What Questions to Ask When Buying Life Insurance?

Life insurance is a financial planning tool providing protection for your loved ones. It offers a financial safety net, supporting those who depend on you if you are no longer there. Making an informed decision involves asking key questions. This article guides you through essential inquiries when evaluating a policy.

Determining Your Life Insurance Needs

Understanding your life insurance needs begins with assessing your personal financial situation. Identify individuals financially dependent on you, such as a spouse, children, or elderly parents. The goal is to determine the coverage amount needed to replace your income and cover future financial obligations.

Consider the income your dependents would need to maintain their standard of living for a specific period, such as 10 to 15 years, or until children are self-sufficient. Account for outstanding debts, including mortgages, car loans, personal loans, and credit card balances, which your family might inherit. A policy can help settle these debts without burdening your beneficiaries.

Future expenses, such as children’s college education or final expenses, also warrant consideration. Reviewing any existing coverage, such as through an employer, is a sensible step to understand your current financial protection.

Understanding Policy Types

Life insurance policies fall into two main categories: term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, such as 10, 20, or 30 years, and typically does not accumulate cash value. Variations include level term, where the death benefit remains constant, and decreasing term, where the death benefit gradually reduces. Premiums for term policies are generally lower than for permanent policies.

Permanent life insurance offers lifelong coverage, provided premiums are paid, and includes a cash value component that can grow. This cash value can be accessed during your lifetime through loans or withdrawals, though doing so may reduce the death benefit. Common types include whole life, which offers guaranteed cash value growth and fixed premiums, and universal life, which provides flexibility in premiums and death benefits. Indexed universal life and variable universal life policies link cash value growth to market indexes or investment sub-accounts, respectively, introducing potential for higher growth and risk.

Key Questions for Insurers

When discussing life insurance with an agent or company representative, specific questions help you understand your options.

Policy Details

Ask about convertibility options for term policies, which allow conversion to a permanent policy without a new medical exam. Inquire about available riders, such as waiver of premium, accidental death, or child riders, which can customize coverage. For permanent policies, clarify how cash value can be accessed, including rules for policy loans or withdrawals, and any surrender charges if the policy is terminated early. Understand the guaranteed versus non-guaranteed elements of a policy, especially for permanent plans where cash value growth or premiums might fluctuate.

Premiums and Costs

Ask about the premium structure, whether it is fixed or flexible, and available payment frequencies (e.g., monthly, quarterly, annually). Determine if premiums can increase over time and what fees are associated with the policy. For participating policies, inquire how dividends are handled—whether they can reduce premiums, increase cash value, or be paid out.

Company and Underwriting

When evaluating the insurance company, inquire about their financial strength ratings from independent agencies like A.M. Best, S&P, Moody’s, or Fitch. These indicate the company’s ability to meet its financial obligations. Also ask about their claims process and customer service reputation. Understanding the application and underwriting process involves asking about medical exam requirements, the health questionnaire, and typical underwriting timelines, which can range from a few weeks to several months. Factors influencing eligibility and rates, such as age, health, lifestyle, occupation, and driving record, should also be discussed.

Agent Information

Confirm your agent’s licensing and experience. Understanding how they are compensated, typically through commissions, can provide context for their recommendations.

What Information Insurers Will Request

During the life insurance application process, be prepared to provide personal and financial information. Insurers typically request personal identification details, including your full name, address, date of birth, and Social Security number. This information helps verify your identity and assess basic eligibility.

A comprehensive medical history is a standard requirement. This includes details about past medical conditions, current medications, and family medical history. You may also need to provide contact information for your doctors to allow the insurer to obtain medical records. Lifestyle information, such as smoking or drinking habits, hazardous hobbies, and your occupation, are factors insurers consider to assess risk. Financial information, including your income, assets, debts, and details of any existing insurance policies, helps the insurer determine an appropriate coverage amount and confirm your ability to pay premiums.

Comparing and Choosing a Policy

Once you have gathered information and received quotes, compare policies to make an informed decision. Compare policy illustrations and quotes on an “apples to apples” basis, ensuring coverage amount, term length, and policy type are consistent across all options. For example, a $500,000 20-year term policy from one insurer should be compared directly with a similar policy from another.

Consider the financial strength and reputation of the insurance company. A stable insurer provides greater assurance that claims will be paid. Review the policy’s terms, conditions, and exclusions carefully. Pay close attention to any clauses that might limit coverage or deny a claim, such as waiting periods or specific exclusions. Thoroughly understand the policy document before signing, as it is a binding contract outlining your coverage and the insurer’s obligations.