Things to Consider Before Buying Life Insurance
Choosing the right life insurance policy requires careful consideration of factors such as your current lifestyle, financial situation, potential expenses, and personal needs. This will walk you through all the things you need to consider before buying life insurance to help align your unique circumstance with the right policy.
Top things to consider before life insurance.
1. Your Financial Needs
- Debts & Mortgages: Most of us resort to loans and mortgages to achieve our goals faster. Think about how much you may have to pay towards loans.
- Education: This is a critical aspect to consider, especially if you have children. Your life insurance can help you significantly with potential future education expenses.
- Future Financial Needs of Beneficiaries: This is to understand the amount of support your beneficiaries need for their daily living expenses to maintain their current lifestyle and potential future expenses after you pass away.
2. Type of Insurance
- Term Life Insurance: As the name suggests, this insurance covers a specific number of years and is considered a low-cost option.
- Whole Life Insurance: This type of insurance is designed to offer coverage for your lifetime with cash-value benefits in the policy.
- Universal Life Insurance: This is permanent life insurance that also offers lifetime coverage, including cash value benefits.
- Indexed Universal Life Insurance: Indexed Universal Life Insurance is akin to universal life insurance and also lasts for the duration of your life and builds cash value through an index account.
- Survivorship policies for estate planning or wealth transfer: Survivorship policies are often done in estate planning or wealth transfer, where two lives are insured, and the death benefit passes to the beneficiary after the second insured person’s passing away.
- Business loan collateral life insurance: This is a policy where a business owner’s life is insured, and the lender, who is the collateral, becomes the beneficiary. This policy aims to protect the lender in the event of the business owner’s death for the repayment of a loan.
- Business buy-sell agreement life insurance: This is a policy that facilitates the purchase of the deceased key partner’s shares by the remaining partners to ensure a seamless transition in business ownership.
- Final Expense Life Insurance (also known as Burial or Funeral Insurance): Simply put, it is a type of life insurance policy that covers after-life transportation, burial, funeral, and other end-of-life costs when you die.
- Business Key Person Life Insurance: As the name suggests, this is an insurance policy that is purchased on the life of an individual who is the key person to an organization, considering the impact this individual’s death might have on the company.
- Group Life Insurance: This is a single policy that covers a group of individuals and is typically used by companies to protect their employees. It offers a basic level of life insurance coverage at a lower cost than individual policies.
- Primary Beneficiaries: Nominating those who will receive the benefits first. ● Primary Beneficiaries: Nominating those who will receive the benefits first.
- Contingent Beneficiaries: Nominating those who will receive the benefits in the event the primary beneficiaries are unable to.
4. Coverage Amount
Understand and calculate the coverage amount needed by utilizing financial calculators. We recommend consulting us to ascertain the right coverage amount.
What is the Purpose of Buying Life Insurance?
Insurance cannot replace your loved ones, but it can provide financial support to beneficiaries after you pass away. The decision to buy life insurance can be driven by personal and professional reasons. On a personal level, life insurance can offer financial protection to your loved ones and, professionally, offer protection to your business partners.
Personal Reasons to Buy Life Insurance
- Family or Mortgage Protection
- Income Replacement
- Charitable Gift
- Estate Planning/Wealth Transfer
Professional Reasons to Buy Life Insurance
- Business loan collateral
- Key person
Information Expected To Disclose In a Life Insurance Application
Here is a breakdown of the information you are expected to disclose when applying for life insurance.
1. Personal Information
Provide basic information, such as your name, age, occupation, and marital status. Include information on your current and past health situation, such as health, smoking, drinking, or exercise habits.
2. Health History
Furnish up-to-date medical records for past and current medical conditions. Typically, you will be requested to furnish records from the last 5 years. Be prepared to submit yourself to a medical examination, if requested, as per policy.
3. Financial Information
Insurance companies may ask you to furnish details of your annual income and/or more details, such as your assets, liabilities, and tax returns for the last two years. This largely depends on the face amount of the policy.
4. Lifestyle Habits
List out lifestyle habits, such as smoking, drinking, extreme sports, exercises, and other activities that may pose a risk to your health and lifestyle.
What is Life Insurance Underwriting and How It Works
Once the insurance application is submitted, the underwriting process begins. Every applicant must go through this process, which helps to understand if an applicant is insurable and the cost of coverage for the applicant. Here is a glimpse into how underwriting works.
Step 1: Life insurance application
The first step in the underwriting process is the submission of a life insurance application. You can expect to disclose the following information —
- Personal Information - name, date of birth, address, and other contact information
- Health and Medical History - Your body measurements, medication, and other medical records for existing conditions.
- Family Medical History - Medical conditions you are likely to develop as a result of family history.
- Lifestyle Habits - Occupation and hazardous activities, such as smoking, drinking, extreme sports, etc. should be listed.
- Existing Insurance Policy Details - Your existing life insurance policy coverage amounts,
Step 2: Phone interview
The next step is the completion of a phone interview if required. This is done to verify the information on your application, ask for additional information, and cover any incomplete sections on the application.
Step 3: Medical Examination
The third step is submitting to a medical examination if required. In this case, the underwriter may request the insurance agent to schedule a medical examination to assess your health situation. The results are then used to check the insurability of your application.
Step 4: Quality Check
Application quality checks are done to identify false information on your application via the
- Attending Physician’s Statement (APS)
- Medical Information Bureau (MIB)
- Motor Vehicle Report (MVR) and
- Prescription History.
Typically, the insurer has a period of two years to deny your claim in the event you have provided false information on your application. In this case, the policy can be canceled, and coverage could be lost.
Step 5: Create a Risk Profile
In this step, underwriters use actuarial tables to create a risk profile and predict your life expectancy. The two types of actuarial tables used are mortality table and build table.
Step 6: Risk Classification
Once all the information has been categorized, underwriters will use the following risk classifications — Preferred plus, preferred, standard plus, standard, and substandard.
Key Things To Check In Life Insurance Policy at the time of Accepting the Policy
Some of the key things to check in life insurance policy at the time of accepting the policy are –
- Insured Full Legal Name
- Date of Birth
- Social Security Number
- Policy Date
- Face Amount
- Optional Rider (if selected)
- Exclusions or Limitations
- Free Look Period
- Grace Period
- How to file a claim
Things to Do After Buying the Life Insurance Policy
- Inform your beneficiaries and provide them with policy details and the insurer’s contact information.
- Store documents in a safe, secure, and accessible place.
- Review your policy periodically, such as annually or after an important milestone, to ensure your goals are on track and that your policy continues to support your goals.
- Ensure your premiums are paid on time to avoid policy lapses.
- Consider cash-value aspects of your policy and manage them as needed.
Ways To Reduce Life Insurance Premium
1. Buy Early
Age plays a crucial role in determining premiums. Buying a life insurance policy at a younger age will naturally result in a lower premium.
2. Maintain Good Health
Good health can lead to lower premium rates. Practicing a healthy lifestyle and avoiding unhealthy habits, such as smoking, drinking, etc., can have a positive impact on your premiums.
3. Choose the Right Coverage
Choose only the policy that meets your requirements and avoid over-insuring. Consider an insurance policy which might be cost-effective for your situation.
4. Avoid Risky Lifestyle Habits
Anything that poses a risk to your life and health, such as smoking, drinking, extreme sports, etc., can result in higher premiums. Practice safer hobbies and activities to enjoy lower premiums.
5. Shop Around
We have access to several carriers. Connect with our agent to get quotes from multiple insurers for the best rate.
Life insurance is a significant commitment and requires careful planning. Consider the various factors necessary to make a wise decision. Make the right choice for an invaluable peace of mind and secure the future for your loved ones!
To learn more or for further queries, kindly contact us for professional guidance.