4 Questions to Ask Before You Buy Life Insurance

by Jason on January 5, 2010


Oh great – a post about life insurance – doesn’t he know I’m not interested in reading about life insurance?

Is there anything people hate thinking about, talking about and paying for more than life insurance?

A necessary evil if you will.

It just feels like a waste – I mean what benefit do you receive from having it?  Abolutely nothing – only your heirs get to see that.

At least if you need other forms of insurance you can realize something tangible like health or a fixed vehicle or something!

But we all know that we need it, we probably should get online quotes for life insurance and at the very least we need to talk about it and come to an informed decision regarding it.

So, when you’re about to make the plunge and start looking at life insurance for the very first time or you are re-evaluating your current situation - answer these four questions before you pay that premium!

1. What’s the purpose of my life insurance

Are you serious?  The purpose of my life insurance?  Isn’t it to pay someone when I die?

Sort of.

What I mean by purpose of life insurance is what exactlly are you using it for.  Here’s some examples:

  • To provide my spouse with income for life
  • To create funds for my children to go to college
  • To pay off my mortgage
  • To pay estate taxes and minimize the erosion of my estate
  • To pay off other debt
  • To bury me

As you can see there are multiple purposes for your life insurance and you may have more than one.

It’s vital to understand why you are buying the life insurance in the first place.

2. How much insurance do I currently have

You might have a million dollars through your group insurance at work and think that you’re good to go.

Wait!  Not so fast – think about it for a second.  If that’s the only insurance you have what about if you lost your job, quit or retired?  What happens to all that insurance?

In most cases it disappears – so do you really have that coverage?

Yes and no.

You do have coverage, but it’s temporary.  So you need to evaluate how much you have and what kind of insurance you have as well – term, permament or group.

3. How much life insurance do I need

There are countless calculator’s on the web you can use to determine your life insurance needs.

The amount of insurance you need will vary depending upon what your purpose for the insurance is.

If you are trying to provide for your spouse for the next 20 years then you’ll probably need more than someone only worried about having enough to bury themselves and pay off some outstanding liabilities.

There’s no hard or fast rule regarding how much you need, but here’s a handy guide from LIFE (Life and Health Insurance Foundation for Education):

4. What kind of life insurance policy should I buy?

Yes, Suze Orman will tell you to only by term insurance.  Others will tell you to only buy permanent (also known as whole life insurance, universal life or variable universal life insurance).

But what kind do you really need?

The answer is it depends.  It depends on the purpose for your insurance and how long you want it to last you.

If you’re concerned about using life insurance for estate planning purposes you probably need something more than term insurance.

If you’re only concerned about protecting your life for 20 years until the kids go off to college then a term product is proably right for you.

Don’t let people tell you that only one type of insurance is right for everyone.  There is no one size fits all!

The bottom line with life insurance

Identify the purpose of the life insurance, do your homework, shop around and do what’s best for your situation.

What about you? What other questions should you ask before you buy life insurance?

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{ 23 comments… read them below or add one }

Craig January 5, 2010 at 10:30 am

I am not up to this part of my life yet but these are good things to consider when the time does come.
.-= Craig´s last blog ..Huge Giveaway at Money Crashers with $4367+ in Prizes =-.

Joe Plemon January 5, 2010 at 11:13 am

Jason,
Thanks for challenging our thinking about life insurance. You are right in saying there is no one size fits all.

Perhaps in a future post you could explain how “something more than term” can be an advantageous tool with estate planning.

Wojciech Kulicki January 5, 2010 at 11:32 am

Great overview as we await the arrival of our first baby. For us, now is the time to start considering life insurance, so I feel like I’m venturing into a dark, unexplored cave. You’ve certainly made it a little easier. :)
.-= Wojciech Kulicki´s last blog ..Untemplater: Personal Finance for Generation Y =-.

Aaron @ Clarifinancial January 5, 2010 at 1:28 pm

Absolutely! Keep it simple and stay focused on your goals. Of course, that means you have to figure out why the heck you even need life insurance. Once you do that, it’ll help keep wily life insurance sales people from selling you something you don’t need.

Jason January 5, 2010 at 1:43 pm

Thanks Craig – Just throwing this out there to think about – Since life insurance is dependent on age and health sometimes it is wise to look into it now while you are young and health to “lock in” your age/health status.

Jason January 5, 2010 at 1:44 pm

Joe – Great idea on the future post. I would like to spend some time talking about when “something more than term” might make sense and the strategies behind it.

Jason January 5, 2010 at 1:45 pm

@Wojo – congrats on the new addition on the way! That is really exciting. Life insurance can be a scary thing to address – just be sure to do your homework and be comfortable with your decision.

Kevin@OutOfYourRut January 5, 2010 at 2:10 pm

You hit a homerun on this one Jason! We’re all so caught up in health insurance that this one gets overlooked. But it’s really the most important coverage you can have if you have dependents.

Another purpose under point 1 is to clean up medical bills. With most of us making compromise choices on health coverage to keep it affordable, the uncovered portions our dependents might be left with can be substantial.

More than a few people are going with $10,000 deductibles and that’s only the beginning. Coinsurance and uncovered expenses can leave more expenses than we can imagine, especially on a long term illness.
.-= Kevin@OutOfYourRut´s last blog ..7 Ways to Improve the Success of Your New Business =-.

Peter January 5, 2010 at 2:17 pm

Good overview – and good reminder for me. I have to buy life insurance now that I’m going to be a daddy. Time to stop putting it off!
.-= Peter´s last blog ..Blueprint For How To Make Money With A Blog: Creating Content, Optimizing SEO And Promoting Your Site =-.

Jason January 5, 2010 at 2:23 pm

Kevin – thanks for bringing the medical bills up. We so often think “it won’t happen to us”, but we should be prepared for worst-case scenarios like that – or at the very least take them into consideration when making decisions.

Thanks for the comment!
.-= Jason´s last blog ..3 Ways to Get 2010 Off to a Great Start Financially =-.

Jason January 5, 2010 at 2:24 pm

Pete – Another congratulations to you for the new addition as well! I suggest getting it done sooner rather than later just in case.

Evolution Of Wealth January 5, 2010 at 5:05 pm

Wow, lot’s of pf bloggers are having kids. Is it the year of pf kids?

I love your focus on purpose. There are very few insurance agents and even less people that focus on the purpose of the policy. If you thoroughly look at and are comfortable with the purpose of the policy, the rest of the pieces just seem to fall into place.

From my experience there are two other things that come into play with life insurance. One is health history and the other is cash flow. Even though money shouldn’t be a deciding factor it almost always plays a role in the decision.
.-= Evolution Of Wealth´s last blog ..Cash Is Clementines!?! =-.

Tim Bain January 5, 2010 at 5:44 pm

Jason – Excellent review of some very important factors to consider ‘before’ buying life insurance coverage. Too often we see people who have not given any thought to this important purchase whatsoever. Think about it … life insurance is something you may only purchase once or twice your entire life (if done correctly). Put some effort into it!

I particularly like how you explained the group coverage at work concept. We hear this from customers daily. Many don’t realize that although this coverage is sometimes portable, it is typically extremely expensive to convert when you leave/lose your job.

Ken January 6, 2010 at 5:24 am

I would ask the sales agent how much of my premium payemnts go towards his commission (how much of it does he keep). It’s also important that you find an agent patient enough to teach you about options instead of pushing things that line thier pockets.
.-= Ken´s last blog ..Being Faithful in the Small Things =-.

Jason January 6, 2010 at 5:27 pm

Evolution of Wealth – great points about health history and cash flow. Those are very important. I made the point earlier, but if you are young and health it may make sense to get some sort of coverage to sort of “lock in” in your good health.

And about purpose – way too many folks just buy life insurance because they are supposed to do it and not because they know what they need and have a purpose behind the insurance.

Jason January 6, 2010 at 5:29 pm

Tim – I agree…effort needs to be put into the decision regarding life insurance. Group coverage is great, but at the very least we need to understand that it may not be there when you really need it.

Jason January 6, 2010 at 5:30 pm

Ken, good point about the agents. You definitely want full and fair disclosure and finding someone who educates you along the way and informs you of different options rather than imposing his or her ideas on you is someone you want to work with!

hgstern January 13, 2010 at 8:10 am

This week’s Cavalcade of Risk is up, and your post is in it:

http://www.healthinsurancecolorado.net/blog1/2010/01/13/cavalcade-of-risk-the-new-year-edition/

Please let your readers know.
.-= hgstern´s last blog ..Cavalcade of Risk #96: A New Year Begins Edition =-.

Evan January 13, 2010 at 3:26 pm

Great review – refreshing to read something other than, buy term and invest the difference.

Just wanted to point out that there are situations when group term is actually worse! If you are a REALLY healthy there are situations when you are paying more than similar product if purchased straight from a company.
.-= Evan´s last blog ..Wifey 101: Messing with His Manhood =-.

Jason January 13, 2010 at 9:53 pm

Hey Evan, thanks for the comment! I agree, buying term and investing the difference isn’t always the answer – especially considering that most folks don’t invest the difference.

Good point about group insurance as well.

Anonymous August 31, 2010 at 7:13 pm

First of all, most people, ordinary people, can’t really afford even the basic Term Life Insurance. Hopefully the system will improve and we can all start looking for something that is right now only a luxury.

remove AntiMalware GO March 3, 2011 at 8:32 am

Nice post there. Raised a few things I hadn’t thought about before. Thx.

webmaster loans July 21, 2011 at 7:09 am

Life assurance types of policies are designed for meeting the needs of the people.

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