7 essential life insurance questions to ask before you buy

Josh Monen

essential life insurance questionsIf you're shopping for life insurance, you're probably wondering how much you need.

You don't want to be over-insured and pay too much for your monthly premium. But you also don't want to be under-insured and put your family in a financial strain if you were to die unexpectedly.

NetQuote.com interviewed several financial advisers and came up with the seven most important questions to ask when deciding what policy type and how much life insurance you need.

What are the different types of life insurance?

Term life insurance: this is the most basic type of life insurance policy. You simply pay a certain amount each month for the amount of life insurance you want (for example, $30 a month for a $500,000 policy).

Your rate is locked in for a predetermined period such as 5, 10 or 20 years. If you die within that time period then your family gets paid the death benefits you were insured for.

Whole life insurance (also known as cash-value, or permanent insurance): These policies are usually more expensive because you're locking in a rate for the rest of your life, not just a period of time as with term life insurance.

Whole life insurance also combines death benefits with a savings component or cash value that is reinvested and tax deferred.

7 essential life insurance questions to ask before you buy

1. What's your income?

The first step in determining how much life insurance you need is to figure out how much annual income you would need to replace.

The next step is to figure out the number of years you expect to work prior to retirement.

Christopher Huntley, an independent insurance agent with Huntley Wealth, says, "The more money people make, the more they spend. Therefore, higher income earners want and buy more life insurance."

2. How old are you?

Generally speaking, the younger you are, the less you'll pay for life insurance. "Health and age are the two primary drivers of life insurance cost," says Terry Bobo, financial adviser with USA Financial, an organization of independent financial companies based in Ada, Miss.

This makes sense because as you age, the sooner you are likely to die, and therefore you're a "higher risk" to the insurance agency.

Bobo says, "Buy young if you can. If you're a parent and cannot afford permanent coverage, purchase term insurance and look to convert the policy to a permanent policy when you can afford to."

Even though life insurance is usually more appealing when you have dependents, it's not a bad idea to lock in a lower rate before you start having kids.

3. Are you married (and does your spouse work)?

Life insurance is for your family, your spouse and your kids.

And if you're married, are you financially prepared if your spouse who takes care of the kids were to die?

Steven Schwartz, vice president of the Executive Benefits Division at HUB International Northeast, says, "When a spouse takes care of the household and children, replacing all those tasks would be very costly."

4. Do you have kids or dependents?

If you have kids or dependents, such as family members you care for, think about all their future financial needs, such as a car (and auto insurance) when they turn 16, money for college and maybe a down payment for their first home.

"I always want to make sure that I have enough life insurance to pay for my kids' future needs and dreams," Schwartz says.

5. Do you have any debt?

If you don't want to burden your family with your debt when you die, then it's critical to factor it into the amount of life insurance you need.

Most people think of the mortgage as the only debt, and often this is true. However, student loans and any loans you co-signed for can often be overlooked.

However, you're usually not liable for a spouse's debt if it was obtained prior to marriage says Karen Lee, a financial planner and author of "It's Just Money, So Why Does It Cause So Many Problems?" Lee also suggests researching the laws of your state just to be sure.

6. How much savings do you have?

In 2012, insuranceQuotes reported that 28 percent of American families have no emergency savings. Therefore, many income earners can't rely on savings to take care of their family in the event of their death.

However, even if you do have a significant amount saved, you may not want to use that money to replace your income when you die.

Schwartz says, "People don't usually live off their savings while they're alive, and they wouldn't expect their surviving family to live off the savings when they're gone."

Retirees, on the other hand, usually do live off of their savings and therefore have different life insurance needs than younger people.

It's also important to make the distinction between the types of savings. If you have money in a retirement account such as a traditional 401(k), that money typically can't be touched without significant penalties and taxes prior to age 59 and a half, says Matthew Trujillo, a certified financial planner with the Center for Financial Planning..

7. How much do burials typically cost?

The cost to bury a person varies by region and how you want to be buried. According to Schwartz, funerals cost between $5,000 and $25,000, and expenses may include: casket, grave, funeral home and director's services, or a headstone.

Therefore, it's important to add at least $25,000 for burial costs when deciding how much life insurance to buy.