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What To Ask Before Buying a Life Insurance Policy

Life insurance can provide relief to the loved ones you leave behind after you pass. Life insurance can provide funds for college, pay off mortgages, and create income for a spouse. Understanding this need is the driving force to purchasing a policy, but there are some questions you should have answered before buying.

What is my need?

Purchasing a life insurance policy should never be a rash decision. A mistake people make is buying a standard term policy with coverage of $250,000, $500,000, or $1,000,000. Understanding the need for this purchase will alleviate the stress of your passing. So, your first task is to ask yourself why I am looking into buying a policy.

The easiest way to assess your needs is by calculating Debt, Income, Mortgage payments, and future Education costs or using the DIME method. This strategy is a great starting point in determining how much coverage is needed. The fundamental purpose of life insurance is to provide income for your dependents if you are no longer here. While DIME does not cover all your future needs, it is a good starting point.

Who is my intended beneficiary?

Determining who will be the recipient is crucial when purchasing life insurance. Everyone’s situation is different, so finding someone you trust as a beneficiary should be established before reviewing policies.

Most situations are relatively simple, each spouse will take out a policy and make the other their beneficiary. This allows the debts of the spouse who has passed to be paid off. In other situations, you may find assigning a beneficiary to be more complicated. For example, you could be looking at a business continuity plan where you are establishing a buy-sell agreement. This is where more consideration must be put into the beneficiary choice.

Additionally, many must recognize that having only a primary beneficiary is insufficient. What we fail to predict is an event where your beneficiary is unable to receive the death benefit . Therefore, you should not only pick a primary beneficiary but a contingent as well.

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Should I buy online or through an agent?

Buying online or through an agent is a personal preference. If time constraints prevent you from meeting with an agent, online would be a better option. Below, the pros and cons of each are outlined.

Buying online

Buying online offers many benefits that some agents might need access to. For instance, an agent may be a captive writer, only offering policies with one company. However, if you use a comparative rater online, you can compare multiple quotes. Additionally, healthy young adults could pass through without having to do a medical exam. Medical exams are not a full physical but include bloodwork and a short exam for underwriting purposes.

Buying through an agent

In an increasingly virtual world, it is easy to go online, search for a company, and purchase a life insurance policy. If you go through a strictly online process you will not have control over who services the policy. A good place to start is finding rates online and brining them to an agent who sells with that company. Something to keep in mind is that these rates are not guaranteed because you have not passed any underwriting.

What you are missing out on is the advice a seasoned agent can provide you. The process of finding an agent you feel comfortable with and can trust is longer, but the benefits outweigh the cons. Sometimes, the best way to find an agent is by asking a family member for a recommendation.

A seasoned agents has years of experience selling policies. The human experience is not lost in the decision process; so finding an agent who can advise you will put you in a better situation. Life insurance policies range from simple to complicated, so you want to make sure you know what you are buying.

Do I need to establish a will?

In short, no. A will is not required for life insurance. The long answer is yes.

Life insurance automatically pays out to your beneficiary in the event of your passing. We fail to realize there may be no instruction on how that money is meant to be used. Do you want some of it saved for your future children’s college fund? Will a portion be going to paying off a mortgage?

While this cannot be added to a policy, having a will provides instructions for how to use the death benefit. If you have a trusted beneficiary and a valid will, it is the best way to ensure the money will be used per your wishes.

How do I know my insurance company is financially stable?

Knowing that the company you are buying from is stable allows you to feel safe in your investment. Although risk potential is unpredictable, a company's reputation and longevity should be considered when purchasing an insurance policy.

So, how do you learn if a company is financial stable?

To determine a company's financial stability, check the AM or Standards & Poor rating. These represent an insurance company’s ability to pay claims and other financial obligations.

To find a company’s rating you can go to the following:

  1. Company and Rating Search - Best's Credit Rating Center
  2. Home | S&P Global Ratings

Here you can search for the best credited life insurance companies in your state.

Do you need permanent or term policy?

A term policy guarantees your coverage for the term of your choosing; Annual Convertible Term or ART, 5 years, 10 years, 15 years, or 20 years. These policies are cheaper because they accumulate no cash value and the insurance cost are less. Term polices also have features that allow you to convert them to permanent polices down the line. This guarantees a better rating at a young age that can be transferred to a permanent policy without underwriting.

With a permanent policy, your insurance premiums stay the same for the entirety of the policy until it pays out at the event of your passing. Some permeant policies also feature cash value and possibly accumulate dividends that you cannot get in a term policy. Taking these facts at face value will instantly lead toward the permanent policy. But, they are often more expensive due the insurance cost being higher along with the accumulation of cash value.

So, how do you choose between the two?

  • Your age. Life insurance premiums become more expensive as you age. Buying a term policy is the best option when you are young and do not have the extra money to spend but have more debt. As we get older and our debts become settled, you may just be looking for money to cover funeral expenses; in this situation, a small permanent policy works well.
  • Your budget. If you can afford a more expensive policy when you are young, then go for the permanent policy. Here you can tap into extra features and build cash value over the years. This cash value is a bucket of money that you can dip into to pay for future expenses at a lower interest rate with no credit approval.

Purchasing life insurance takes a lot of thought before you sign the contract. Having all your facts in order and picking out the best company will ensure your policy works the way you intend it to.

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