Life Insurance Checklist

Generally, life insurance coverage isn't a great expense, but many people are intimidated by the buying process. Buying financial products requires an evaluation of one's own finances and an understanding of the products available on the market. There are so many options to choose from that it scarcely seems likely that anyone could make the best choice, right? After reading the following checklist, you may have a different conclusion. Let's look at what's involved in making a wise purchase and what each step demands of you.

- identifying your insurance needs - choosing the right products - shopping around - the application process - collecting on the policy - making use of the proceeds

IDENTIFYING YOUR NEEDS. More would-be buyers are terminally frustrated by this step than by any other, I would wager. But if you can trace your household expenses for a month, you have the capacity to calculate your coverage needs. Make a list of your future financial needs by category: income replacement, higher education, debt amortization, estate protection, and so forth. Yes, your coverage needs will change in the future, but in most cases they change in a predictable manner.

Divide your future into ten-year intervals and evaluate your coverage needs for each period. ("If I died at age 50, how much money would my family depend on for support? Our annual expenses right now are…") Then, beginning with the oldest you imagine ever being, work backward by ten-year periods, evaluating your expenses. Write down how much coverage your survivors will need and the reason for that coverage. Here's an example of what your list might look like if you started your plan at age 30:

Between ages 80–90, 70–80, and 60–70, your family will not rely upon you for financial support. However you have a large estate, whose taxes you'd like to pay with tax-free income, so you need $100K for estate protection and $250K to fund a buy-sell agreement. If you died between ages 50 and 60, your family would require $50K for income replacement. If you died between ages 40 and 50, your family would require $200K for children's tuition, plus $300K for income replacement. If you died between now and age 40, your family would need the aforementioned funds, plus another $150K of income and $300K for the mortgage.

At this point, you had better make an adjustment for inflation. At age 60, how much money will equate to $50K + $150K + $150K of today's dollars? (If the math is outside of your expertise, there are numerous online calculators for the task, and any decent life insurance agent can assist you for free.)

CHOOSING THE RIGHT PRODUCTS. For each ten-year increment you listed in the previous step, you will purchase one or more life insurance policies.

It's hard for some people to make choices because of the great abundance of options before them. My advice is to keep it simple. There are three basic types of life insurance (term, whole, and universal) and all other types are variations on these three. Unless you are really quite disciplined and vigilant, I recommend only considering the three basic types because they are, by and large, the simplest. For any lifelong life insurance needs, go with a permanent insurance policy (whole or universal). For all others, go with term life insurance (which is the cheapest and simplest of all). Here's how your plan should look now:

Carry $350K of permanent life insurance (estate protection + buy-sell agreement). Carry a $50K, 30-year term life insurance policy (income replacement). Carry a $175K, 20-year term life policy (more income replacement, college tuition). Carry a $450K, 10-year term life policy (more income replacement, mortgage payment).

You just built a financial plan. If you were to die tomorrow, your family would collect on all four policies mentioned above. If you were to die between the ages of 50 and 60, two of your policies would have expired, but two would still be in force, and your family would collect on those.

SHOPPING AROUND. The question of where to buy your insurance presents more options than any other, and it does make a difference which insurer you choose, particularly for individuals with special circumstances that affect their insurability, such as a health concern. Different insurers have different beliefs about different risks, so some of them are better for cancer survivors, others are better for sufferers of emotional disorders, etc.

You can find the best price by comparing quotes online and/or making use of a qualified agent (again, this is especially true for individuals with impaired insurability). Avoid agencies that contract with fewer than 20 different insurers. Some agencies/websites only shop prices from 1–5 companies, and that won't give you a good idea of who can provide the cheapest coverage for your unique mortality risk. (The agency where I work contracts with over 80 different life insurance companies.) Before deciding you've found the right site, peruse the list of insurers that the agency represents. Make sure it includes trustworthy, reputable names.

THE APPLICATION PROCESS. It's pretty straightforward and doesn't involve much decision making on your part. Be as forthright as you can be. If you're in doubt as to whether to inform your insurer of certain details, err on the side of caution or ask your agent for advice.

COLLECTING ON THE POLICY. This too does not require your attention or that of your survivors. If your agent is at all worth his/her salt, he/she will ensure the delivery of your death benefit (in the event of your death). We've had death benefits delivered in cases where survivors didn't even know that the decedent was covered by insurance.

MAKING USE OF THE PROCEEDS. This is a serious issue because people tend to mismanage large cash receipts, and if your family is depending on a death benefit for long-term support, mismanagement means disaster. Again, your life insurance agent can be of great assistance. You can plan in advance how the death benefit is to be issued (lump sum, lifetime income, fixed allowances, etc.). If necessary, you can make a trust the recipient of the death benefit and arrange for the trustee to dispense with the life insurance proceeds however you see fit.

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