Jessica Gibson | (TNS) Bankrate.com
Initially, figuring out how to obtain life insurance could seem daunting. If you’re not familiar with the different types of coverage or the process of purchasing life insurance policies, you might feel inclined to delay it. Luckily, Bankrate’s editorial team has already done most of the work for you. They have created a thorough guide for buying a life insurance policy and provided useful advice for choosing coverage amounts and reducing your premium.
How to purchase a life insurance policy
Acquiring life insurance might appear complex if you have never done it before. The first thing to understand is that you can select between permanent and term life insurance. Each option has its own advantages and disadvantages, as well as a wide range of premiums.
Buying a life insurance policy has become simpler as more insurance providers offer the ability to ask for quotes and purchase a policy through their website. If you prefer to speak with a licensed agent, you can usually reach out over the phone or in person. Your insurance provider or agent will explain the steps to finalize your policy. For example, you might need to undergo a medical examination, which must be conducted in person.
If you are looking for life insurance, here are the steps that might be useful for purchasing a suitable policy.
1. Determine the necessary coverage amount
Before you start requesting life insurance quotes, decide the appropriate coverage amount for you. Specifically, consider the reason behind your purchase of life insurance. For instance, you might take out a policy to financially support your dependents after your passing, or you might obtain life insurance to provide a financial gift to loved ones or cover funeral expenses. If you have significant wealth, you could use life insurance to manage estate taxes or plan for business succession.
Determining your motives for getting insurance will help you decide whether a term or permanent policy is more suitable for you. For instance, if your goal is to ensure financial security while you pay off a mortgage, you might opt for a term that would enable your beneficiary to pay off the loan after your passing. If you aim to leave a legacy, you might choose a policy with a higher death benefit.
Here are just a few of the reasons why people require life insurance:
—Providing financial support for dependents
—Covering end-of-life expenses
—Paying for funeral costs
—Making charitable contributions
—Managing debts
—Replacing lost income
—Safeguarding businesses
While there are several methods to calculate a potential coverage limit, one popular approach is the DIME formula, which considers your debts and final expenses, total income necessary after your passing, the remaining amount on your mortgage, and any upcoming expenses for your dependents’ education or schooling.
For a simpler approach, you could select a policy with a death benefit equal to 10 times your current income. However, this method does not account for your family's living expenses. You might prefer to use an online coverage calculator that prompts you to enter details such as your expenses, mortgage, or education costs to generate a more precise estimate. Some individuals prefer to work directly with a financial adviser or Certified Financial Planner when determining their coverage requirements.
2. Choose a type of life insurance policy
There are two primary varieties of life insurance: term and permanent. Inside permanent insurance, the primary kinds are whole life insurance and universal life insurance. Term life insurance is typically less costly with fewer advantages, while permanent life insurance is typically more expensive as it offers more advantages. Here’s a closer look at what these policies cover and how they operate:
—Term life insurance: Term life insurance is generally the least expensive type of life insurance. It provides coverage for a specific period, typically between 10 and 30 years. If you die during the term, your beneficiaries will receive a payout from the insurance company. Once the term is over, the benefits end unless the policy is renewable or convertible, which is offered by many insurers. It is important to note your premium will likely increase if you choose to renew or convert.
—Whole life insurance: Whole life insurance is a form of permanent life insurance that offers lifelong protection as long as you continue to pay the premium, with fixed premiums and cash value. With certain whole life policies, policyholders have to pay their premium until they die, and other policies only require a premium for a certain number of years (though these premiums are much higher compared to the lifelong premiums).
—Universal life insurance: Universal life is another type of permanent coverage. It also builds cash value, but the policy is flexible to allow you to adjust your death benefit and premium to suit your changing needs. There are various forms of universal life insurance, including variable universal life insurance and indexed universal life insurance.
Before you purchase life insurance, you may want to conduct further research to find out which option will best meet your needs.
3. Explore different life insurance providers
Next, begin searching for life insurance companies that interest you. Keep in mind that no two companies are identical. When selecting a life insurance company, explore the website and examine the policy options. The right life insurance company for you may provide a mix of coverage options that suit your insurance needs and a positive customer service experience.
You can gauge a company’s level of customer service by reviewing J.D. Power assessments for life insurance. Check for a company’s financial stability by examining ratings from AM Best, S&P and Moody’s. You may also want to research and compare different life insurance riders, which are additional coverage options that could give you a wider range of protection. To save time, think about working with an independent agent or broker. They can obtain quotes from several providers on your behalf.
4. Ask for and compare life insurance price estimates
Once you have chosen a few potential providers, you can obtain price estimates from each company. This can be informative, as pricing can differ significantly among insurers. Generally, you will need to provide some personal information, such as your name, address, age, and gender, and you will probably need to answer health history questions. For example, you might need to indicate whether you smoke, take medications, have had surgeries, and answer questions about your lifestyle.
The insurance company then uses that information to figure out a life insurance price for you. Keep in mind that this is just an estimate since the exact amount might change after a medical exam.
If you can’t get an immediate quote on an insurance provider’s website, you might have to contact an agent for more details.
5. Fill out the application
After selecting the provider that suits your needs, the next step is to complete an application. You will need to provide basic personal info, as well as your Social Security number and driver’s license number. Additionally, the insurance company or your agent may ask you to submit an Attending Physician Statement (APS), which helps the insurance company verify your medical history (this form will be given to you). Some life insurance applications can be filled out online, and it is usually a quick process. However, you should be prepared and have your medical info available, including a medication list and details about any chronic or pre-existing conditions.
6. Prepare for your phone interview
After submitting an application, the insurance company may require a phone interview. The interview is mostly used to confirm the info you included on the application, but there may be some additional questions asked. For instance, the interviewer may want to know more about your lifestyle and hobbies, your financial health, your income and any other life insurance policies you have. The interview is generally quick and will likely be scheduled shortly after submitting your physical application, if it’s required at all.
7. Schedule a life insurance medical exam
Many life insurance companies and policy types require applicants to get a physical exam before they can be approved for coverage. The life insurance medical exam is similar to a regular doctor appointment, but the insurance company’s medical examiner may be able to visit your home or office to see you. They will generally take your vitals, like weight and blood pressure, and draw blood. The exam usually takes about 30 minutes, and you may be able to schedule it during your phone interview.
Not all life insurance policies require a medical exam. If you meet certain requirements, you might be able to get approved for life insurance without a medical exam.
8. Wait for approval
When the application process is complete, your job is done. The insurance company’s underwriter will take the information gathered from your application, phone interview and medical exam to determine if you’re eligible for coverage and, if so, what your premium is. As there is so much information to review, the approval process may take several weeks.
If you get approved and are happy with the quoted premium, you will be sent the policy documents to sign and approve. If you aren’t satisfied with the quoted rate, you can work with your agent to adjust the policy. For example, you might change the death benefit/coverage amount or term length.
Once you’ve purchased the policy, you typically have a free look period that lasts 10 to 30 days, depending on the insurer, to confirm that you’re pleased with the policy. If not, you can get a full refund of the paid premium.
Other things to think about when shopping for life insurance
When looking at choices for life insurance, there are other important things to remember:
—Riders: Life insurance companies usually offer riders, but the options can vary. When selecting a life insurance company, it's worth checking if it has riders that fit your needs, such as a return of premium rider or child term rider. Also, consider how adding riders affects the premium and the coverage you can afford.
—Financial goals: How much of your income goes towards the household? Besides basic needs, is this used to make progress towards financial goals? Consider how your death could impact reaching these important milestones.
—Employer-sponsored coverage: If you have group life insurance through your employer, consider if it's enough to cover your family's financial needs if you die. If not, you may need additional coverage. Also, note that employer-sponsored policies typically become inactive when employment ends.
—Captive vs. independent agent/broker: A captive agent works with only one insurance provider, so if you want help finding the best rates for life insurance, you might prefer an independent agent or broker. An independent agent can request quotes from several insurers. However, keep in mind that many of the largest insurers, like State Farm and Allstate, only offer their products through their captive agents.
What are some common mistakes when purchasing life insurance?
In general, life insurance rates are most affordable the younger you are. People who wait too long to get a policy may find that they pay more for life insurance than if they had taken out the policy earlier.
Another common mistake is not evaluating your needs before buying a policy. This could lead to having more coverage than necessary, resulting in unnecessarily higher premiums, or not having enough coverage for your family's needs. For instance, you might choose a $250,000 10-year life insurance policy because of the low rate, without considering the costs of raising children and the need to protect them financially through their most vulnerable years.
If your aim is to cover specific financial situations, such as funeral expenses or paying off a mortgage in the event of your sudden death, it could be a mistake to pay for more coverage than needed, such as permanent life insurance. Take the time to decide which type of insurance is right for you before committing to a life insurance policy.
Frequently asked questions
—At what age should you purchase life insurance?
The younger you are, the lower your life insurance premium generally is, assuming you are in good health. Age is a strong indicator of mortality, so as you get older, the likelihood of passing away during the policy period increases, leading to higher rates. However, not everyone needs life insurance, even at older ages, so it's worth discussing your situation with a licensed life insurance agent.
—How much life insurance should I purchase?
The amount of life insurance you should get depends on why you want the policy. If you're getting term life insurance to provide financial security for your partner while you pay off your mortgage, you might only need enough coverage to pay the principal of your loan. If you want to provide money for your children's college education, replace your lost income for your family, or leave a financial gift to your loved ones or an organization, you might need more coverage. Using a life insurance calculator can help you figure out how much coverage you need, but you might also want to talk to a licensed agent about your situation.
—What are the top life insurance companies?
No single life insurance company will be the best for everyone. To find the right company for you, you could check the customer reviews, financial strength, and policy options each company offers. You might also benefit from getting multiple quotes to figure out which company could offer the right product and riders at the lowest price.
(Visit Bankrate online at bankrate.com.)
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