Before you buy a life insurance, make sure that you ask your life insurance agent several essential questions.
Life insurance is pretty complicated and surprisingly more important that we normally take it to be. In order to find the essential information that would really help you, you must know how to ask the right questions.
Below are top questions you must ask your life insurance agent when you are planning to buy life insurance. You may get unexpected answers but all of them will make a difference in your application.
What Company am I Buying From?
First things first. Before you even jump into the major items like how much or what type of insurance you need, find out about the company. You need to have an idea of how long they have been doing business, their current size, and their ratings. You may also want to be straightforward with the agent and ask for his credentials for being a life insurance professional.
The public has the right to access certain information about corporate entities – including insurance companies. You can check the insurance company’s financial strength by their fiscal ratings through organizations such as A.M. Best Co., Standard and Poor’s and Weiss Ratings.
For the life insurance agents, look out for designations such as Certified Financial Planner, Chartered Financial Consultant, and Chartered Life Underwriter.
These designations are not easy to acquire – agents study up to 10 semesters long to earn them. Predictably, you can count on the graduates to have a better knowledge about the workings of a life insurance.
You would also have to check if your agent represents just a single insurance company or sells on behalf of multiple firms.
How Would I Know The Amount of Insurance I Need?
Of course, the key question is: “How much life insurance do I really need?”
Sure, you’ve heard several ‘rules of thumb’ on this matter (such as 10X your annual income). However, when it comes to death benefits for your family, it remains a very individual calculation.
The amount of life insurance rests on two major factors: how much do you need to pay off all your debts (including the mortgage) and how much your dependents will need to maintain the same lifestyle after you pass on.
Although all companies consider these two variables in, insurance providers use different templates for calculating your specific insurance need.
Your line of questions might go something like the following: “How did you come up with a final amount of insurance? Is that a ballpark figure? Is it based on your analysis? If so, how extensive was your analysis?”
You can ask the agent what assets and obligations did he use to come up with the recommendation. Just make sure that the reply makes sense to you.
Coming up with the final amount is crucial, more so if your family has unusual debts (ex. High medical bills) because these are not usually part of the equation in a rudimentary-needs formula. Only when you are sure that your agent is taking all of your current and future financial needs into consideration, should you go and buy that insurance.
How Long Should I Have Insurance Coverage?
After you’ve ironed out the policy amount, the next step is to choose a policy type: permanent or term life insurance. Permanent policies remain in effect for your entire life while term life policies last only for the term you buy (ex. 20 years). Term life insurance is cheaper and in many cases, consumers do not need lifetime coverage.
Premium rates for term policies are usually lower than those for permanent policies (for the same coverage), but there are pros and cons. For one, premiums on term policies normally increase significantly at the end of the initial term around 10, 20 or 30 years. Another thing is, if you stop paying premiums, you forfeit the death benefits which could put your family’s finances at risk in the future.
Term policies are best suited for financial obligations with a definite due date such as a mortgage or college education.
On the other hand, permanent policies are good for other specific purposes. They’re fit for retirement planning, income replacement and ongoing financial obligations like taking care of a handicapped family member. These policies can accrue cash value and stay in force as long as you are paying the premium. Some insurers will require a medical exam but they usually fix your premium so it doesn’t go up even if your health suddenly deteriorates.
It’s an important decision to make that would require a good discussion with your agent.
Should your agent suggest a permanent policy (variable, universal or whole life), make sure you ask for the reason why. Agents tend to get a higher commission for permanent insurance so you can’t really expect them to give an unbiased answer. This is the advice of Andy Tilp of Trillium Valley Financial Planning in Sherwood, Oregon. They are well-trained to answer that question as “Of course you need [permanent life insurance].”
If you’re feeling a pressure from your agent, be frank with him. Do not hesitate to ask him how the commission will vary in each product.
Would There Be Benefits in The Event of Disability?
In some cases, life insurance companies often offer certain benefit in the event of disability. One is a waiver of the premium provision that lets you waive your premiums in the event you become disabled. Usually, this will last for six months.
Some life insurance policies go as far as allowing you to collect the death benefit should you become disabled. For example, if you have a $100,000 life insurance policy and become completely disabled, the company will release the benefit to you – much as they would if you had died. This is not a standard practice and those who do it normally charge a much higher premium for the said feature.
This does not take the place of disability insurance but it can come close. You could get a windfall in the event that you become disabled – that’s a valuable benefit to have under the circumstances.
If you are genuinely serious about getting a life insurance, never be afraid to ask your agent the serious questions. That is generally the best way to gauge the competence of the agent, the integrity of the insurance company, and other useful benefits you could get.
Are There Other Options We Can Add to The Policy?
Similar to buying a new car or a computer, there are always options when we talk about life insurance. You just need to know what options are available and if you can add them to your policy.
Here are some of the important ones:
Convertibility clause. In this option, you can convert a term life insurance policy to whole life without having to go through a medical examination. This will work to your advantage if you develop health conditions during the term of the original policy.
Guaranteed insurability. In this option, the company will let you purchase additional life insurance in the future regardless of your health condition.
Return of premium rider. In this option in a term policy, the company will return your premiums at the end of the policy term. You will have to pay more for this option but it is a good way to accumulate cash for a future need.
What If I Don’t Die During The Term Of The Insurance?
It’s a little ironic that people who buy term life insurance get upset when they find out that if they don’t die, they get zero out of their insurance.
If this is an issue for you, then let’s see what will happen to your policy as you near the end of the term.
- Your premiums will go up. In practice, many term policies offer level premiums for several years – 10, 20, even 30 years as an example). As you near the end of the term, you may have the option of keeping your policy. If you decide to do so, expect a sizeable spike in your premium.
- You might need a new policy. If you are still healthy at this time and you still want the same insurance coverage, we would suggest that you apply for a new policy.
- You can drop your coverage. Let’s say you got the policy just for safety while you are paying off your mortgage and now you’re fully paid. Since you have no other obligation to protect, you can just let the coverage expire.
- You can upgrade the policy. Many term policies come with a ‘conversion privilege.’ This would allow you to trade in your old term policy in favor of a new permanent policy.
Will My Premiums Go Up?
This will depend whether you have a term or permanent insurance. With term life coverage, your premiums will start out lower than its counterpart permanent coverage and stay the same for the initial term. If you opt to keep the policy in effect past the initial term, the premiums will most likely increase. With permanent life insurance coverage though, for as long as you don’t let the policy lapse, your premiums will stay the same as long as you live.
What Are The Exclusions?
This is a must-ask question because life insurance has no standard policy. Terms, prices, and exclusions will vary dramatically by company. As a practice, insurance companies want to get as many customers as possible so they don’t normally want to turn business away.
Many activities that they considered risky and they excluded in the past (like scuba diving and mountain climbing). They are often accepted for an additional charge. Even the people who have chronic illnesses may get coverage if they are willing to pay a few dollars more in premiums. Many companies still exclude suicide usually for the first one or two years of the policy.