8 Smart Steps for Buying Life Insurance

Introduction

It is important to have life insurance as part of your financial planning. However, finding the right coverage for you and your budget can be difficult without any guidance. Don’t worry. You can focus on the most important aspects when buying an insurance policy that suits your needs by following a few simple steps.

1. Check if you require life insurance.

Life insurance can be useful, but not for everyone. If you meet any of the conditions listed above, consider purchasing a life insurance policy.

You may be financially dependent on someone else and they will likely need financial resources even after you die.

You will not have enough liquid assets to pay your estate’s taxes and debt. This can reduce the amount of inheritance that you intend to leave.

You want to pay for your funeral and burial costs at least, so your assets and legacy can be preserved.

You may not need life insurance if you do not have a dependent. Consider life insurance to be a way to support a charity you care about.

2. Calculate the amount of life insurance you require.

Many people find this part of the process daunting, but it doesn’t have to be. Answer the three questions below to get a snapshot of your financial situation.

What financial resources are available to your heirs or survivors after you die? Consider three main categories of financial resources:

Social Security and other retirement benefits for survivors;

Group life insurance, e.g. You may be covered by a group life insurance policy through your employer.

Other assets and Financial Resources

When will these funds be available? Social security survivor’s benefits, for example, are paid immediately to the surviving spouse when there are children dependent on them. Social security benefits may not be paid to your spouse if you do not have dependent children.

Calculate the financial needs of your survivors after you die. You might simplify your analysis by focusing on three categories: final expenses (including debts), income requirements, and debts.

Subtract your survivors’ financial assets from their needs in order to calculate the amount of coverage you should buy. Most people underinsure themselves because they either skip these steps, or buy a policy that is a multiple of their annual income. See How Much Life insurance Do I Need for more information on determining how much life insurance you need.

3. Determine your financial goals before purchasing life insurance.

You want to ensure that you can leave a financial legacy for those who are important to your life. The premiums you pay to the insurer go towards the death benefit – the payout that will be made after your death. This money is often used to pay for final expenses, support loved ones or fund a favorite charity. You can use your life insurance to save money, either for retirement or as a source of income for your loved ones after you die.

4. Find out what kind of life insurance suits your needs.

You might have heard of term life, universal life and whole life. Each has its own fundamental differences. Consider the differences and how they might affect you.

The death benefit is paid for a certain period of time, like five, ten or twenty years. Most people pay lower premiums for term life insurance. However, as the policy’s duration increases, premiums can increase. A term life insurance policy is a good option if you only need coverage for a short period of time or have a limited budget.

What if you wanted to buy insurance for several decades, up until your death? You might also want to save some of the premiums you pay. In either case, a universal or whole policy could be the best option. The basic whole life policy has a fixed rate of return and a minimum amount invested. This builds up the cash value. A universal policy can increase the death benefit and adjust the premium payment.

5. Check to see if any "riders", or additional coverage, are needed.

The type of life insurance policy you buy will determine the primary benefits. Riders, optional additions that can be added to a policy of life insurance, provide additional coverage or benefits. Some riders will increase your premiums while others may be free.

You may wish to add two riders: the waiver of premiums and the guarantee of insurability. If you don’t have them, they are usually available as an option. If you’re disabled, the waiver of premiums will pay your life insurance premium. You can increase the death benefit by adding to it without having to provide additional proof that your health is acceptable.

6. Compare life insurance policies to find the one that suits you best.

Many ways exist to save on life insurance. However, they do not always involve paying a lower rate immediately. Life insurance is highly competitive, so quotes may vary widely between companies. It’s more important to get coverage that meets your financial and budgetary goals. When you decide to work with an agent directly, be sure that your agent is aware of your financial situation and explains your options to you in simple terms.

7. Choose whether you want to pay your annual premiums in one lump sum or by installments.

It may be possible to spread the cost of the annual fee over smaller payments. You may find it more cost-effective if you pay annually, as there are often large extra charges for paying by installments. Choose what is best for you.

8. Inform your beneficiaries of your life insurance policy.

Tell your beneficiaries, once the policy has been purchased, which company issued the policy, where they can find a paper copy, and what you would like them to do with any death benefit. It is uncommon for someone to not know they are the beneficiary, but it can happen. Benefits may go unclaimed. Do not forget to keep your documents in a place where your beneficiaries will be able to easily find them.