Wed Jun 12 2024, by Tyler Gardner

Five Important Factors to Consider Before Buying Life Insurance

If you are considering purchasing life insurance, here are five things that you need to know.

I'm Tyler, a former financial advisor and portfolio manager. Now, I create financial content for free so that you don't have to pay for it.

1. Consult an Independent Financial Advisor

To learn about insurance products, do not go to an insurance agent. They make high commissions by selling you their own company's products, whether they are in your best interest or not. Instead, consult an independent financial advisor who can offer you unbiased advice that is tailored to your needs for a flat fee.

2. Know Your Reason for Buying Life Insurance

Understand why you're actually buying life insurance. If other people depend on your income, life insurance is a good idea. To calculate how much coverage you need, consider what their expenses would look like for the next 15 to 20 years without you. Include factors like childcare, housekeeping, and outstanding mortgage payments. Also, make sure to adjust that number for inflation, and boom, there's your coverage estimate.

3. Choose Term Life Insurance

Term is best, invest the rest. Term life insurance covers a set period of time and is much cheaper than whole life insurance. It protects your dependents until they have earning power of their own. However, if you insist on covering your children throughout your entire life, consider putting $7,000 into a custodial Roth IRA for them at birth, investing in a low-cost index fund, so they'll have a million bucks waiting for them when you die.

4. Be Aware of Premium Increases

Remember that life insurance premiums increase over time. If it's a stretch now, it will most likely be unaffordable later. And if you stop paying premiums, bye-bye life insurance.

5. Life Insurance Will Not Make You Rich

Lastly, understand that life insurance will not make you rich. Insurance agents often try to sell you annuities and indexed universal life policies with promises of risk-free financial freedom. But what they're not telling you is that they’re speaking about their own risk-free financial freedom—making 75 to 90% commissions off those very products. You would make much more money by investing in a low-cost index fund within a Roth IRA.

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