What to Consider Before Buying Life Insurance (2024)

Determining whether to purchase life insurance is a big decision. There are numerous policies that provide different types of coverage. Some are for a specific period of time, and others are for life. In light of National Insurance Awareness Day, which is June 28, now is the perfect time to assess whether purchasing life insurance is right for you.

Just like any other insurance plan, life insurance requires you to pay premiums in exchange for coverage. These premiums can be paid through a series of payments or all at once, depending on what works best for your budget. However, you’re not required to purchase a life insurance policy, so it’s important to determine whether you can afford it before moving forward.

In addition to the financial aspect, there are other factors to consider. If your death and the loss of your income would cause financial hardship for your beneficiaries, a life insurance policy may be a good choice. Life insurance can also cover your end-of-life care, funeral expenses and any outstanding debt in the event of a premature death. If any of these apply to you, life insurance might be a feasible solution.

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The different types of life insurance

Before purchasing a life insurance policy, it’s important to know the different types that are available. Some are temporary and some are permanent.

Term life insurance is an example of a temporary policy. These policies typically provide coverage for 10, 20 or 30 years. There are also different subcategories for term life insurance.

Decreasing term life insurance is a renewable type of insurance with coverage that decreases as the end of the term nears. These policies also have a predetermined rate.

With convertible term life insurance, policyholders can convert the term policy into a permanent one.

Renewable term life insurance gives policyholders a quote for the year the insurance was purchased. From there, the policy’s premiums increase annually.

If you’re interested in receiving lifetime coverage, a permanent policy might be more suitable. Permanent life insurance is usually more expensive than term, but the coverage will last until you die or stop paying the premiums. Similar to term life insurance, there are different types of permanent coverage.

One common type is whole life insurance. In addition to providing life-long coverage, this policy also offers a cash value component, which is like a savings account. The cash value component allows the policyholder to take out loans or pay premiums.

Universal life insurance also provides a cash value component, but unlike whole life insurance, the cash value component earns interest. Another perk is that the premiums are flexible, and the policy provides options for level death benefit or increasing death benefit. A level death benefit is a payout from the policy that remains the same regardless of when the policyholder dies. An increasing death benefit is a little different. This type of benefit allows the policyholder to increase the payout amount over time, but the premiums are more expensive.

Another type of permanent life insurance is an indexed universal policy. This type of insurance allows the policyholder to earn a fixed or equity-indexed rate of return on the cash value.

The last option is a variable universal life insurance, which gives the policyholder the option to invest the cash value into a separate account. This policy also includes flexible premiums, and policyholders can choose between a level or increasing death benefit.

How life insurance premiums are determined

In addition to understanding the different types of policies, it’s important to understand the premiums, which are based on a number of different factors. For example, your health and age are huge factors that determine the cost. Therefore, maintaining your health as best you can and purchasing life insurance as soon as you need it may help lower the cost. But how do you know if you actually need it?

As briefly mentioned earlier, life insurance is about providing your dependents with financial support after you're gone. Parents with minor children or children who have special needs could benefit greatly from life insurance. If one parent dies, these policies can help supplement the surviving spouse’s income. If you have a child who requires life-long care, life insurance can help cover that cost once you and your spouse have passed away.

However, parents aren’t the only ones who can benefit from life insurance. These policies can also be useful for adults who jointly own property, families who can’t afford funeral expenses, married pensioners and those who have pre-existing medical conditions.

Purchasing life insurance can be a great way to make sure your beneficiaries have financial support once you pass away, but it comes at a cost. If you’re considering buying life insurance, determine just how much you’ll need and do your research. Meeting with a financial adviser can help determine what kind of policy works best for you and your situation. The last thing you want to do is purchase a policy you can’t afford or one that doesn’t provide the coverage you need.

Pat Simasko is an investment advisory representative of and provides advisory services through CoreCap Advisors, LLC. Simasko Law is a separate entity and not affiliated with CoreCap Advisors. The information provided here is not tax, investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Related Content

  • When Is the Perfect Time to Buy Life Insurance?
  • 10 Things You Should Know About Life Insurance
  • How to Shop for Life Insurance in Three Easy Steps
  • How Life Insurance Can Help You Preserve Your Wealth
  • How Much Life Insurance Do You Need?

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

What to Consider Before Buying Life Insurance (2024)

FAQs

What to Consider Before Buying Life Insurance? ›

How much of the family income do you provide? Does anyone else depend on you financially? How will your family pay final expenses and repay debts – such as mortgages – after your death? Based on the answers to these questions, decide how much coverage you need, for how long and what you can afford to pay.

What should you consider before buying life insurance? ›

Before you buy a policy, make sure you consider your financial situation and needs, and ask yourself: What costs and hardships will my family deal with after I'm gone? How will the loss of my salary affect my family?

What to consider when choosing a life insurance? ›

5 Factors to Consider Before Choosing Life Insurance
  • Assess your current financial situation. It's critical to have life insurance in place to protect your loved ones should something happen to you. ...
  • The best time to get life insurance. ...
  • The amount of coverage you need. ...
  • Bonus tip: Don't focus too much on premium cost.
Feb 7, 2023

Which of the following factors should be considered before buying life insurance? ›

thus, the correct options are 3) present and future income, 4) net worth, and 5) group life insurance. Before buying life insurance, factors such as present and future income, net worth, and whether you have access to group life insurance should be considered.

What are the factors that are considered before making buying decisions of life insurance? ›

Evaluate how much coverage your family needs by taking into account factors such as fixed expenses, financial dependents, long-term goals and retirement corpus. Additionally, assess whether there are any existing resources your family can rely on to cover expenses and debts during uncertain circumstances.

What not to say when applying for life insurance? ›

For example, applicants might lie about their age, income, weight, medical conditions, family medical history or occupation. It's also relatively common for applicants to lie about their alcohol or drug use.

At what point is life insurance not worth it? ›

Drawbacks of life insurance

Policies can be canceled if you miss payments, leaving your beneficiaries without a death benefit when you die. Coverage can cost more than the payout. If you're older or have a serious health condition, the potential life insurance payout may not be worth the cost.

What age is best to get life insurance? ›

Young people tend to pay the lowest life insurance rates, whereas older people tend to pay the highest. Although there are exceptions — usually based on the health of the applicant — a 30-year-old will likely receive a lower premium quote than a 40-year-old.

What is the best type of life insurance to get? ›

A whole life policy is generally considered the most secure form of insurance. Whole life policies have more rigid premium payment requirements than universal life policies. As long as scheduled premium payments are paid, the cash value is guaranteed to increase each year.

At what age should you stop buying life insurance? ›

Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they have retired, their kids have grown up, and they've paid off their mortgage and other debts.

Why is it so hard to get life insurance? ›

Their reasons could be anything from a serious medical condition (like heart disease) or poor results from your life insurance medical exam to nonmedical reasons like bankruptcy, a criminal record, a positive drug test or even a dangerous hobby—carriers are not fans of insuring base jumpers in squirrel suits.

Which person should most consider purchasing life insurance? ›

People with young children are strongly recommended to have life insurance to protect their family. Homeowners should take out life insurance so that the death benefit can pay off the mortgage. Business owners and those who want to pass down a financial legacy are also advised to purchase life insurance.

What should be included in life insurance? ›

Life insurance can be used to pay off outstanding debts, including student loans, car loans, mortgages, credit cards, and personal loans. If you have any of these debts, then your policy should include enough coverage to pay them off in full.

What should you consider before you buy life insurance? ›

The most important factor you must consider when it comes to buying life insurance is how much coverage you need. That will likely depend on your life situation. For example, if you're single with no dependents, a group policy through your work may be enough to cover your burial and final expenses when you die.

What makes life insurance more expensive? ›

The premium rate for a life insurance policy is based on two underlying concepts: mortality and interest. A third variable is the expense factor which is the amount the company adds to the cost of the policy to cover operating costs of selling insurance, investing the premiums, and paying claims.

What are the risks involved in life insurance? ›

Life insurance risk factors describe information about an individual that is needed to underwrite a life insurance policy, such as age, sex, weight, current health, medical history, height, tobacco use, and occupation.

What 3 questions should one ask when deciding on life insurance? ›

Choosing the right life insurance policy requires careful consideration of your needs, coverage amount, and budget. By asking these three essential questions, you can make an informed decision that provides financial security and peace of mind for you and your loved ones.

At what age should you consider purchasing life insurance? ›

In accordance with the “get a life insurance policy while you're young and healthy,” mentality, the 20's would be the ideal age. Many young people think that they don't need a life insurance policy, and it's not difficult to see why.

What factors should be considered when deciding whether or not to purchase whole life insurance? ›

Cost: Whole life insurance typically has higher premiums compared to term life insurance, so it's important to assess whether the cost fits within your budget. Investment Value: Whole life insurance has a cash value component that can grow over time. Consider if the investment aspect aligns with your financial goals.

What is the general rule for life insurance? ›

Human Life Value*

Based on the value of your future earnings, a simple way to estimate this is to consider 30X your income between the ages of 18 and 40; 20X income for age 41-50; 15X income for age 51-60; and 10X income for age 61-65. After age 65, coverage is based on net worth instead of income.

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