5 Tips For First Time Life Insurance Policy Buyers
You are considering buying life insurance but aren’t finding much useful information online. The sites listed on the first few pages of your search are all life insurance companies trying to sell you a policy. That’s not really helpful, is it?
What you need instead is to know what types of life insurance are available, how to determine which type is right for you, how to determine how much life insurance coverage you need, how to apply for life insurance, and how to avoid problems for your beneficiaries.
This article answers those questions for you and comes not from an insurance company trying to sell you something, but from the office of one of the nation’s busiest life insurance beneficiary attorneys.
Choose the Right Type of Insurance for You
While insurance companies offer many, many variations, we can simplify things. There are basically two types of life insurance: Term Life Insurance and Whole Life Insurance.
Term Life Insurance
Term life insurance is a policy that is purchased for a set number of years, called the “term.” The face value of the policy is the death benefit, and the policy accrues no present cash value. If the insured pays all premiums in full on time and dies within the policy term, the term insurance company pays the death benefit to the named beneficiaries on the policy.
If the insured fails to pay premiums, the policy lapses and terminates and there is no coverage. If the insured survives the policy term, the policy expires without paying out.
Term life insurance is by far the most popular form of life insurance. It is inexpensive and one can easily obtain a policy with coverage as little as $5,000 if the insured only wants to cover funeral expenses, and as much as several million for high-worth individuals.
Whole Life Insurance
Also called permanent life insurance, whole life insurance policies have no set term. They do accrue present cash value as the insured pays premiums. The insured can borrow, withdraw, and lend from the amount contributed without tax or other penalties. When the insured dies, the beneficiary receives the death benefit minus withdrawals and interest.
The administrative costs and fees of whole life policies are prohibitive for everyone but high-worth individuals who have contributed as much as they can to their other retirement accounts and are looking for another place for money to grow tax-free.
Calculate the Amount of Life Insurance Coverage You Need
Why do you think you need life insurance? Your answer to this question will set you on the path to calculating how much coverage you need.
If you are young and single and are just looking to cover end-of-life expenses such as funeral expenses and perhaps some lingering bills, it is very easy to obtain a $10,000 policy online by answering a short questionnaire. The premiums will be very low.
If you are newly married and just bought a house, you might consider a policy in the amount that will pay off the mortgage. If you are the primary breadwinner, you might add an amount of coverage that would supplement your spouse’s income.
If you two have young children, you should consider covering their educational expenses or the expense of attending job training. Granted, that is many years off, but perhaps guesstimate how much they would need and go from there. Also, consider what amount might pay the mortgage and taxes and supplement your spouse’s income.
If your children are grown and you only have maybe ten years left on your mortgage, again, consider coverage in an amount that will pay off the mortgage and supplement your spouse’s income or Social Security or pension. If you have grandchildren and are well-off enough to afford to purchase coverage to help them with their education expenses, you can do that.
Consider Whether “Laddering” Multiple Policies is Right for You
Once you’ve determined what your life insurance needs to cover, you need to think about the timeline, because you don’t need the same amount of coverage throughout your life.
For example, if you have small children and just bought a house, you need a different amount of coverage than when you have teenage children and are ten years into paying your mortgage off. What coverage will you need fifteen years later when the mortgage is almost paid off and your children are out of the house?
In this instance, you might employ the technique of “laddering” policies to have adequate coverage at all phases of your life. Let’s say you’ve determined you need $600,000 in coverage right now. Don’t go out and purchase a $600,000 30-year term life insurance policy. You will pay much more in premiums than you need to. Instead, consider purchasing:
Policy #1: $100,000 coverage for 30 years
Policy #2: $300,000 coverage for 20 years
Policy #3: $200,000 coverage for 10 years
The moment you purchase these three policies, you have $600,000 in coverage to pay off the mortgage, provide for the kids’ education expenses, and supplement your spouse’s income. Ten years later, when you are ten years along in paying your mortgage, Policy #1 expires, you are no longer paying premiums for that, and you still have $500,000 in coverage. Ten years later, when your children are out of college and you are over 20 years into paying your 30-year mortgage, Policy #2 expires and you still have $200,000 worth of coverage.
Laddering saves you money and gives you the coverage you need when you need it.
Designate Your Life Insurance Beneficiaries By Name
In the old days before the internet, your insurance agent would have helped you with this. Since the availability of virtual life insurance applications, there have been increasing problems with this aspect of life insurance law. If you do not designate a primary beneficiary or beneficiaries and a contingent beneficiary or beneficiaries by name, you create problems that could have been avoided.
First, you must name a contingent beneficiary. Why? Because if your primary beneficiary dies before you or cannot be found, the death benefit will then go to your estate to pay your creditors. After your creditors’ claims are satisfied, there might be something left for your heirs, but it will be subject to income tax.
Second, you must name your beneficiaries by name. Why? Because if you name a category of people as your beneficiaries, there will likely be a dispute over who qualifies as a member of that category.
For example, let’s say a woman dies and named “her grandchildren” as the beneficiaries of her life insurance policy. She has two children from a first marriage and five grandchildren and two step-children from a second marriage and four grandchildren from those step-children. Who did she mean? Are there five grandchildren or nine grandchildren? This is a beneficiary dispute waiting to happen.
You can avoid a beneficiary dispute by designating your beneficiaries specifically by name.
Complete & Review Your Initial Application and Medical Questionnaire
This is a must. If you fill out your initial paperwork, or if an agent does it for you, review it for accuracy and completeness before signing it and submitting it.
Why? Because any mistake, however innocuous, will result in denial of your beneficiaries’ claims during the 2-year contestability period, when the insurer can claim that you tried to defraud them through misrepresentation. After that, if your death had anything to do with your mistake or omission, the insurance company can deny your beneficiaries’ claims due to alleged misrepresentation.
Disclose any and all past and present medical conditions, surgeries, diseases, and lifestyle habits such as smoking, drinking, engaging in risky or dangerous sports or hobbies or traveling to dangerous countries. If you fail to answer all questions truthfully and completely, you might have paid all that money in premiums for naught.
Use these five tips to help you find and purchase the insurance you need. Good luck!