4 Questions Most People Forget To Ask When Considering Life Insurance
Written by
Laura Bogart
Edited by
Kristen Mae
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You’ve worked hard to reach a place of financial stability. Started an emergency fund. Learned how to invest. Taken on a side hustle that has made your 5-to-9 as productive as your 9-to-5. And, of course, you’ve been building up your retirement savings, including taking advantage of an employer match.
Now you’re at the next stage of your financial growth, and you’re looking into topics like estate planning and purchasing life insurance.
Sure, you likely get some sort of life insurance through your employer, but is that coverage enough to really serve you and meet your family’s needs? Probably not. Odds are, you’ll need to purchase some life insurance on your own. When you sit across from a broker, there’s so much information to process that it’s easy to forget core questions that can make or break your family’s financial future.
Many people forget these questions, but you don’t want to. Keep them top of mind as you search for the right insurance plan.
1. What Debts Will My Family Still Have?
Naturally, the idea that you might pass away suddenly is too upsetting to contemplate. It feels morbid. But if you don’t think about it — at least, in terms of the amount of debt your family could carry without your income — you could be leaving the people nearest and dearest to you holding a major financial burden.
When you’re considering how much coverage you need, make a list of what your loved ones will be on the hook for, like car loans, mortgages, children’s education, credit card debt or even caring for other dependents, such as elderly parents or grandparents.
Despite the common notion that a quality life insurance policy only covers your salary, you’ll need it to serve as a more comprehensive financial buffer.
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2. Will the Money My Family Gets Be Subject to Taxes?
It seems hard to believe, but yes — if you own your life insurance policy at the time of your death, the death benefit could be included in your taxable estate — potentially subject to estate taxes if your estate exceeds federal or state exemption thresholds. While the death benefit itself is generally income tax-free to beneficiaries, including it in your estate may increase your estate tax liability.
To avoid this, many people transfer ownership of the policy to a trusted family member or an irrevocable life insurance trust (ILIT). This keeps the death benefit out of your taxable estate and helps ensure that your beneficiaries receive the full payout you intended.
3. Am I Better Off With Whole Life or Term Life Insurance?
You might think life insurance is just, well, life insurance — the amount of money it pays may differ, but it’s all fundamentally the same, right?
Not quite. Whole life insurance (or universal), true to its name, offers lifetime coverage (as long as you pay your premiums) and guarantees a death benefit regardless of when you die. Conversely, term insurance provides coverage for a set period (or term) of 10, 20, or 30 years. If you pass away during that term, your beneficiaries receive the death benefit — however, if you outlive the term and haven’t renewed your policy (assuming it’s renewable), they won’t get anything.
Term life is generally much less expensive than whole life — especially if you’re relatively young and healthy. However, it has no cash value, unlike whole life, which allows you to build cash value over time. You can borrow against or withdraw from this cash value to meet other life goals, like putting a down payment on a house or car, or paying for a child’s education.
Term insurance is generally best if you’re looking for funds that protect your family during a defined period and address specific needs, such as replacing your income, covering a mortgage, or funding childcare. If you’re looking for a policy that can assist you with estate planning, support lifelong dependents, or transfer wealth, whole life is a better fit.
4. Is My Policy Set in Stone Forever?
You can breathe a sigh of relief — the answer is not at all. Indeed, you should review your policy after major life events such as marriage or divorce, the birth of a child, purchasing a new home, or getting a new job. You should also pull out your policy every two or three years to reassess your coverage amount and beneficiaries.
Bottom Line
Purchasing life insurance is a major decision for you and your family. Take a deep breath and avoid feeling overwhelmed by keeping a few key questions in mind when you sit down with your broker.
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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