Life insurance buyer checklist
The purchase of life insurance should not be dismissed as an ordinary consumer activity. It is a contract between two parties. As a party to this agreement, you have rights as well as obligations.
To be able to get the most out of such a contract, it is important for you not to miss key details prior to purchasing a policy. It is toward this end that this checklist was drawn - to keep the consumer from skipping or missing out critical information that might serve as a disadvantage to him later on.
1. Decide on the type of policy to purchase
A term life insurance policy is for you if you:
- Require coverage over a certain period of time. For example, a 20-year term policy will ensure that the young children you have in your family will have resources to take care of them when they pursue college education in the future.
- Want that a major debt you leave behind (such as a mortgage), will be covered so that your family will not be bothered with .
- Have a limited budget for insurance premium but require large coverage.
When deciding between level term policy vs. decreasing or diminishing term policy remember:
- Level term pays off with a lump sum amount that is agreed between the policyholder and the insurance company at any given time within the term period.
- Decreasing term also pays off a lump amount but one that has a diminishing value - this is generally required for mortgage protection purposes. Between the two, decreasing term policy is generally cheaper.
A permanent life policy is for you if:
- You require life insurance throughout your lifetime.
- You need a source of funds on which can draw money for a variety of purposes.
2. Decide on the level of life insurance coverage you need
- Do the necessary calculations - start with what is the ideal coverage for you and meet this with the budget you currently have now and your budget in the future.
- Be a wise shopper. Do not limit your choice of insurance carriers from a few and do not get easily swayed with advertised quotations, as these may not apply to your situation.
- Choose the best policy ownership option for your situation. For example, if your wife is the policy owner, you may be able to avoid paying estate taxes.
For a more detailed discussion, head on to our Q&A "How Much Life Insurance do I need?" The article has a sample computation, and possible scenarios that can serve as your guide.
3. Choose between going directly to an insurance company vs. using an agent or broker
Go directly to an insurance company:
- You go direct to an insurance carrier if you know exactly what you want.
- You are detailed in your research, you read the fine print, and you understand very well the ins and outs of this product.
- You go directly to a provider if you want to save on money that would have gone to the broker as commission.
Go to a broker or agent:
- You get the services of a broker or insurance when you are not sure what you require given your circumstances.
- You get a broker when you do not have time to thoroughly sift through the many different policies that the market can offer you.
- You opt for a broker's services when you want to take advantage of their network with insurance providers to get the best deal for you.
- You get a broker when you want someone with in-depth knowledge of the product to advise and guide you through the process of buying it.
- You secure the services of a broker if you are willing to extra pay for his services.
Selecting a life insurance company
When you are choosing your insurance company follow these simple guides:
- Look at your needs and look at the company's policies. Selection of a company has to be done based on your needs and how well their product can meet them.
- Look at the company's track record, its address and its affiliations with the rest of the industry.
- Choose a company with solid financial outlook. Look at how independent rating agencies rate them.
- Make sure you deal with a company that is known for its ethical business practices - choose one that is affiliated with the Insurance Marketplace Standards Association.
- Give preference to a provider who offers you sound advice as well as quality service.
- Look at how a company handles claims and complaints, that way you get to separate the bad ones from those you want to do business with.
Selecting an agent or a broker
When selecting your agent or broker follow these simple guides:
- Look for their state issued license.
- Choose an agent who knows how to look at your financial circumstances and filters policies that can meet your needs.
- Opt for one who will go at great lengths to make you understand the nitty gritty of a policy, any alternative options as well as related concerns.
- A good broker maintains an excellent record of his customers so that when they come back for a renewal or a new purchase, the broker would be able to recommend the right policy based on what has changed in the consumer's situation.
- Stay away from brokers or agents who are fond of pressuring their clients to make a decision.
- Choose an agent who is accessible and checks on his clients for any changes in their circumstances that could impact their life insurance.
4. Assess the company's financial strength
To assess an insurance provider's financial strength look at what reputable rating companies have to say about them. There are four major rating agencies that do separate reviews: Fitch, A.M. Best, Standard & Poors and Moody's.
Do nor rely solely on the rating of one agency but look at what the rest have to say.
Understand the ratings systems employed by them because each one stands to be unique from the rest. For your guide, here are the official sites of the rating agencies:
- Fitch Ratings: www.fitchibca.com
- A.M. Best: www.ambest.com
- Standard & Poors: www.standardandpoors.com
- Moody's: www.moodys.com
Do not be lured by what a provider says about the rating they got from one agency. A company is likely to harp on the excellent rating they received from one agency while trying to hide the negative review they received from another.
5. Extra tips to consider when purchasing insurance
- Take advantage of a "free-look" offer. This is usually a ten-day period where a customer can have a change of mind with regards to the policy they just purchased. Review the terms included in that policy during this time frame. If you opt not to continue, the provider will cancel and provide you with a refund. Information about this offer can be found in the contract. Be sure you know about the effectivity date of the policy.
- Secure your policy along with other pertinent financial or legal documents in an area where your survivors can easily locate them. If you keep them in a safety deposit box, be aware that in certain states, this will be sealed for a temporary period of time. This could bring about a delay in claiming insurance proceeds.
- Prior a decision to cancel a current policy, you should get in touch with your broker or agent or the current insurance provider for advice. If you have not been as healthy as when you purchased the current policy, you might not be able to attract the best rates. If you plan for a replacement of a cash value policy with a similar one, be aware you might not get one with the same value.
- For complaints against a provider or agent, contact the company's customer relations department. If your issue is not addressed properly, get in touch with the insurance department in your state.
- From time to time do a review of your insurance policy. Do this especially when an important event takes place in your life - marriage, divorce, birth, retirement, etc.
- Strive for full understanding of the policy you are about to purchase. In majority of the states, an insurance company is required to give out their customers a buyer's guide, which will provide explanation about the company's life insurance product. Read this guide and understand.
- Only give out accurate and true answers on your insurance application. If a mistake was made on an entry, promptly have this corrected.
- Always make your premium payment checks payable to the company and not the broker or agent and always keep a record of the transaction.