Everything you Need to Know About Buying a Life Insurance Policy

If you are at the point where you are asking how to buy a life insurance policy, then you have already made the most important financial decision, which is to take the steps to insure your family’s or loved one’s financial security.  For many people, that is most likely a critical decision that has long been procrastinated. Even after the decision has been made, the process for buying life insurance can be somewhat intimidating to some people and the process can get bogged down if they are at all uncertain about the direction they should take. With a little bit of knowledge and research, you can prepare yourself to take the initial steps with confidence and ask the right questions so that you can get exactly what they need. 

Uncovering Your Need

Knowing how much life insurance you and your family needs is the first step to buying the right policy. While some people rely on the simple formula of a multiple of annual income, such as five times or ten times your income as amount, this can create uncertainty as to whether it will meet all your family’s needs.  

With your family’s security at stake, it’s best to take some time to determine, on a more accurate scale, the amount of capital your family will need to sustain meet their lifestyle needs. You can start by listing assets and debts, income and expenses, and then prioritize your family’s needs for now and in the future.  Working with a financial planner can also help make the process easier.  The bottom line is you want to determine is how much capital will be needed to pay immediate obligations and to provide an income stream that will allow your family to remain in their current lifestyle. 

There are some life insurance needs calculators that can be accessed for free online or determining your need with an insurance professional or financial planner can all work.  Just remember that, the more certain you are of the amount of life insurance you need, the more confidence you will have in buying the right policy for you.

Determining the Right Product for You

Ideally, you will be able to find an experienced and objective life insurance specialist or Certified Financial Planner Practitioner™, (CFP®), to work with you to find the best product match for your needs.  Still, it is recommended that you equip yourself with some fundamental knowledge of how these products work so you ask the right questions when you are presented with a choice of products.

The different types of policies – term, whole life, universal life, variable life – all have many variations which make the selection of product very confusing. While the internet provides a wealth of product information that can get you up to speed on the advantages and disadvantages of the different types of policies, working with a professional may be more helpful in narrowing down the right types of policy or policies you should consider. 

Know the Process

Do your homework before you begin initiating the buying process.  One key way working with a professional can help save you time and money and not making a big mistake is discussing your and your family’s medical history.  Different insurance companies view different health conditions and histories differently.  An experienced financial planner or life insurance professional who is independent and can broker almost any policy in the marketplace can preliminarily evaluate your circumstances and determine ahead of time which companies may give you the best chance to get the best rating or underwriting class, potentially saving you money.  Too many folks look at the cheapest quote online and don’t realize they may have no chance of getting that rating, and end up surprised at how much the cost is after they complete the underwriting process, wasting time and potentially a lot of money.  And once you apply for a policy any derogatory rating will be part of your history which other companies will be able to view in the future which may impact you if you apply again at some point down the road.

Once you initiate the buying process with a life insurance provider, the process takes on a life of its own. It begins with the completion of an application, so it is helpful to have all your financial and medical information at hand. The application will ask you about your current financial situation and it will inquire about your medical history. You will also need to agree to a release of your medical records.

The application is also where you will begin to piece together the different components of your policy, including the death benefit amount, your beneficiaries, policy riders, dividend options or investment selection, and your mode of payment.  Consulting an experienced life insurance professional or CFP® can help you make sense of all your choices, as it can become overwhelming.

The application is submitted for review by underwriters. If a medical exam is required (this will depend on your age, the amount of life insurance, and your medical history), it is scheduled. The exam is usually done by a paramedical professional who comes to your home or office.  Your exam results are submitted to the underwriters for review. After all the medical records and the exam have been reviewed, the policy is issued.  From the time of application to the time of policy issue it can take from 30 to 60 days depending on how quickly your medical records are transferred. 

After you receive the policy and pay the first months’ premium, you have a free look period of 30 to 60 days, depending on where you live, to carefully review the contract and the policy provisions.

Additional Key Tips

• Find a reliable life insurance specialist or financial planner with whom to work. They will take on the responsibility of getting you from the needs assessment to application to policy issue with the least amount of friction. They can also be invaluable during times when you need any sort of service on your policy.
• Buy from the best. Make sure you submit your application with a company that is highly rated for their financial strength and claims paying ability. Check their ratings from A.M. Best (A rated or better) and Standard & Poor’s’ (AA rated or better).
• If an agent or broker recommends more life insurance than you calculated for yourself, be sure to get a complete audit of their calculation and have them validate their reasoning.
• If a product other than what you were considering is recommended, ask for a detailed cost-benefit comparison of the two types of policy and a written explanation as to why it was recommended.

Summary

Buying a life insurance policy can be an intimidating experience, which is the main reason why people procrastinate.  Armed with the fundamental knowledge about your own needs, the different types of policies and how the process works, you should be able to enter the process in control and with greater assurance that your life insurance needs will be met. 

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites and Chris Cosenza, CFP®, AIF®, to provide information on a topic that may be of interest. Copyright 2014-2017 Advisor Websites.