When should I buy life insurance?

When to buy life insurance depends more on your individual circumstances and your personality than on any hard-and-fast rules. There are good arguments on both sides of the issue.

Buy now : Life insurance premiums increase dramatically as you get older. If you buy permanent life insurance while you’re younger and (presumably) healthy, you can take advantage of lower rates. Your premium costs may increase, but these increases are strictly regulated. Cash value life insurance also offers a type of “forced savings,” and the policy accumulates tax-deferred over time. Buying while you are younger provides the added advantage of extra time in which the cash value can grow.

Buying life insurance while you are younger can be especially important if you are in a high-risk group for any disease or medical condition that might make you uninsurable. If you choose to buy insurance for this reason, ask about adding a guaranteed insurability rider to your policy. This rider guarantees you the right to purchase additional insurance at specified times, without having to provide proof of insurability. This way, if you get married, start a family, or take on other responsibilities, you can purchase the insurance you need without worrying about whether you will be denied coverage.

Buying term life insurance while you are younger has certain advantages as well. Like cash value insurance, premiums for term life insurance increase significantly as you get older. By buying now, you can lock in low premium rates for the duration of your policy. If you choose to purchase term insurance, look for a policy with a renewability provision. This clause allows you to renew the policy without having to take a medical exam or prove insurability. However, your premiums will likely increase each time you renew your policy as a result of your decreased life expectancy.

Buy later: Instead of buying life insurance now, you might decide to put off this purchase until later, perhaps when you have a family and more responsibilities. For the time being, you may want to put that money into other types of investments that have the potential to provide greater returns.

In order to fully reap the benefits of this strategy, you must have the financial discipline to invest your premium savings on a regular basis. Or, instead of depending on your own ability to faithfully invest each month, arrange for funds to be automatically transferred from your bank to the investment account of your choice.

Keep in mind, however, that while this strategy provides the potential for investment returns, these returns are not guaranteed. In addition, it would be unwise to delay purchasing any life insurance if you have children or other dependents who would suffer financially as a result of your premature death.

I’m single. Do I need life insurance?

Single people often think they don’t need life insurance, and in many cases, they are right. However, there are many factors that determine your need for life insurance; marital status is just one.

First of all, do you have any dependents? If you have children, or if you provide support for a parent or grandparent, your death could create a serious financial hardship for these dependents. Life insurance can provide a continued stream of income for your loved ones if you die prematurely. It can also provide peace of mind for you, knowing that they will be taken care of when you’re gone.

Do you have a mortgage or other loans that are jointly held with a cosigner? If so, your death would leave the cosigner responsible for the entire debt. You might want to consider purchasing at least enough life insurance to cover these debts in the event of your death. If you have debts for which you alone are responsible, your creditors can make a claim for payment against any assets in your estate.

Are you at risk for any serious medical conditions? If, for example, your family medical history includes certain genetic conditions (diabetes, certain types of cancer, etc.) it may make sense to purchase life insurance while you are young and healthy. Purchasing life insurance after you develop such a condition could be difficult, or even impossible. If you choose to buy insurance for this reason, consider adding a guaranteed insurability rider to your policy. This rider guarantees you the right to purchase additional insurance at specified times, without having to provide proof of insurability.

If you died tomorrow, would you leave enough to cover your funeral expenses? If not, who would be responsible for paying? For many families, even a relatively simple funeral can create a major financial burden. For this reason alone, you might consider purchasing a small life insurance policy, or even a simple burial policy. As an alternative, you could invest the premiums you would spend on such a policy, and make sure your family knows this investment is earmarked for your final expenses, should the need arise.

Even if you determine that you don’t need life insurance, make sure your other insurance needs are covered. You may not realize it, but disability insurance is just as important as life insurance. Statistically speaking, you are much more likely to become disabled than to die prematurely. Disability insurance can replace lost income if you are unable to work due to serious illness or injury.

Do I need to buy a separate life insurance policy for my child?

If you want life insurance coverage for your child, you may be able to add a child death benefit rider (usually limited to $5,000 or $10,000) to an existing policy on your own life. Otherwise, you’ll probably need to buy a separate policy on your child’s life.

But is it a good idea to insure your child’s life? In some cases, yes. Term policies for children typically carry small premiums. In addition, your employer’s group policy may include inexpensive term coverage for your dependents. Either one of these options can provide you with some peace of mind at a relatively low cost. In most cases, however, it’s better to wait until your child reaches adulthood to start thinking about life insurance.

Why? Because the main purpose of life insurance is to replace lost income when a person dies. Unless your child is a movie star or a model, he or she is likely earning little or no income. His or her death would certainly be a tragedy, but it would probably not cause your family any financial hardship. You would have to pay for your child’s funeral expenses, but buying a life insurance policy just to cover those costs may not make sense. Instead, consider saving or investing the money you would spend on insurance premiums. That way, the money will be available in case a tragedy strikes, but it can be used for other purposes as well.

Perhaps you have other reasons for wanting to buy a separate insurance policy on your child’s life. You might be worried that you won’t be able to insure your child down the road if he or she develops a medical condition (especially if certain diseases run in your family). However, few medical conditions make a person uninsurable. Only about four percent of all life insurance applications are rejected. And don’t think that life insurance will be too expensive once your child grows up. Insurance policies for healthy young adults don’t cost much more than policies for children.

I don’t smoke cigarettes, but I smoke cigars occasionally. Will I have to pay smokers’ rates for life insurance?

Because of the increased mortality risk associated with smoking, smokers almost always pay more for life insurance than their nonsmoking counterparts. Some life insurance companies distinguish between moderate smokers (20 or fewer cigarettes per day) and heavy smokers (more than 20 cigarettes per day) and offer somewhat lower rates for those who smoke less. The recent cigar craze has now raised numerous questions about how to classify cigar smokers. But unfortunately, there is not yet an industry-wide consensus on this issue.

Note: Life insurance companies now ask about the use of any nicotine-containing product, including chewing tobacco.

The ways in which life insurance companies categorize treatment of cigar smokers literally vary from one extreme to the other. A few companies have taken the position that all forms of tobacco are equally harmful, and thus charge cigar smokers and cigarette smokers the same rates. (However, there may be exceptions for very occasional use; for example, less than 12 cigars per year.) Other insurance companies take a middle-of-the-road position, charging cigar smokers more than nonsmokers but less than the heaviest-smoking class. Some insurance companies even consider cigar smokers to be nonsmokers, offering the lower rates typically reserved for those who don’t smoke cigarettes at all.

So, if you’re a cigar smoker, try calling your insurance agent or doing some research to find the best life insurance rates available. You should probably act quickly, too, as insurance companies could change their rules if clinical research determines that cigar smoking is more dangerous than previously believed.

Insurance companies will typically reevaluate your rates if you quit smoking for at least a year – something to keep in mind if you’re more just a part of the cigar trend than a truly dedicated stogie smoker.

What is a life insurance medical exam and how should I prepare for it?

Sometimes when applying for a life insurance policy, you may be asked to take a medical exam. Generally, you won’t have to take a medical exam if you’re under age 40 and applying for life insurance coverage of less than $100,000. However, the older you are, the less life insurance you can buy without a medical exam. Of course, these figures also depend on your health history and the underwriting guidelines of the insurance company you choose.

A typical medical exam may include a basic physical, blood work, and urine tests. Some insurance companies also require EKGs and/or treadmill EKGs (stress tests), especially for large life insurance policies. You’ll also have to provide information on your medical history, including the names of doctors you’ve seen, dates you saw them, and any treatment recommended. A nurse or doctor (often an independent contractor) who is paid by the insurance company will normally conduct the exam.

If you have a medical condition, there’s really nothing you can do to hide it. In fact, you shouldn’t even try. Insurance companies have access to an amazing amount of medical information through the Medical Information Bureau, so even if you attempt to obscure the facts, there’s a good chance an insurance company will find the information it needs. In addition, if the insurance company discovers you have withheld information, it will look at everything else much more closely. And if you died as a result of the illness, your insurance company may opt not to pay your death benefit.

There are a number of simple steps you can take to make sure you get the best possible results at your medical exam:

  • Get a good night’s sleep the night before the exam
  • Fast for eight hours before the exam if possible to ensure the most accurate results
  • Don’t smoke for at least one hour before the exam
  • Avoid caffeine for at least one hour before the exam
  • Avoid alcohol for at least eight hours before the exam
  • Don’t engage in strenuous exercise for 24 hours before the exam
  • Limit your consumption of salt and cholesterol for 24 hours before the exam
  • Cancel the exam if you get sick – even a minor infection can distort the results

My insurance agent advised me to convert part of my term life insurance to permanent life insurance. How does this work?

If you own convertible term life insurance, your policy contains a provision that allows you to convert the policy to permanent life insurance (cash value insurance) such as whole life, variable life, or universal life. Convertible term policies typically state that conversion must occur within a certain time after the policy is issued, or before you reach a certain age. Once the policy is converted, you enjoy all the benefits of cash value life insurance, including lifetime coverage, a more stabilized premium structure, and the tax-favored buildup of cash value. (You will pay a higher premium for the cash value insurance.) And, you won’t be required to provide proof of insurability at the time of conversion.

For instance, if you have a $100,000 term life insurance policy, you can opt to convert $50,000 to permanent life insurance while keeping $50,000 in term life insurance. Then, you can either keep the remaining term insurance until the term period expires, or later convert the $50,000 term policy to permanent life insurance, depending upon your needs.

The premium you pay for the permanent life insurance policy will usually be based on your age at the time of conversion (attained age), but in some cases it may be based on your age when the original policy was purchased (original age). Ask your insurance agent for details.