1st Time Buyers

Tips for the First-Time Buyer of Insurance

Looking to buy life insurance for the first time? Some important tips will help you make the right decision.
1. Why You Need it

If others depend on your income for support, you should strongly consider life insurance. Even if you don’t have any of these needs immediately, you still may want to consider purchasing a small “starter” policy to provide your family with financial security in the event of the death. It can help your dependents pay for mortgages, a college education, help to fund retirement etc.

2. How much you need

The amount of death benefit your family or heirs will receive after your death is how much you need. It depends upon various factors and each individual has unique need. You need to discuss with your insurance agent.
The easiest way is to simply take your annual salary and multiply by 8. A more detailed method is to add up the monthly expense your family will incur after your death. Remember to include the one-time expenses at death and the ongoing expenses such as a mortgage or school bills. Take the ongoing expenses and divide by 0.07. That indicates you’ll want a lump sum of money earning approximately 7% each year to pay those ongoing expenses. Add to that amount any money you’ll need to cover one-time expenses and you’ll have a rough estimate of the amount of life insurance you need.

3. Type of Policy you need.

Once you’ve got an estimate of how much insurance you’ll need, it’s time to think about the type of policy that best fits your needs. Today life insurance comes in many varieties, but there are four basic types; term, whole life, universal life, and variable life. As a first-time buyer, one will more than likely fit your needs.

Term Life Insurance

As its name implies, term insurance provides life insurance protection for a specific period of years. Benefits can be used to help pay off mortgages and other outstanding debts in the event of a premature death. Generally the least expensive form of life insurance, term provides pure insurance protection only.

Whole Life

In contrast to term insurance, whole life, also known as permanent insurance, protects you throughout your lifetime, from the day you purchase the policy until you die, as long as you pay the premiums. Guaranteed for life, your policy will be renewed every year, regardless of your health for as long as you live, again, as long as required premiums are paid.

Universal Life

Universal life also provides permanent life insurance protection and access to cash values that grow tax-deferred. Universal Life differs from whole life in its flexibility that enables you to choose the amount of protection that best suits your family or business. With Universal Life, you can increase or decrease your coverage, as your insurance needs change and control the amount and frequency of premium payments. The policy can also be customized with various riders to fit your lifestyle.

4. Look at the Quality of the Company

An insurance policy is only as good as the company that backs it. You want to know for certain that the company that issues your policy will be around to service it and eventually pay the death claim. To help you discern the strongest companies, there are several ratings agencies that rate insurance companies on the quality of their fiscal fitness, quality of investments, and overall financial soundness.

5. Look at the Quality of the Agent

Agents provide an invaluable service. The relationship you develop with an agent can last a lifetime. Second, an agent can help you update your coverage as your needs change. They can help you guide you through a lifetime of financial decisions, giving you one less thing to worry about. It is therefore, very important to assess the knowledge and ability of an agent. There are many new agents who join the industry but leave the business due to challenge and failure to sell. Buyers from those are left without service.

6. Don’t buy insurance like vegetable.

Buying insurance means a life time commitment of funds in exchange for financial coverage in emergencies. Don’t buy what is first offered, but seek a second opinion. Convince yourself about the need and the financial commitment.

Understanding most common types of insurances

Term Insurance Permanent Insurance Universal Life Insurance
Description Low cost, temporary protection for times of high financial risk (e.g. when you have a mortgage) Stable lifelong protection without the complexities of universal life. Over the long term, it offers generally a better financial choice than buying and renewing term insurance. More flexible but intricate type of insurance that combines long term life insurance with an opportunity for tax-deferred savings
Duration Coverage will end at a certain age Guaranteed lifetime protection Typically lifetime protection
Face Value Once Chosen, doesn’t change Once chosed, doesn’t change Choice of level or increasing amount of insurance
Premium Lowest initial cost, but cost may increase each 5, 10 or 20 years. Cost can rise dramatically in later years. Typically guaranteed not to change for the life of the policy but some products are adjustable.
Premiums tend to be higher than term insurance when you’re younger but will be lower than term when you’re older.
Cost of the insurance may be:

  • guaranteed and level,
  • increase each year or
  • be a combination of both.
Cash Value None A cash value usually accumulates, and is paid to you upon cancellation. Payments made, in excess of required cost of insurance, can be invested and grow tax-deferred.
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