- Best practices to buying life insurance
- October 3, 2013
Most people buy life insurance to ensure that their loved ones are protected financially in the event of their death.
However, most people don’t realize that although paying funeral expenses and replacing income are two very important reasons to purchase a life insurance policy — you can also use life insurance to pay for a home, plan for retirement or prevent tax penalties when you transfer an estate.
According to Forbes, the percentage of American households with individual life insurance policies has hit an all time low of 44 percent. This dramatic decline is due to unemployment, confusing products, reports of denied claims and high commissions of insurance agents.
LIMRA, an insurance industry research outfit, recently conducted a study where they discovered that 11 million American families are currently without a life insurance policy. Most of these families could benefit from owning a policy, especially if dependents are involved.
It’s important to know which policy fits your particular needs and those of the people you love. The Life and Health Insurance Foundation for Education, a non-profit consumer insurance education organization, offers these tips for buying life insurance as well as where to buy coverage.
Tips for buying life insurance
1. Consider those who rely on you financially, including your spouse; children, parents or other loved ones. You should periodically re-evaluate your insurance needs whenever there is major life change, such as getting divorced, buying a home, or changing jobs. It is highly advised to re-view your policy every couple of years.
“A life insurance policy should be reviewed when there are major times for financial change in your life,” suggests Jack Dewald, Chair-elect for the Life Foundation. “Even if there hasn’t been any major changes in your life, you should reevaluate every five to seven years to see what you have and what you need and what you don’t need anymore.
2. How much is enough? Ask yourself how much money your family will need to cover living expenses and how much they will need over the long-term to maintain their standard of living.
Insurance companies generally recommend coverage that will replace the equivalent of 10 to 15 times your annual income.
3. Does it fit your needs and your budget? Research term and permanent policies to figure out what kind of life insurance is right for you.
4. Find an expert that can explain the different types of life insurance available. You can find an insurance agent through referrals from someone you trust such as friends and family.
5. Have your agent or broker put together a life insurance needs analysis. A needs analysis is a personalized illustration of your current and future financial needs. The worksheet would include: Income needs, expenses, existing assets and insurance, new insurance amount needed, rate of return flowchart, summary of rates of return, a comparison between rates of return upon death, annual rates of return by age, assumptions or client and insurance policy information.
6. Research the insurance company or the broker you plan to work with to determine its financial stability.You can check out an insurance company’s financial strength rating at A.M. Best, Fitch, Moody’s and Standard & Poor’s websites.
It is important to keep in mind that the process of getting life insurance can be intimidating and confusing, but it is an important life decision to help protection the future well-being of your loved ones.
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