Eight Things to Consider When Buying Life Insurance

Your life insurance can support your family after you die. Dean Drobot/ShutterStock

Does a 25-year-old, healthy, male need life insurance? His 30-year-old businessman brother has group life insurance; but is shopping for more insurance because he is raising three young children, his wife doesn’t have a job, and they have a mortgage on their home. What key features should their 65-year-old parents look for when choosing a life insurance policy?

When buying life insurance, you will be faced with several key decisions. Being an informed shopper will help you avoid making wrong choices. Without being informed, you could end up with a product that may not meet the needs of your survivors. Eight things to consider, that will help you avoid mistakes when finding your ideal life insurance policy, are given below.

1. Get the Right Coverage

One choice that you must make when buying life insurance is the type of coverage you need. There are two kinds—term and whole life.

Term life insurance is purchased for a specified time period, most often for one, 5, 10, 20, or 30 years, and has a level premium during the term. It is the least expensive option, and it will enable you to buy 10 or more times the coverage as whole life when you are young. At the end of the term, you can purchase more—but being that insurance is based on your age—it will cost a lot more when you are older.

Whole life insurance is purchased once and has a set premium as long as you keep the policy in force. It does not have an expiration date, but some companies will not let you buy a policy once you reach the age of 75. It also has a cash value built into the policy that you can withdraw, but it will diminish the face value unless you pay the borrowed amount back.

In some cases, it could be a good idea to buy both types of policies. Buy term life for the higher coverage and greater financial responsibilities when you are younger, and whole life for a stable policy that will last a lifetime. With whole life, you also have a built-in savings program for emergency cash.

Life insurance can protect your loved ones from financial woes after you die. VGstockstudio/Shutterstock

2. Buy When Younger

Life insurance costs less when you are younger. You could buy a 20-year term insurance policy of $500,000 for an average cost of $340 per month if you are 40 years old and in good health, says NerdWallet. Buying the same coverage at 50 will cost $835 per month and $2,632 each month at 60. Because women live longer, their costs are lower than men’s. This is an average price, and varies for different companies.

3. Buy What You Can Afford

Life insurance agents will always try to get you to buy more coverage because it means a larger commission for them. If you are not careful, you could end up buying more than you should—making it more likely that you will drop the policy later on. Before you talk to an agent, calculate how much money you can afford to spend—then stick with that number. You also want to have the agent show you a few different insurance products—do not buy the only product they show you.

4. Don’t Make Life Insurance Your Sole Savings Program

If cash does not easily come your way, it is easy to think that a whole life policy can give you a good way to save money.

While the money can help meet some emergencies after a few years, you need to know that cash value will not even start to build until the third year. The interest rate on your whole life policy is very low, and you could easily find other savings tools that will pay higher interest.

5. Calculate How Much Coverage You Need

Since you are buying life insurance for anticipated future needs, it can be difficult to determine just how much coverage is necessary. A rule of thumb is to get enough to pay for ten times your current budget. Then, add to this any extras you want, such as paying for a child’s college education, leaving an inheritance, etc.

When calculating your insurance needs, Forbes suggests that you subtract from your total needs the value of assets you have on hand. Insurance should cover the difference between your debt and your assets.

You might want to have more than one life insurance policy. (Renae Wang)

6. Consider Buying Optional Riders

Since insurance is all about financial protection, you should make it as secure as possible. Life insurance policies make several options available—but often only at the time of purchase. Some that you may want to consider, according to Investopedia are:

• Child rider - insures all your children for a set price
• Waiver-of-premium Rider - pays all future premiums if you become disabled
• Family Income Rider - Pays your family a regular income after you die for a pre-determined number of years
• Accelerated Death Benefit Rider - enables you to get a percentage of the death benefit in advance if you become terminally ill.

7. Buy Insurance On Top of a Group Policy

A group life insurance policy is excellent in price while you are working with that company. When you leave the job, your coverage will most likely end. Then, you will be forced to buy new coverage at a higher premium—one that might be unaffordable.

Having a separate policy from the one at your place of employment is a good idea—partly because the average group policy does not provide much coverage, says Expensivity. It is often only one or two times your annual budget.

Your employer-supplied group life insurance may not be sufficient to cover your debts. Africa Studio/ShutterStock

8. Shop Around

Every insurance company sets its own rates and they will vary quite a bit between companies.

Get estimates from different companies. Remember that you will not get an exact price until you take a physical exam, which is usually only required if you buy more than $50,000 (sometimes $100,000) in coverage.

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