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8/05/2013 @ 8:56AM |9,771 views

Top Four Questions To Ask Before Buying Life Insurance

Considering the purchase of life insurance? Before making the commitment, make sure you know what you want the life insurance to do for you and your loved ones. In a recent study, consumers indicated “covering burial expenses” and “replacing lost wages” were the top reasons for owning life insurance.¹ Many consumers also see value in owning life insurance to transfer wealth, pay estate taxes and supplement their retirement income.

Both term and permanent life insurance can provide for these needs, though they are very different products. Term life insurance provides your loved ones with financial protection for a specific “term,” or period of time (e.g., 10, 20 or 30 years). Term insurance is generally the most affordable type of insurance and allows you to get the greatest amount of coverage for the lowest initial premium. Where term insurance covers only a certain period of time, permanent life insurance can cover your entire lifetime, provided you pay the necessary premiums. Permanent policies also give you the ability to build equity called cash value.

Which may be right for you? To make an informed decision about the purchase of life insurance, start by asking yourself these four questions:

Question 1: Why do you need life insurance?
The main reason to own life insurance is to provide your loved ones financial protection in the event of your premature death. And as time goes by, the needs of what the insurance will provide typically evolve as well. In their early 20s and 30s, most individuals purchase life insurance to cover items such as housing, raising children and future income potential. As people move into their 40s, 50s and 60s, their focus also includes supplementing retirement, estate planning and leaving a legacy.

Question 2: How much coverage do you need?
There are numerous online calculators designed to help you determine your insurance needs. However, many of them do not take into account lifestyle impacts and your needs in the future. The best way to figure out how much life insurance you need is to sit down with a financial advisor, who will assess your needs based on your specific financial goals and circumstances.

Question 3: What is your budget?
The primary reason to purchase life insurance is to protect against the financial risk of premature death. If you have budgetary restrictions and the amount of coverage you require can only be attained today by purchasing term insurance, you should buy term insurance. The worst-case scenario would be buying insurance that is too expensive and determining shortly thereafter you cannot afford it and let your policy lapse. If term insurance is being purchased, make sure you ask if your policy can be converted to a permanent policy. Many term policies have the option to convert some or all of it to permanent insurance for a certain period of time without having to provide additional proof of insurability. If you’re beginning the buying process with budget flexibility, you can consider the full range of options—from lower-cost term insurance to permanent policies that offer more benefits.

Question 4: What are your other financial priorities at the moment?
The decision to buy life insurance should never be made in isolation. You need to consider how much money your loved ones would need if you were suddenly gone and could no longer provide for them, and determine how much you can spend on life insurance relative to other financial commitments.

Once you answer these questions, you’ll be better positioned to think about which insurance product to purchase—term or permanent life insurance. To learn more about the benefits of each, read Northwestern Mutual’s white paper, Term or Permanent Life Insurance: Which option is right for you?


¹ Source: Insurance Barometer Study, 2013 LIMRA

The Northwestern MutualVoice Team is a group of professionals who share insights and opinions from experts and industry leaders across the enterprise. Our vision is to inspire others to take action and plan for their financial future through topics ranging from financial planning, retirement planning and distribution strategies, wealth accumulation and preservation, to leadership, philanthropy and innovation. 

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