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Do you know which questions to ask about life insurance before you buy a policy? As you work with a financial representative, being prepared and knowing what to ask may help you find an option that suits your needs. Here are five questions to consider asking before you purchase life insurance.
1. Why Do I Need Life Insurance?
This may feel very basic, but it's an important question to get a strong start on your search. Many people purchase a policy to help protect their loved ones financially if something were to happen. However, life insurance can serve other purposes.
For example, do you need life insurance to replace your income and support your young family? Or do you only need life insurance to cover your final expenses? Do you hope to leave your family more financially comfortable should something happen to you? Do you have future childcare and education expenses to consider? Will your life insurance allow you to leave a charitable legacy?
If you start by determining why you need life insurance, it may be easier to choose a policy that will help meet those needs.
2. How Much Life Insurance Do I Need?
This is one of the most common questions to ask about life insurance, and it is a natural follow-up to why you need the policy in the first place. After you determine why you need a life insurance policy, you may have an easier time deciding how much coverage to buy.
For instance, if you need a policy to cover only your final expenses, you can determine the average funeral costs in your area to inform the policy size you need. If you need life insurance to replace your income, calculations can become a little more complicated, but you may still be able to come up with an estimate.
3. Do I Need Term or Whole Life Insurance?
Life insurance is generally broken down into two types: term and whole life insurance.
Term life insurance is coverage for a specific period of time. This can range from just a few years to several decades. Because term life insurance does eventually expire, premiums tend to be less expensive than for a comparable amount of whole life insurance. In essence, term life insurance is often used to help protect your family in case of your premature death.
If you outlive your term life insurance, you may have the option to renew or convert the policy. However, the premiums may go up at that point.
Whole life insurance offers you coverage throughout the rest of your life — no matter how long you live as long as you continue to pay premiums when they are due. Premiums for these policies are typically higher than those for the same amount of term life insurance. However, whole life insurance also often includes a growth component, known as the policy's cash value. You may be able to borrow against the policy's cash value after you have held the policy for several years. It's important to note that loans or withdrawals may generate an income tax liability, reduce the cash value and death benefit, and cause the policy to lapse.
4. When & How Are the Benefits Paid?
Before you purchase life insurance, it's important to understand the specific circumstances for a death benefit payout. In particular, you will likely want to know:
- If there is a waiting period before coverage goes into effect. If something unpredictable happens a week after you purchase the policy, will your family receive the death benefit?
- If there are any situations in which your beneficiary would not receive the death benefit.
- When the death benefit will be paid out.
- How your family will receive the death benefit. It could be paid as lump sum, monthly payments or even a contribution into an individual retirement account (IRA). Many insurers will allow you to choose the structure of the death benefit yourself.
5. How Does My Health Affect My Costs?
Many life insurance providers require you to complete a physical exam before they issue you a policy. The price of your premium may be impacted by your physical health and habits (including smoking, drinking and extreme sports). In general, individuals in better health may spend less on their premiums than those who have health problems or engage in unhealthy activities.
With all the different policy options, buying life insurance can feel a little intimidating. Knowing what questions to ask about life insurance can help you feel confident as you track down a policy suited for you and your loved ones.