How To Buy Life Insurance
Buying life insurance requires thinking about who you want to support after your death and how much money they’ll need for their current and ongoing living expenses in addition to getting quotes from multiple companies.
Key Takeaways
- The process of purchasing life insurance involves considering various factors like policy type and coverage, naming beneficiaries, calculating the death benefit amount, completing an application and in some cases taking a medical exam.
- Life insurance is categorized into term policies and permanent policies, the latter of which build cash value and do not expire.
- The decision to buy life insurance and the amount of coverage you need is based on an assessment of your financial obligations, your existing assets and the financial well-being of your dependents.
Factors to Consider
First, think about what you’re looking for in a policy:
- Type of policy: Choose between term and permanent, and within permanent, whole, universal, variable universal and indexed universal.
- Coverage amounts: As some policies have coverage limits, determine a reasonable range for your death benefit amount (more information on calculating how much insurance you need is below).
- Age: Some policies have issue age ranges. Expect it to be more difficult to find affordable life insurance for seniors, as older adults have higher mortality rates compared to younger adults.
- Gender: Expect to pay more if you are a male, as men have lower life expectancies compared to women.
- Relationship status: If you’re married or in a domestic partnership, you may want to buy joint life insurance that covers both you and your spouse/partner.
- Number of children: The more children you have, the greater your death benefit amount will be, especially when you consider the cost of a child’s education, taking inflation into account.
- Income: Your income level will greatly influence your death benefit amount, particularly if you are the primary wage earner.
Compare Companies
Be sure to research companies and their policies and get multiple life insurance quotes for the same death benefit amount, making an apples-to-apples comparison.
Choose Beneficiaries
Your life insurance beneficiaries can be:
- One or several people
- Your partner/spouse
- Your children
- A charitable organization
- The trustee of a life insurance trust that you’ve created
- Your estate
Keep in mind that you can change your beneficiaries as long as you’re the policyholder. If the beneficiaries are irrevocable, however, you’ll need to get their consent before you make any changes.
Pick Riders
The life insurance riders you can choose depend on your company and policy, but some common riders include:
- Living benefit riders: Living benefit riders allow you to access part of your death benefit during your lifetime if you are diagnosed with a terminal, critical or chronic illness.
- Accidental death benefit: An accidental death benefit provides an additional benefit if you die in an accident.
- Long-term care: If you need long-term care because you are unable to perform activities of daily living independently, a long-term care rider would give you money for long-term care services, both skilled and non-skilled.
Calculate How Much You Need
There are various methods for calculating how much life insurance you need, from taking multiples of your salary to adding up your debts, income, mortgage and child’s education costs. You can also calculate your death benefit amount with the insurance agent or financial advisor after determining:
- Who you want to protect
- How long they will need financial support
- If any of your dependents are disabled or have special needs
- Your amount of debt/savings
- Whether or not you will be responsible for paying for your child’s education
- If your partner will need help funding their retirement
Complete the Application
The life insurance application may or may not include a health questionnaire, even for policies that don’t require medical examinations. Fill out the application truthfully, as giving false information counts as life insurance fraud.
Take a Medical Exam
Your underwriting process may include a medical exam, an assessment of your health and your family’s health history. Insurance companies require medical exams in order to assess your overall risk level, which will determine whether they want to insure you and, if so, how much you’ll pay in premiums. Additionally, medical exams can prevent insurance fraud if someone lied about their health on their application.
Sign the Contract and Pay Premiums
Your policy will become active on its effective date after you sign the contract and pay your first premium. From then on, you’ll pay premiums on a regular basis, typically monthly, although single-premium life insurance exists, which requires only one up-front payment.
Term
Term life insurance lasts for a finite amount of time, typically between one and 30 years. Because it’s not permanent and doesn’t have a cash value component, term life insurance is cheaper than permanent policies, usually. The death benefit is not guaranteed if you outlive the term, although you may be able to renew it for another term or convert it to a permanent policy at the end. You will pay higher premiums in both cases.
Whole
The most common type of permanent policy, whole life insurance has a cash value component that grows at a fixed interest rate. As long as you pay your premiums, the death benefit is guaranteed. Whole life insurance also can earn dividends, which the company can pay out to you.
If you want a life insurance policy to cover your final expenses only, consider final expense coverage, a type of whole life insurance meant to cover your medical bills, legal costs, accounting costs and funeral/burial expenses. This is a cheaper option than a standard whole policy, and it may not require a medical exam.
Universal
Another type of permanent policy, universal life differs from whole life in that you’ll be able to adjust your premiums and death benefit amount throughout the lifetime of your policy. Your cash value can grow based on a fixed interest rate, like whole life, or, it can grow based on:
- Market index: The cash value of indexed universal life policies grows based on a market index like the S&P 500. Sometimes, there is a floor that the interest rate can’t go under, like 1% or 0%, guaranteeing that the cash value amount won’t decrease even if markets perform poorly. However, having a floor also means having a ceiling that caps earnings.
- Investments of your choosing: Variable universal life policies have the greatest earning potential as well as the greatest risk, as you’ll choose your own investments from stocks, bonds and mutual funds. If you have a high tolerance for risk, VUL may be the right policy type for you.
Generally, you can buy life insurance for anyone you have an insurable interest in. An insurable interest can be legal, financial or emotional, and it’s required for life insurance policies. You may have insurable interest in:
- Your spouse
- Your dependent children
- Your business partner
- Your parents (e.g., if you co-signed their debt or will inherit their mortgage)
- Beneficiaries of an estate plan
- Anyone who owes you legal obligations, like alimony and/or child support
Additionally, corporations can get corporate-owned life insurance on their high-level employees, listing themselves as the beneficiary.
Sign your contract and pay your premiums to make a policy active. When you die, your beneficiaries will file a claim with your insurance company, sending a copy of your death certificate. The company will review the claim, and if it is approved, the company will pay the beneficiaries the death benefit.
You may want to consider getting a life insurance policy if:
- Your dependents need your income for their living expenses.
- You do not have enough money, nor do your survivors, to pay for your final expenses or debts.
- You want to create an inheritance or donate to a charity after your death.