Life insurance policies are their own special breed. Unlike car or homeowners insurance policies, they don’t come up for renewal each year, so when you buy one, you’re typically making a long-term commitment of 10, 20 or even 30 years.
That’s why it’s important to do your research before you buy life insurance, and that includes asking your insurance agent the right questions. Start with these five if you’re in the market for life insurance.
How will you determine the amount of insurance I need?
“How much life insurance do I need?” is the key question, according to Brian Galey of BGA Insurance in Newport Beach, California.
Although you may have heard different “rules of thumb” about how much life insurance you need — for example, 10 times your annual income — the death benefit that’s right for you is a very individual calculation.
Ask your agent what assets and obligations were used to reach the recommended amount, and make sure the reasoning makes sense to you.
How long should I have insurance in force?
Once you’ve zeroed in on a policy amount, the next step is to pick a policy type: permanent or term life insurance. Permanent policies provide coverage for your entire life, whereas term life policies last only for the term you buy, such as 20 years. Term life insurance is the less expensive option. And, often, consumers don’t need lifetime coverage.
[Life insurance quotes are available through NerdWallet’s Life Insurance Comparison Tool.]
“There are very few scenarios in which I recommend individuals purchase permanent life insurance,” says Daniel Johnson of Parsec Financial in Asheville, North Carolina.
If your agent recommends a permanent policy — such as variable, universal or whole life insurance — it’s wise to find out why. Because agents are paid higher commissions for permanent insurance, you can’t necessarily depend on them to give an unbiased answer, says Andy Tilp of Trillium Valley Financial Planning in Sherwood, Oregon. “They are well trained in answering that question as, ‘Of course you need [permanent life insurance].’ ”
If you’re feeling pressured by your agent, try being direct: “Don’t hesitate to ask them what the differences are in the commission,” Johnson says.
What happens if I can’t pay premiums?
If you are buying a term life insurance policy, the answer is simple — if you stop paying, you’ll no longer have life insurance coverage. But if you’re leaning toward permanent life insurance, you may have payment options in the future, after the policy has built up cash value. “Policies have provisions to use cash value and/or dividends to pay premiums,” Tilp says.
It’s up to policyholders to understand how the process works and how much cash value they can use for premiums, Tilp adds.
How can I expect my policy to perform?
If you’re buying permanent life insurance, you might already know that your policy will have a cash value component that your company will invest for you. But unless the returns are guaranteed, the future value of your cash value is anyone’s guess.
“Policies typically have a guaranteed illustration [of returns] and a hypothetical illustration” based on investment predictions that aren’t guaranteed, Tilp says. “I would insist on focusing on the guaranteed illustration, as that is the one that you know is accurate.”
Can we solve any other potential problems with these insurance policies?
If you buy permanent life insurance, you might be able to fill other needs with your policy, like long-term care insurance or retirement planning, Galey says.
Some retirees use withdrawals or loans from their cash value to supplement retirement income, although most advisors agree that it’s a strategy that’s best for only those who are already maxing out other methods of retirement savings, like 401(k)s and IRAs. And some policies offer long-term care riders or other ways of funding nursing home stays.
You might also be able to stretch your life insurance benefits with riders. For example, an accelerated death benefits rider can cover long-term care medical needs by paying out a portion of your death benefit if you’re ill or injured. You could also consider a waiver of premium rider, which pays your premiums if you’re unable to work.
But when it comes to other uses of your policy, as with all aspects, it’s important to know what you’re buying. “If they don’t understand it, then they need to ask,” Tilp says. “Or strongly consider a simpler solution of a low-cost term policy and investing the difference in premiums on their own.”
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