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Life Insurance and Why it's Necessary - Part 3

Life Insurance and Why it's Necessary - Part 3

| November 16, 2022

Last week we spoke about some of the benefits of having life insurance and who needs it. This week we are going to talk about the application process and how to determine exactly how much life insurance you need for your specific scenario.

Things to Consider Before Purchasing Life Insurance

Now we need to look at some things to consider before you apply for life insurance. It is very important to analyze your financial situation and determine how much money would be required to maintain your beneficiaries’ standard of living or meet the need for which you’re purchasing a policy. After all, in the simplest of terms, maintaining your family's quality of life after you are no longer able to provide is what getting life insurance is all about. For example, if you are the primary caretaker and have children 2 and 4 years old, you would want enough insurance to cover your custodial responsibilities until your children are grown up and able to support themselves.

You might research the cost of hiring a nanny and a housekeeper or using commercial child care and cleaning services, then perhaps add some money for education. Include any outstanding mortgage and retirement needs for your spouse in your life insurance calculation. Especially if the spouse earns significantly less or is a stay-at-home parent. Add up what these costs would be over the next 16 or so years, add more for inflation, and that’s the death benefit you might want to buy—if you can afford it.

How Much Life Insurance to Buy

So how much life insurance should you buy? Many factors can affect the cost of life insurance premiums. Certain things may be beyond your control, but other criteria can be managed to potentially bring down the cost before applying.

After being approved for an insurance policy, if your health has improved and you’ve made positive lifestyle changes, you can request to be considered for a change in risk class. Even if it is found that you’re in poorer health than at the initial underwriting, your premiums will not go up. If you’re found to be in better health, then you can expect your premiums to decrease.

Let’s break the process of purchasing life insurance down into some tangible steps. We touched on this a little but let’s get them in order so that if you haven’t gone through the process of buying insurance and considering what type, you can have a roadmap to work with going forward. 

Step 1: Determine How Much You Need

First, you should think about what expenses would need to be covered in the event of your death. Things like mortgage, college tuition, and other debts, not to mention funeral expenses. Plus, income replacement is a major factor if your spouse or loved ones need cash flow and are not able to provide it on their own. There are helpful tools online to calculate the lump sum that can satisfy any potential expenses that would need to be covered.Now, you can start an application, but first, you need to know that there are many factors that will affect the cost and premiums you pay for life insurance. Let’s go over those as we talk about step 2 - preparing your application.

Step 2: Prepare Your Application

Life insurance applications generally require personal and family medical history and beneficiary information. You will also likely need to submit to a medical exam, and you will need to disclose any preexisting medical conditions, history of moving violations, DUIs, and any dangerous hobbies you may have if you are a daredevil, like auto racing or skydiving. Standard forms of identification will also be needed before a policy can be written, such as your Social Security card, driver's license, or U.S. passport. Here are some of the standard things you’ll need to answer on any application.

  • Age: This is the most important factor because life expectancy is the biggest determinant of risk for the insurance company.
  • Gender: Because women statistically live longer, they generally pay lower rates than males of the same age.
  • Smoking: A person who smokes is at risk for many health issues that could shorten life and increase risk-based premiums.
  • Health: Medical exams for most policies include screening for health conditions like heart disease, diabetes, and cancer and related medical metrics that can indicate risk.
  • Lifestyle: Dangerous lifestyles can make premiums much more expensive.
  • Family medical history: If you have evidence of major disease in your immediate family, your risk of developing certain conditions is much higher.
  • Driving record: A history of moving violations or drunk driving can dramatically increase the cost of insurance premiums.

Step 3: Compare Policy Quotes

When you've assembled all of your necessary information, you can gather multiple life insurance quotes from different providers based on your research. Prices can differ big time from company to company, so it's important to make the effort to find the best combination of policy, company quality rating, and premium cost. Because life insurance is something you will likely pay monthly for decades, it can save an enormous amount of money to find the best policy to fit your needs.

There you have it! Next week we will get into how life insurance works and how you can make your policy work for you in the best way possible.

Until next time…

One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.