·  Legal News, Analysis, & Commentary


4 Things You Should Do Before Applying for Life Insurance

— June 5, 2020

You shouldn’t put off purchasing life insurance. Learn about available coverage options and find a policy that meets your future needs without compromising your current financial stability. 

Purchasing life insurance is one of the most important financial decisions you will make. The right coverage allows your family to maintain their standard of living in the event of your death. Unfortunately, many people are overwhelmed by the process and simply put off shopping for life insurance. Knowing what to expect can remove the mystery and make the entire process easier. 

1. Learn About the Different Types of Life Insurance 

Life insurance is not a one size fits all shopping experiences. There are several different types of policies and the right one for you will depend on your unique situation. For many people, a combination of policy types can effectively meet short- and long-term goals. While there are subcategories within them, there are three major categories of life insurance policies. They are term, permanent, and hybrid. 

Term policies are generally the most affordable option, so you can purchase a higher death benefit amount for a moderate premium price. These are for a preset length of time during which your beneficiaries will receive benefits upon your death as long as premiums are paid in full. Most term policies will be for between 10 and 20 years. 

Permanent life policies, on the other hand, remain in effect until your death as long as premium payments are made. You may hear these referred to as an IRC 7702 plan because they are covered under section 7702 of the Internal Revenue Code. In addition to providing a death benefit, they also serve as investment vehicles by accumulating cash value. Premiums are often higher for these policies, but that can be mitigated by taking them out when you are young. 

Hybrid policies often combine the benefits of a permanent policy with long term care coverage. When you look at the rising cost of care combined with longer life spans, this type of policy may make sense.

Elderly Man Sitting in a Nursing Home
Elderly Man Sitting in a Nursing Home; image courtesy of Thomas Bjørkan via Wikimedia Commons,

2. Determine the Amount of Coverage You Actually Need

Some people look at life insurance as putting a dollar amount on a person’s life. This couldn’t be further from the truth. In addition to paying for final expenses, it is designed to replace income and cover large expenses in the event of your death. That is why each person will need to carefully consider how much insurance they should carry. There are several ways to estimate how much you need, including multiplying your income by 10, using the standard of living, or inputting your information into an insurance calculator. 

3. Understand the Factors That Can Affect Your Rate

There are numerous factors that affect your premium. As most people guess, age and health are the two biggest. Generally, the younger you are when you take out a policy, the lower your rates will be. This can play a big role in permanent insurance premiums since they are locked in for your lifetime. Your personal and family health history will also impact the premium. It is important that you are honest when answering application questions since you can expect to undergo a physical that may include urine and blood samples as part of your application process. A few things that affect your rate that many people find surprising include:

  • You work in a high-risk occupation
  • You participate in hobbies such as rock climbing or skydiving
  • You have a shaky credit history
  • You have a history of smoking or tobacco use
  • You have a history of driving violations

4. Assess How Much You Can Afford to Pay for Premiums

Look at your budget and determine how much you can dedicate each month or year for premium payments. This is crucial, since failure to pay premiums will result in your policy being canceled. Try to balance present and future needs when you make this assessment. If you are burdened with debt, life insurance will help your beneficiaries get free and clear upon your death, but it won’t help them get food on the table right now. 

You shouldn’t put off purchasing life insurance. Learn about available coverage options and find a policy that meets your future needs without compromising your current financial stability. 

Join the conversation!