Shopping for a life insurance policy is a big decision, and deserves plenty of consideration.
There are several important questions you should ask yourself:
1. Why do I need life insurance?
Your response to this question will influence how large of a life insurance policy you’ll need, as well as how you answer many of the remaining questions.
Asked another way: What will be the primary purpose of your life insurance policy? The answer here is often multifaceted and depends on if you are married and if you have children.
Here are a few common reasons people purchase the death benefit protection of life insurance:
- Protecting family income.
- Leaving a legacy to children or grandchildren.
- Donating to a charity.
- Paying for burial.
- Paying off mortgage or other large debt.
- Paying for a child’s college education.
- Planning for a special needs situation.
2. How much coverage do I need?
This is another potentially complex answer and one that will dictate your options to some extent. Think about it this way: If you pass away, how much money will your family need to fulfill immediate obligations — uncovered medical expenses, funeral and estate-settling costs, outstanding debts — then add in any ongoing income to maintain their lifestyle and cash flow.
One of the easiest ways to estimate how much life insurance you need is to use an online calculator like this one: How much life insurance do I need? You’ll be asked to consider your current salary and savings, all of your final expenses, plus several other factors like inflation. But you also may want to think about non-monetary contributions like childcare or housecleaning that may need to be added if you were gone.
3. What type of life insurance should I buy?
"Term” and “permanent” are the two main categories of life insurance, and they each have their advantages. A term policy offers protection for a specific period of time and provides a death benefit for your surviving family. Permanent insurance, which includes whole life and universal insurance policies, is for life: It provides a death benefit for as long as you pay the premium, but also may include cash value that can be accessed during the insured person’s lifetime.1
While a permanent policy is typically more expensive, it may be the wiser long-term option . Another consideration: The role of your life insurance may change over time, so you may wish to consider a mix of both types of protection. (Related: How to ‘ladder’ life insurance)
4. How long will I need the policy?
This may be the toughest of the big questions. No one knows when he or she is going to die, of course, and that is a good reason to at least consider a permanent policy. While many people only think about life insurance to replace lost salary if they die during their working years, coverage during retirement can be critical for your surviving family.
Life expectancy and retirement aside, if you’re purchasing a life insurance policy to protect a specific interest — such as a business loan or mortgage — you may also need to think about the potential duration of that need when considering your options. (Related: 4 times when term insurance may be the solution)
5. How long do I want to pay premiums?
Paying for life insurance during retirement may not be an appealing prospect. While term policy payments end if you decide not to renew your coverage after the term ends, many permanent life insurance products also offer shorter-term payment periods. Once the policy is paid up, you won’t have any more premiums due. So be sure to explore your options.
6. Will I need flexibility for my premiums?
Many life insurance policies require steady monthly, quarterly, semi-annual or annual payments, and if you earn a stable salary that shouldn’t be a problem.
But if you own a business or work on commission, it may be helpful to have flexibility built into your premium payments to accommodate varying levels of cash flow. Some policies allow you to pay a larger portion of your premium at a time that works for you as long as there is sufficient value in the contract to cover the monthly insurance charges. Make sure to consider a policy that has a payment structure that works for you. (Related: Different types of permanent insurance)
7. Will I need other kinds of flexibility?
Changes to your financial needs are difficult to anticipate, but remember that life is unpredictable. Plan accordingly and consider a life insurance policy that provides flexibility. For example, cash value from a permanent policy can be used for purposes other than the original intent of the insurance.1 Also, many term policies can be converted to a permanent policy over time, and some policies provide the option to increase insurance without a medical exam.2
8. Will I need cash value?
The good news is that many people who purchase a term policy don’t end up using it. The bad news is that they get nothing after the policy is up.
In contrast, many permanent life insurance policies allow you to borrow against your cash value while you’re alive (with some tax advantages) or the option to walk away from the policy and take the cash surrender value if you no longer need the insurance coverage. Cash value could supplement your retirement income, help with your child’s education funding, or simply be available for an emergency. The choice is yours, but be advised that taking cash from your policy will reduce your coverage.1
9. Who is protecting my family?
A life insurance policy is a long-term commitment, and it’s important to do business with a reliable company. So do some research before making your decision. One good way to compare companies is to look at their financial strength ratings. (You can find MassMutual’s here)
Answering the questions in this article is the first step to ensuring that you get an insurance policy that fits your needs. Of course, after really thinking about life insurance and how it can help your family, you probably have some questions of your own. The next step is to talk to a financial professional who can help answer those additional questions and discuss your options.
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¹ Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
² Additional options or riders added to a policy are generally available at an additional cost.