Insurance is there to protect all that is valuable, and what’s more valuable than caring for your loved ones? There may be a lot of people that depend on you. Naturally, you want to make sure your loved ones are fully taken care of financially once you are gone. That is where a life insurance policy can help. But buying a life insurance plan can be tricky. Like all insurance, you want to make sure you are not only getting the best rates but also the best financial coverage, especially in this case since this insurance will most likely go towards your loved ones. This brief guide can help start you on your journey of hunting, analyzing, and purchasing the smartest life insurance policy for you.
What is Life Insurance?
Insurance is based on your needs. If you have a car, you buy auto insurance. If you have a home, it’s homeowners insurance. Since you have a life filled with those that you love and wish to protect, you would buy life insurance. Life insurance is financial protection for your loved one should you pass away unexpectedly. A payout will go towards your beneficiaries in the event of your passing so they can cover expenses like tuition, debts, and other payments that you would have usually picked up. This insurance gives you and your loved ones a little peace of mind knowing they will be supported even after you are gone. It can be very beneficial, so it is worth looking into it no matter your age or who you are currently supporting. Like all other insurances, this is a financial security measure as you never know what the future holds.
Steps For Buying Life Insurance
While all of these will be explained further in this piece, it is a good idea to get an idea of the general steps when it comes to buying life insurance. Insurance of any kind can be a winding road to navigate, and if you get lost, you could leave your beneficiaries and yourself without the right financial coverage. It is best to look at all the steps and proceed carefully.
If you are considering purchasing a policy, consider doing the following:
- Determine if you need life insurance
- Analyze the types of insurance
- Decide how much life insurance you’ll need
- Settle on a policy
- Consider adding any life insurance riders
- Compare insurance companies based on quotes
- Complete the application, interview, and medical exam (if applicable)
- Purchase the life insurance policy
Do You Need Life Insurance?
Technically, no. Unlike auto insurance, a life insurance minimum coverage is not required by law. So while you do not need this type of insurance, having it can be immensely useful. The primary purpose of life insurance is to provide for your beneficiaries financially after your passing, but it can be used towards other things like donating to charity or funding a business. No matter the route you choose, having a policy can be helpful for whoever is on the receiving end.
Is There a Life Insurance Minimum?
If you are already paying for auto insurance, you are familiar with the minimum liability coverage required by most states. Even homeowners insurance has some form of the minimum that insurance experts recommend keeping. With life insurance, it is mainly on the same lines as homeowners. You are advised to carry life insurance that is 10-15x your annual income. This would require you calculating your assets.
Investopedia suggests multiplying your annual salary by the number of years you have left until retirement in order to figure out a reasonable amount of life insurance. For example, if you are a 50-year-old who makes $35,000 a year, you could need $525,000 (15 x $35,000) in life insurance, assuming you strive to retire at 65. You could also try calculating the standard of living as a look into what your beneficiaries may need to maintain living expenses. But your actual coverage can always be higher or lower than calculated. These are both just suggestions to achieve some sort of guide for understanding how much life insurance coverage to put your money towards.
At What Age Should You Get Life Insurance?
There isn’t really a set age for buying a life insurance policy. Some argue that the younger you are, the cheaper life insurance will be. Premiums generally tend to be lower when you are younger, depending on your health status. As you develop more health problems, the more expensive life insurance policies can become. However, depending on the type of coverage you purchase, your policy can run out as you are younger and probably going to live beyond it, meaning you will have to repurchase. You are also, at a young age, faced with many types of payments like rent and student loans. This can lead to you putting off buying life insurance since it may not seem to be the most pressing matter at the time. It is best to look at your situation and budget before proceeding but at least keep the option in mind.
Types of Life Insurance
There are two main types of life insurance policies that any insurance company will offer: term and permanent. Term focuses on a set period of time it covers you, while the permanent will last your entire life as long as you stay on top of your premium payments. There are some variations of these types, but term and permanent are the two main categories for your life insurance policy options. The plans outlined below are three main ones: term life, whole life, and universal life. Other smaller types of insurance will be explored later on, including any riders (add-ons) you may want to opt for once establishing a preferred policy.
Term Life Insurance
Term life is, as the name applies, insurance for a set term. This policy usually covers you for either 10, 20, or 30 years. Once the term is up, the policy expires, and you are no longer covered. Insurance companies will sometimes offer you the option of converting your term life policy to a permanent one when its expiration date is coming up. Coverage and cost vary company by company, but term life insurance is typically the cheapest of the two options.
Whole Life Insurance
Whole life insurance is a type of permanent life insurance. As such, a whole life insurance policy never expires, unlike term life. As long as you stay on top of your premium payments, your policy will not lapse. Whole life insurance also includes what is known as “cash value.” Cash value is a component of whole life insurance that is an investment-like feature. Every month, a bit of the premium you pay goes into the cash value of your whole life policy. Over time, the amount grows. You can pull from this money to put towards things like help taking out a loan. How much this money grows and when you are able to borrow from it depends on your insurance company and whole life policy. The cost of whole life insurance also varies on several factors, not unlike other insurance types.
Universal Life Insurance
The second type of permanent life insurance is universal life insurance. This one is considered to be fairly complicated, so it should only be considered if you are comfortable with handling financial investments. Universal life insurance allows you to adjust your premiums and death benefits. It also comes with a cash value. As you make premium payments, part of the money goes to an investment account and accumulates interest, growing on a tax-deferred basis. There are three types of universal life insurance:
- Variable universal life - This type of policy ties cash value to investment options.
- Indexed universal life - This universal life insurance policy accumulates cash value based on specific index performances. This is the cheaper option and can be less risky of an investment.
- Guaranteed universal life - This type of universal life insurance policy has lifelong coverage with a limited cash value amount that stays constant.
How Much Insurance Should You Get?
Life insurance policies have to be customized, meaning it is vital to calculate things such as your income, debts, and any dependents you have. As a general rule of thumb, the more of these expenses you have, the more life insurance coverage you should get. If you are deciding on a policy while you are still relatively young, make sure to calculate future wages and student loans that your dependents may need to pay for in the event of your passing. Account for any children you have and how your spouse will need to adjust if they are left without your income. But also keep in mind as you calculate, the more coverage you need and the higher your premiums will be. While you do not want to be underinsured, it is smart to stay mindful of your assets and potential insurance rates. As a standard baseline, it has been found by some insurers that a healthy 30-year-old may possess an average coverage of around $500,000. But when it comes to insurance of any kind, each person is different. Take that time to assess your valuables and payments. Some companies may even offer an online life insurance calculator in order to assist you.
Gathering Personal Information For Buying Life Insurance
After deciding on what kind of coverage you need, you will want to begin compiling the information insurance companies may ask you for during the phone interview. We’ll cover the phone interview in more depth later, but for now, let’s look at some basic personal information that may be required.
- Driver’s license
- Medical history
While insurance companies do not keep the documents mentioned above, nor do each company request the same information, it is still helpful to have all of these at the ready when it comes to applying for life insurance. Health records will also be a big part when applying for this kind of insurance.
Do You Need a Medical Examination?
The short answer is, it depends. If you would like to simplify the process of buying life insurance, you may opt to go for a non-medical exam life insurance. How it works is you choose what kind of life insurance you would like (term, whole, etc.), and you include that you would like a no-exam policy. Under this, you would forgo the medical exam, and the insurance company would then base your quotes on your medical history. This would include former lab results, prescription history, and any health diagnosis listed.
The non-medical exam route could be good if you wish to limit contact with others during the COVID-19 pandemic. Life insurance purchasing has reportedly gone up during this time, and you could make it possible to receive insurance from the comfort of your own home.
If you are not opting for a non-exam medical policy, you would need to undergo the required medical examination for the life insurance application process. A technician or nurse will make a note of health factors such as your height, weight, blood pressure, and pulse. You will also need to provide a blood and urine sample. The medical examination can be worth it as its results can be used on other life insurance applications should you need to switch or postpone buying your policy, and health records will always come into play in some aspect of the process.
Should You Add Riders to Your Policy?
As life insurance is customizable, you may have to determine if you would like to add any life insurance riders to your policy. Riders are a way to make your policy a better fit for your personal needs and provide various layers of protection. While they do require you to pay extra, their benefits may outweigh their costs. Explored below are some life insurance riders you may consider, given your personal circumstances. There may be a variety of more specific ones offered through your insurance company, but those listed below are some major, probably useful ones, for the everyday insurance shopper.
Accelerated Death Benefit Rider
With an accelerated death benefit rider, the policyholder can use the death benefits if you are diagnosed with a terminal illness. Like what you will find with most of these riders, purchasing one is kind of a gamble. If you worry you will be diagnosed with a terminal illness or if anything of the sort runs in your family, this rider may be worth adding on. But it is always fair to assume the extra expense may not be worth it.
Disability Waiver of Premium Rider
For some insurance experts, this is considered to be one of the most popular life insurance riders. Under the disability waiver rider, your insurance company will waive your premium payments for a set period of time if you find yourself disabled/ This usually lasts for six months. Before going with this life insurance rider, make sure to double-check what your insurance company considers being “fully disabled.” These guidelines can vary by company, but if you end up falling under them one day, having this kind of rider can be very beneficial for you and your family.
Guaranteed Insurability Rider
A guaranteed insurability rider offers you the opportunity to buy extra insurance coverage at certain periods without having to go through a medical examination. This extra coverage may be purchased after significant life milestones such as having a child, getting married, or an income increase. While this can be very beneficial, guaranteed insurability rider may end after you hit a certain age. So, bear in mind that if you purchase it, you should use it before it expires.
Accidental Death Rider
If you are to die as a result of an accident, an accidental death rider will pay out an additional amount of death benefit. This additional amount is typically equivalent to the amount of the original policy. This means your family or beneficiaries could receive double the benefit. This rider can be very helpful for your family, but some argue it may not be worth the cost. You may have a higher chance of being disabled as opposed to killed, meaning something like a disability waiver rider could be better worth your money.
Child Term Rider
While children have virtually no need for life insurance, there is still a way to provide them with a spot in your policy. With a child term ride, you will receive a death benefit should your child die before a certain age. After the child reaches a specific age and the rider policy expires, they may begin looking into their own life insurance policy, or their existing rider can be converted. Separate whole plans for children can be a bit unnecessary, so the addition of this rider can be a useful protective measure.
Family Income Benefit Rider
Upon your death, if you have a family income benefit rider on your insurance policy, then your beneficiaries will receive the pay-out as a stream of income as opposed to a one-time payment. This can help alleviate any financial worries that come from receiving a large sum of money at once. If you worry that your family may not be able to handle such a financial increase, it may be best to look into a family income benefit rider. Some can manage, some cannot. It is best to discuss with your family or other beneficiaries their stance on the matter and decide if this rider could be worth it.
Compare Insurance Companies
Arguably one of the most important steps when it comes to purchasing insurance of any kind is to shop around. Never settle for the first few quotes you get. It is always wise to pull quotes from both local and national insurance providers in order to find the right price and policy for you. Cost varies from company to company because each insurer has its own algorithm and pricing. Coverage also varies as each has its own policies. How you are analyzed is also up to each company’s discretion. Each may set mortality expectations differently. This is why it is essential to shop around as much as you can. Collect quotes from every insurance company you look into just to get an idea. Quotes can be great baselines. While quotes are never a set-in-stone cost, they certainly can offer you a valuable look into just how much of your budget needs to be adjusted for your policy.
It is also important to speak to family members and friends about the insurance policies they have. Ask them about their plan and the company they have it under. As paying customers, they probably have some key insights into things like customer service and coverage level. They are also bound to give an unbiased opinion, unlike company websites which are just trying to sell you something.
If you need more insight on an insurance company, it is best to look through third parties. National Association of Insurance Commissioners (NAIC) and your state’s insurance department are just some of the number of resources available to learn about life insurance and what to be on the lookout for. Doing the appropriate research can be very beneficial when it comes to getting not only the best price but the best coverage for you. This can be a big investment, and you want to make sure the company you choose can actually provide for your dependents.
Should You Consult a Broker or Agent?
Due to this being a much more personal kind of insurance, as opposed to home or auto insurance, it may be beneficial to seek out an insurance broker or licensed agent to help you find a policy. A licensed insurance agent is someone who works for a specific insurance company and is knowledgeable in their policies. A broker, on the other hand, is someone who works for you and helps you hunt for the best policy. Brokers do more of the heavy lifting for you by going to companies and analyzing policies and cost. A company’s licensed agent works more in favor of the said company, but they are still very knowledgeable on the insurance you are looking for.
Either of these individuals can be very beneficial to consult with when it comes to life insurance. It all really comes down to what you are comfortable with and if you want said person to be in your corner. If you already have a good understanding of what company you want your policy under, consulting with an agent from that insurer can give you deeper insight. But most people probably feel like insurance is the wild west. There are so many avenues to turn down, and you do not want to be caught in a tricky position, especially when a payout for your loved ones is on the line. This is where a broker may be more helpful, but you will eventually have to interact with your chosen company yourself. It just depends on where you want to start and how confident you are navigating the insurance world.
Also, keep in mind that it may take a few tries to find a licensed agent or broker with whom you can actually get comfortable. You are discussing pretty sensitive topics with them, and it is best to do this with a person that you feel you can trust. It is best to look for someone who clearly can understand your financial situation, is good at explaining all the aspects of your policy, answers any and all questions, and works with you until you are confident enough with what you put your money towards. Finding a licensed agent or broker who checks off all these boxes can be a whole process on its own, so be patient. You want to get insurance right, no matter if it’s for your life or other assets.
You could also just start by asking family and friends about their insurance situation. They may be able to give some reviews about what they like or dislike about their insurance provider. It is definitely more valuable to speak with paying customers as opposed to just reading what insurance companies highlight on their websites. People you know and trust are always reliable sources when it comes to trying to find an insurance company.
Completing The Application And Interview
Reaching out for quotes is very helpful in your life insurance planning, but the actual application and subsequent interview are even bigger factors in your overall life insurance cost. After filling out the application, you will be asked to do a phone interview with the insurance company. The purpose of this is to collect necessary personal information about you. During the interview, you will be asked about your lifestyle, medical situation, and personal details. You may have to give information regarding any car accidents you have been involved in. Make sure you do not leave anything out, either accidentally or intentionally. Insurance companies will go back and evaluate your history and/or other life insurance applications to confirm the information you have given. If you are not honest and they discover something in your background, your premiums could be higher than the quotes you initially received.
Naming a Beneficiary
A beneficiary is a person or persons who will receive the death benefit once you pass away. Usually, people opt for naming a child or spouse as the beneficiary on the policy but organizations may also be named. You could even donate your death benefit. Some other avenues for “naming” a beneficiary include setting up a trust, listing your estate, your business, or just someone else very close to you. Take time when deciding on a policy to consider who will receive these financial benefits upon your death. Minors are not eligible to receive the death benefit, so that is where trust may come into play if you are a parent who wishes to name your child.
You also have the option to set up a secondary beneficiary. If the primary beneficiary is unable to receive the death benefit, it will go to the second person named. Should the first two named be unable to take the death benefit, you can name a final beneficiary. Keep all this in mind when deciding on a beneficiary. It is best to think of at least three people who depend on you or others who could handle the death benefit. Also, while this may seem like common sense, remember to inform your beneficiaries that you have named them on your policy. You do not know what could happen to you after establishing a policy, and it is best the people you have listed are aware of the decision you have made. It is really a common courtesy.
What to Avoid When Buying Life Insurance
As insurance can be tricky to navigate, you may find yourself running into some issues. While this section does not cover everything that could go wrong in the insurance shopping process, it gives you some idea of little things to double-check once you find a policy you are thinking of committing to.
Firstly, make sure that you are buying the correct kind of insurance. Of course, everyone wants the cheapest rates they can get, but this may come with the issue of being improperly insured. A common example may be buying a term life insurance policy while you’re only in your twenties. Even if you purchase the 30-year plan, you will be about 50 when it runs out. Your life will only really be starting, and you could use such insurance as your age increases. If this happens, you will need to go back and start the process all over again. This time your premiums could be greater as you are purchasing a policy at an older age. This fact also serves as a reminder never to wait too long in general to purchase a life insurance policy.
In the same realm of situations, you may find that you have miscalculated and do not actually have a policy that fully covers expenses your beneficiaries need to pay for. This could leave your dependents in a very unfortunate place. You may also accidentally pass on life insurance riders when they could be necessary for your living situation. It is best to truly sit down and analyze all aspects of life to see what could be in danger should you suffer an untimely death. While this is never a pleasant topic to discuss around the dinner table, it is a crucial one.
Are There Any Discounts on Life Insurance?
As you go buy life insurance, depending on the insurance company you choose, there may be some discounts available to you. Explored below are some common discounts that may be available to you. But keep in mind, this is not all of them, and not all insurance companies may offer these. Still, they could be worth looking into as you set up your policy and committed to an insurer.
If you regularly workout, your insurance company may offer you a discount on your life insurance policy. Some insurers will ask how often you exercise for your health examination, and based on your answer, they may give you a break on rates. If they do not ask, still try mentioning it and see if they tack on any discounts.
Staying away from high-risk activities can help your life insurance premiums stay low. An insurance company may consider you at-risk for participating in extreme activities. If you express an interest in rock climbing or skydiving, your insurance cost will go up. If you avoid such activities, your premiums won’t necessarily go down (you won’t receive a break), but it will keep them from being increased. Always let your insurance company know if you give up your thrilling hobbies.
Giving up smoking and using tobacco can save you a few dollars on your life insurance policy. After a few years of quitting, let your insurance company know. They may give you a break on your premiums.
Some insurance companies may offer you discounts if you are part of a select group of people. This includes military personnel, educators or students, and homeowners. If you are part of an organization, like AARP, you may also be eligible for a discount depending on the company you are insured with. Even if the insurer does not ask about your status, let them know. They may still have hidden discounts available.
Policy-based discounts may also be offered by your insurance company of choice. This can be done through a variety of options. If you opt to get notices through email, you could be rewarded for going paperless. Perhaps you stick to one company for many years. This can potentially grant you a loyalty discount. How you go about managing your life insurance policy can help to reduce the cost over time.
Review Your Plan
According to the Insurance Information Institute (III), you should review all your insurance plans once a year. This includes your life insurance policy. Should any significant changes happen in your life, like getting married or health crises, your insurance will need to know. This may also help you with your premiums. As mentioned above, some lifestyle changes can fluctuate your premiums. While all changes may not be great for your rates, it is important to make sure your policy still is the right fit for you. If it is not, it never hurts to hunt for new quotes to see if you are fit for a different policy from another insurance company. Settling with one insurance policy forever may seem tempting, but it is wise to continuously be on the lookout.
Life Insurance Alternatives
While life insurance is undoubtedly encouraged for everyone, you may run into a situation where you keep being denied or unable to receive a policy for whatever reason. In the case of this, there are a few alternatives to life insurance.
- Self-insure - If you can’t find life insurance, be your own. Life insurance is intended to make sure your loved ones have enough money to continue on with their lives and pick up where you no longer can. This can be done through you simply saving money for them in an investment account.
- Investing - Speaking of investments, traditional investing could also work. Putting aside money while you are alive and letting it collect can allow your family to then cash them in for a lump sum.
- Mortgage Insurance - It isn’t very uncommon for your largest expense to be your mortgage. You may be eligible to get a mortgage insurance policy that can help cover payments should something unfortunate happen to you. But, be sure to carefully analyze these policies and weigh the pros and cons.
- Accidental Death & Dismemberment (AD&D) Insurance - This insurance type protects your loved ones in the event of death with a set monthly amount of money or one-time payment. The money is meant to replace the cost of your income. Be sure to review the policy before agreeing to make sure the coverage is appropriate for you.
- Employers - If you are having trouble covering the cost of life insurance, check with your employer and see if they offer a policy as part of your work benefits. You may be able to receive some level of life insurance coverage through them.
Selecting The Best Life Insurance Policy For You
Now that you’ve learned a little about life insurance and the process of buying it, it is best to think about what kind of policy would be right for you. If you are someone who likes the idea of life insurance going hand-in-hand with financial investing, maybe a universal life insurance policy would be right for you. If you have children and would like to add them to your policy before they can apply for their own insurance, tacting on a child rider to your insurance plan could be worth it. Some people fear accidents that can leave them disabled. If you are someone that believes you may benefit from paying for such coverage, it is best to look into the disability waiver rider. If you feel more comfortable knowing your plan will never expire, strive for whole life or universal life insurance. The beauty of life insurance is that it’s customizable because every person is different. Having some level of an insurance plan that protects those things that make your life your own will always be worth the cost.
You’ve Applied For Life Insurance: Now What?
Wait For Underwriting Results
Once you’ve completed your application and phone interview, all you can really do for the time being is wait for the underwriting results. Underwriting is comprised of your application, interview, and medical exam. The insurance company analyzes all this information to determine how high or low your premiums will be. They will also take time to cross-reference what you have reported and what actual databases say about you. After this is completed, you will fall into a specific health classification. Based on your history, you could be considered a preferred plus, preferred, standard plus, or standard. These run from highest to lowest, preferred plus being the best. If you have a very poor or complicated history, you may be given a substandard rating.
With life insurance, nothing is valid until you pay your first premium, and, unfortunately, the underwriting process can take a few weeks. This means there are many days when your dependents are unprotected. If this concerns you, according to Forbes, you may be able to attach a check for your first premium payment to your application and lock in temporary coverage, but double-check with your insurance company before doing so. This may not work with some insurers.
Sign And Pay
After the underwriting process, you will receive a policy offer. If all looks good to you, sign the documents and pay your first premium. As mentioned above, your policy is not active until this initial payment goes through. Make sure you also take time to review the policy documents and save copies of them. Let your beneficiaries know about the policy and where they can access your documents, electronically or as hard copies. Once all has been completed, you officially have life insurance, and your beneficiaries have financial coverage. Be sure to keep up on your payments, and you will have some peace of mind that loved ones will be supported even after you are gone.