Prepared by the National Association of Insurance Commissioners
The National Association of Insurance Commissioners is an association of state insurance regulatory officials. This association helps the various insurance departments to coordinate insurance laws for the benefit of all consumers. This guide does not endorse any company or policy
Before You Buy Life Insurance
Understand What Life Insurance Is
Life insurance pays a death benefit if you die while the policy is in effect, in exchange for premiums you pay before your death. You can use the death benefit to protect against financial hardships such as loss of your income, funeral expenses, medical or nursing care expenses, debt repayments, and child care costs after your death. You can get information from the NAIC Insure U Life Insurance website – ww.insureuonline.org/insureu_type_life.htm
If You Need Life Insurance, Decide How Much Coverage to Buy
How much life insurance to buy depends on the financial needs that will continue after your death. Examples include supporting your family, paying for child(ren)’s education, and paying off a mortgage. Some questions you may want to ask about your own needs include:
• Does anyone depend on me financially?
• How much of the family income do I provide?
• How will my family pay my final expenses and repay debts after my death?
• Do I want to leave money to charity or family?
• If I have life insurance through my employer, is it enough to meet my financial obligations?
The answers to these questions can help you decide how much coverage you need. An insurance agent, financial advisor, or insurance company representative can help you evaluate your insurance needs and give you information about available policies.
If You Already Have Life Insurance, Assess Your Current Life Insurance Policy
It’s important to compare your current policy with any new policy you might buy. Keep in mind that you may be able to change your current policy to get the benefits you want. Also, know that any changes in your health may impact your ability to get a new policy or the premium you’ll pay. Don’t cancel your current policy until you get the new one. Also, while you may have free or low-cost life insurance through your employer, the death benefit usually is less than you need. And if you leave the employer, you may not be able to take this coverage with you.
Compare the Different Types of Insurance Policies
There are many types of life insurance policies. You should choose a policy with features that fit your individual needs. Some things to consider are:
• Term Insurance vs. Cash Value Insurance.
Term insurance is intended to provide lower-cost coverage for a specific period of time (“a term”). If you want coverage for a longer period of time, such as for your lifetime, cash value insurance may be more cost effective. Most term policies don’t build up cash values that you can use in the future.
• Renewable Term vs. Non-renewable
Term. Most term life insurance coverage can be continued (“renewed”) at the end of the term, even if your health has changed. If you renew a term policy, the new premiums are higher. Ask what the premiums will be before you renew the policy. Also ask if you’ll lose the right to renew the policy at a certain age. A Non-renewable term policy can’t be continued. You’ll have to apply for a new policy if you still want coverage.
• Whole Life vs. Universal Life
Whole life and universal life insurance are two types of cash value insurance. A key difference between the two is how you pay for the coverage. You typically pay premiums for whole life insurance according to a set schedule. In a universal life policy, you can choose a flexible premium payment pattern as long as you pay enough to keep your policy in force.
• Variable Life vs. Non-variable Life.
The investments you will choose (such as stock and bond funds) in a variable life policy directly impact your cash value. These policies have the greatest potential to build cash value but also the greatest risk of losing cash value. Non-variable life policies often have guaranteed minimums for some features (interest or cash value, for example) but not all. Non-variable life policies also have less potential to build cash value than variable life policies
Be Sure You Can Afford the Premium
Before you buy a life insurance policy, be sure you can pay the premiums. Can you afford the initial premium? If the premium increases later, will you still be able to afford it? The premiums for many life insurance policies are sensitive to changes in the company’s investment earnings, claims costs, and other expenses. If those are worse than expected, you may have to pay a much higher premium. Ask what might be the highest premium you’d have to pay to keep your coverage.
Understand the Application Process
You can apply for life insurance through life insurance agents, the mail, and online. In addition to basic information, such as your name, address, employer, job title, and date of birth, you’ll be asked for more personal information. Depending on the type of policy, the insurer may require you to see a doctor, answer health-related questions, or have a medical professional come to your home or office to assess your health. Usually, a policy that doesn’t require detailed health information will cost more and provide less coverage than one that does. It’s important to tell the truth on the application. The insurance company will check your answers so review the application before you sign. If the insurance company discovers false statements on your application after it issues your policy, it could reduce or cancel your coverage.
Choose a Beneficiary
A beneficiary is the person(s) or organization(s) you name to receive your life insurance policy’s death benefit. You’ll need to know the Social Security or tax identification number for all beneficiaries. Experts advise you not to name a minor child as a beneficiary. Insurance companies won’t pay a minor. Instead, consider leaving the money to your estate or trust.
Evaluate the Future of Your Policy
Does your policy have a cash value? In some cash value policies, the values are low in the early years but build later on. In other policies the values build up gradually over the years. Most term policies have no cash value. Ask your insurance agent, financial advisor, or an insurance company representative for an illustration showing future values and benefits
Read Your Policy Carefully
After you carefully read your policy, you should be able to answer the following important questions:
• Is your personal information correct?
• Do premiums or policy values vary from year to year?
• What part of the premium or policy value isn’t guaranteed?
• How will the timing of money paid and received affect any interest the policy might earn?
Your insurance agent, financial advisor, or an insurance company representative can help you understand anything that isn’t clear.
If you’re not satisfied with your new policy, you can return it for a full refund within a certain period, usually 10 days after you receive it. The review period usually is stated on the first page of the policy.
Review Your Life Insurance Program Every Few Years
Review your policy with your insurance agent, financial advisor, or an insurance company representative every few years to keep up with changes in your policy and your needs.
• Have the premiums or benefits changed since your policy was issued?
• Do the death benefits still meet your needs?
• Do you need more or less coverage after life events, such as birth, adoption, marriage, job change, death, or divorce?
The insurance company can provide policy statements and illustrations to help with this review. As the policy owner, you can change beneficiaries at no cost. Be sure to review your beneficiaries every few years, especially after major life events that affect your life insurance needs
© 2018 National Association of Insurance Commissioners