4 Steps to Take Before You Buy Life Insurance

Americans treat life insurance the same way they treat retirement. The vast majority know they’re not adequately prepared, yet don’t always take steps to change.

A 2015 study conducted by the nonprofit Life Happens and LIMRA (a life insurance market research firm) explains this phenomenon in vivid detail. The 2015 Life Insurance Barometer, which polled 2,032 adults, showed nearly one third of Americans believe they need more life insurance than they have. Further, 43% of Americans said they would feel the financial impact of losing their primary wage earner within six months of his or her death.

Astonishingly, 54% of those polled said it was unlikely they would buy more life insurance coverage within the next 12 months. The reason? According to LIMRA, many consumers tend to overestimate the price of life insurance, along with the difficulties of obtaining coverage.

“In addition to believing life insurance is too expensive, our research has shown that consumers are intimidated by the process of buying life insurance — 4 in 10 don’t know how much they need or what to buy,” said Todd A. Silverhart, corporate vice president and director of LIMRA Insurance Research. “Having a better understanding about the factors that influence pricing might help consumers feel more confident and encourage them to pursue getting coverage they believe they need.”

What You Can Do

Like anything else, the key to finding and obtaining the ideal life insurance policy (or policies) is educating yourself on the ins and outs of this coverage. Knowing how policies work and how much they cost is one of the first steps toward protecting your family in the event of your death.

If you’re one of the millions who know you don’t have enough life insurance coverage, here are some steps to take today:

1. Assess Your Risk and Be Specific

Bismarck, North Dakota, financial advisor Benjamin Brandt suggests taking a look at your lifestyle to see which risks you’re trying to hedge against. Do you have unfunded retirement needs? Young children? Mortgage debt? (You can see where your finances stand by viewing two of your free credit scores on Credit.com.)

“If your risks have a specific beginning and ending, consider term life insurance,” says Brandt. Because term life insurance offers coverage for a predetermined length of time, you can customize your policy so it covers a stretch of time when you need it the most. If you plan to retire in just 15 years, for example, you may be fine with a 15-year term life insurance policy that would replace your income if you died.

Whole life insurance provides lifelong life insurance coverage with cash value you can borrow against, but at a more significant cost. Before you buy any policy, you should make sure you understand the difference, how long your coverage will remain in place, and how each type of life insurance might work in your favor.

2. Determine How Much Income You Need to Replace

It’s tempting to try to use a simple formula to determine how much coverage you need. Although you might hear that four times your annual income is a good rule of thumb, this is not enough coverage for most people.

North Carolina financial advisor Peter Huminski of Thorium Wealth Management offers this trick to come up with a smarter amount.

“Multiply your annual income by seven to 10 years,” says Huminski. “The more debt you have or the more responsibilities you hope to cover (such as young children’s needs, for example), the more years you should use for this formula.”

If you earn $100,000 per year, for example, you could estimate you need $1 million in coverage as an absolute minimum.

3. Take a Close Look at Your Liabilities

“The number one reason that people give for purchasing life insurance is to provide income for their family in case of death of the primary income earner,” says financial advisor David G. Niggel of Key Wealth Partners in Lancaster, Pennsylvania.

However, many people fail to look beyond what they earn to what they actually owe.
For example, you might think you need $50,000 in life insurance coverage to replace your salary for the next 20 years — or a $1 million dollar policy. But if you have a $200,000 mortgage, $100,000 in student loan debt, and kids nearing college themselves, you need a whole lot more.

“In order to calculate a minimum amount, you will need to know your income, mortgage balances, debts (such as credit card, auto loans, student loans) and future college tuition expenses,” says Niggel. “This calculation will give you a good starting number that you can discuss with your financial advisor and make any adjustments necessary to fulfill your goals and family wishes.”

4. Shop Around

Just because your college buddy sells life insurance doesn’t mean he should be your first and only contact. Because of the many ways life insurance firms price their individual policies, you could pay considerably more if you don’t shop around.

“Consider working with an independent insurance professional or finding a quote engine online,” says Minnesota financial advisor Jamie Pomeroy. “They will help you look at dozens of different insurance companies and help you determine which company offers the least expensive quote with the highest rated company — and one that has a clear underwriting process.”

This simple act of shopping the life insurance market can potentially save you lots of money in lower premiums over the long haul, says Pomeroy. And due to the wonders of the internet, you can conduct plenty of price comparisons without even leaving your home.

Final Thoughts

Buying life insurance isn’t rocket science, but it does require some work. Not only do you need to analyze your family’s needs, you must compare policies and shop around for the best deal.

Also know that certain factors such as your health and your credit may affect your premiums — and even prevent you from buying coverage. Just like you can’t buy homeowner’s insurance once your house is already on fire, you may not get the life insurance policy you want if you’re chronically ill or have lifestyle factors that might lead to early death.

Either way, the only way to know where you stand is to figure out what you need, shop around and fill out a life insurance application once you’re ready. With good health and credit, you may qualify for an inexpensive life insurance policy that could help you sleep better at night.

The author has an insurance license and has relationships with multiple insurance companies. However, these relationships do not result in any preferential editorial treatment.

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