, life insurance is a very competitive business; therefore, quotes can vary significantly between companies. Consider that what’s important is that you get the coverage that fits your budget and financial goals. If you work directly with an agent, ensure your agent knows about your financial situation and takes time to explain your options in easy-to-understand terms.

Decide whether to pay annual premiums at once or in installments

You may have the option to pay an annual lump sum or spread out the yearly cost over smaller, more frequent payments. It is more cost-effective to pay annually as often there is a significant additional charge for paying in installments. Decide what works best for you.

Tell your beneficiaries about your life insurance policy

Once the policy is purchased, tell your beneficiaries which company issued it, where to find the paper copy and any specifics about what you want them to do with the death benefit. While it is rare for people to be unaware they are the beneficiary of a life insurance policy, it does happen, and benefits may need to be claimed. Remember to store your documents so your beneficiaries can easily access them.

Source:  Insurance Information Institute