Jessica Gibson | (TNS) Bankrate.com
At first, figuring out how to obtain life insurance might feel overwhelming. If you don’t know about coverage types or how to buy life insurance policies, you might want to wait. Luckily, Bankrate's editorial team has done a lot of the groundwork for you. We’ve created a comprehensive guide for buying a life insurance policy and included valuable tips for choosing coverage amounts and saving on your premium.
How to buy a life insurance policy
Purchasing life insurance can seem complex if you have never done it before. The first thing to know is that you can select between permanent and term life insurance. Each has potential advantages and disadvantages, as well as a wide range of premiums.
Buying a life insurance policy has become simpler as more insurance providers allow you to ask for quotes and buy a policy through their website. If you prefer to talk to a licensed agent, you can usually reach out over the phone or in person. Your insurance provider or agent will explain how to finalize your policy. For example, you might have to get a medical exam, which must be completed in person.
If you are in the market for life insurance, here are the steps you may find helpful in purchasing a policy that is right for you.
1. Determine the amount of coverage you need
Before you start requesting life insurance quotes, decide how much coverage is suitable for you. Specifically, decide why you’re buying life insurance. For example, you might take out a policy to financially support your dependents after your death, or you might get life insurance to provide a financial gift to loved ones or cover funeral expenses. If you’re a high-net-worth individual, you could use life insurance to cover estate taxes or business succession planning.
Deciding why you’re getting insurance will help you determine whether a term or permanent policy is best for you. For instance, if your goal is to have financial security while you pay down a mortgage, you might take out a term that would allow your beneficiary to pay the loan off after your death. If you’d like to leave a legacy, you might take out a policy with a higher death benefit.
Here are just some of the reasons people need life insurance:
—Financial support for dependents
—End-of-life expenses
—Funeral costs
—Charitable contributions
—Debt management
—Income replacement
—Business protection
Although there are many ways to calculate a potential coverage limit, one popular method is the DIME formula, which considers your debt and final expenses owed, total income based on what might be needed after your death, the amount left on your mortgage and any outstanding or expected expenses for your dependents’ education or schooling.
For a simpler method, you could take out a policy with a death benefit that equals 10 times your current income. However, this strategy doesn’t take your family’s living expenses into account. You might prefer to use an online coverage calculator that asks you to enter specifics like your expenses, mortgage, or education costs to come up with a more accurate estimate. Some individuals prefer working directly with a financial adviser or Certified Financial Planner when determining their coverage needs.
2. Choose a type of life insurance policy
There are two primary kinds of life insurance: term and permanent. Within permanent insurance, the two main kinds are whole life insurance and universal life insurance. Term life insurance is usually less expensive with fewer advantages, while permanent life insurance is typically more costly as it offers more advantages. Here’s a closer look at what these policies include and how they function:
—Term life insurance: Term life insurance is generally the most affordable type of life insurance. It offers coverage for a specific term period, usually between 10 and 30 years. If you die during the term, your beneficiaries will get a payout from the insurance company. Once the term is over, the benefits end unless the policy is renewable or convertible, which is provided by many insurers. It is important to note that 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 provides lifelong protection as long as you continue to pay the premium, with fixed premiums and cash value. With some 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 (although these premiums are much higher compared to the lifelong premiums).
—Universal life insurance: Universal life is another form of permanent coverage. It also builds up cash value, but the policy is flexible to allow you to change your death benefit and premium to fit your changing needs. There are several forms of universal life insurance, including variable universal life insurance and indexed universal life insurance.
Before you purchase life insurance, you may want to do more research to find out which choice will best meet your needs.
3. Investigate different life insurance companies
Next, start looking for life insurance companies that interest you. Remember that no two companies are the same. When selecting a life insurance company, browse the website and examine the policy options. The best life insurance company for you may offer a combination of coverage options that fit your insurance needs and a positive customer service experience.
You can gauge a company’s level of customer service by examining J.D. Power studies for life insurance. Check for a company’s financial strength by reviewing ratings from AM Best, S&P and Moody’s. You may also want to research and compare different life insurance riders, which are add-on coverage options that could give you a broader range of protection. To help you save time, consider working with an independent agent or broker. They can run quotes from several providers on your behalf.
4. Ask for and compare life insurance quotes
Once you have chosen a few potential providers, you can request quotes from each company. This can be enlightening, as pricing can vary significantly among insurers. Generally, you’ll have to provide some personal information, such as your name, address, age and gender, and you’ll most likely have to answer health history questions. For example, you might have to indicate whether you’re a smoker, take medications, have had surgeries and answer questions about your lifestyle.
The insurance company then uses that data to figure out a price for life insurance for you. Remember this is just an estimate because the exact amount may change after a medical exam.
If you can't get an immediate quote on an insurance company's website, you might need to contact an agent for more details.
5. Fill out the application
After selecting the provider that meets your needs, the next step is to complete an application. You will need to provide basic personal details, as well as your Social Security number and driver's license number. Also, you might be asked by the insurance company or your agent 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 completed online, and it is usually a quick process. However, you should be prepared and have your medical information available, including a list of medications and details about any chronic or pre-existing conditions.
6. Prepare for your phone interview
After submitting an application, the insurance company might need a phone interview. The interview is mainly used to confirm the information you provided on the application, but there may be some additional questions. 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 needed at all.
7. Schedule a life insurance medical exam
Many life insurance companies and policy types need applicants to get a physical exam before they can be approved for coverage. The life insurance medical exam is like 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 qualifications, 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 finished. The insurance company's underwriter will use the information gathered from your application, phone interview and medical exam to decide if you're eligible for coverage and, if so, what your premium is. Because 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 differ. When selecting a life insurer, it’s a good idea to check that it has riders that fit your needs, such as a return of premium rider or child term rider. If so, consider how adding riders affects the premium and how that impacts the coverage you can afford.
—Financial goals: How much of your income goes to the household? Apart from basic needs, is this amount used to make progress toward financial goals? Consider how your death could affect 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’ll probably need additional coverage. Also, be aware that employer-sponsored policies typically become inactive when employment ends.
—Captive vs. independent agent/broker: A captive agent works with just one insurance provider, so if you want help finding the best rates for life insurance, you might choose to work with an independent agent or broker. An independent agent can ask for quotes from several insurers. However, note that most of the largest insurers, like State Farm and Allstate, offer their products only through their captive agents.
What are some common errors when purchasing life insurance?
Generally, you’ll get the cheapest rates for life insurance the younger you are. People who wait too long to take out a policy might be frustrated to find that they pay more for life insurance than they would have if they took out the policy earlier.
Another common mistake is not evaluating your needs before buying a policy. This might lead you to have more coverage than you need, resulting in paying a higher premium unnecessarily, or you might not have enough coverage to meet your and your family’s needs. For instance, you might quickly get a $250,000 10-year life insurance policy because of the low rate, without considering the costs of raising children and the importance of providing for them during their most financially vulnerable years.
If you aim to cover specific financial situations, such as paying for funeral expenses or paying off a mortgage if you were to die suddenly, it might be a mistake to pay for more coverage than you need—in this case, permanent life insurance. Take the time to decide which type of insurance is right for you before committing to a life insurance policy.
Commonly 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 one of the strongest predictors of mortality, so the older you get, the more likely it is that you’ll die during the policy period and that the life insurance company will have to pay your death benefit. This is why rates typically get higher as you get older. However, not everyone needs life insurance, even at older ages, so consider reviewing your situation with a licensed life insurance agent.
—How much life insurance should I buy?
The amount of life insurance you should buy depends on your goals for the policy. For instance, if you want to provide financial security for your partner while paying off your mortgage, you may only need enough coverage to cover the principal of your loan. If you have other goals like funding your children's college education, replacing lost income for your family, or leaving a financial gift, you may need more coverage. Using a life insurance calculator can help you figure out how much coverage you need, but it's also a good idea to discuss your situation with a licensed agent.
—What are the best life insurance companies?
There isn't a single best life insurance company for everyone. To find the right company for you, consider looking at customer reviews, financial strength, and policy options offered by each company. Getting multiple quotes can also help you determine which company can provide the right product and riders at the most affordable price.
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