Because the job of life insurance agents is to sell policies, they may not tell you everything you need to know before you make a purchase.
Agents typically are paid through commissions. The more insurance you buy, the more money they make. It’s up to you to make sure you’re well-informed and choose the right policy. That means doing your homework and asking the right questions.
Following are some important questions to ask before you make a life insurance purchase.
1. Why do I need a life insurance policy?
Contrary to what you may think, not everyone needs life insurance. Your agent should be able to give you a compelling reason why having a policy would be helpful to you and your beneficiaries.
It’s important to remember that the primary purpose of life coverage is to replace your income when you die, to ensure your dependents are provided for. A parent of young children typically has a high need for life coverage, especially if he or she is the family’s primary wage earner.
However, if you have no spouse or dependents, a life insurance policy might not be necessary. Also, if you have enough financial resources to provide for your dependents if you died unexpectedly, buying life insurance may be a waste of money.
2. What is the difference between term and cash-value life insurance?
Term and cash-value are the two basic types of life insurance. It’s important to know the difference since cash value typically is more expensive.
A term policy insures you for a fixed period, such as 10 years. At the end of the term, you must renew your policy or buy a new one.
Cash-value insurance — also known as whole or permanent life insurance — covers you for your entire life, as long as your premiums are up to date. Over time, this policy will build a cash value on a tax-deferred basis. That means you’ll be able to surrender it before your death for a cash payout. Remember, the cash value is less than the face value that’s paid when you die or when the policy reaches maturity.
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3. How much life insurance coverage do I really need?
Taking on more coverage than you need is a waste of money. A common goal is to have enough coverage to pay off your home mortgage and provide for dependents if you die unexpectedly.
Be wary of agents who try to sell you policies for very large amounts, such as $1 million, without justifying the need. For example, if your children are grown and supporting themselves, your need for life insurance benefits is less than if you have minor children depending on your income.
4. Is buying a cash-value life policy a good investment?
Permanent, cash-value policies sometimes are sold as investments. While such policies have an investment component, their main purpose is to replace income for your dependents if you die.
Because each policy is different, make sure you understand how the investment portion works. Find out if there are better ways to invest your money. A qualified financial planner can help you understand how such a policy would fit in with your overall savings and investment strategy.
5. Does it make sense to buy a life insurance policy for a child?
A child who develops a medical problem early in life might have trouble qualifying for life insurance coverage as an adult. By purchasing a permanent, cash-value policy early, you can make sure the child remains insurable later in life, despite health issues.
Before you insure a child, however, remember that the primary reason for having life insurance is to replace the income of wage earners. Since children normally don’t have incomes, a life policy becomes unnecessary in most circumstances.
A better way to guarantee the well-being of children may be to make sure that their parents have life insurance coverage. That way, there will be money for the child to live on if one or both parents die.
6. How costly will it be to renew a term life policy?
If you choose a term life insurance policy, it likely will be renewable, even if your health has worsened and your risk of death has increased since the original policy was purchased.
However, each time you renew a term policy, the price may go up. That’s because insurance is a business and policy prices are based on risk. The greater the risk of death as you age, the higher the cost is likely to be.
Be sure to ask your agent if your term policy can be renewed and how much your monthly premiums are likely to increase over time.
7. Am I prepared to tell my beneficiaries about my life insurance policy?
Not everyone tells their beneficiaries about their life insurance policy. However, if you don’t tell them, they won’t be able to collect benefits when you die.
If the policy goes unclaimed, all of the money you’ve spent on monthly premiums will be wasted.
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