Life Insurance Buying Guide
If you’re thinking of purchasing life insurance coverage for you and your loved ones, there’s a lot to consider.
What kind of coverage do I need? What if my situation changes later in life? Will my family have enough after I’m gone?
Figuring out the answer to any one of these questions can be overwhelming, let alone all of them.
To help you navigate the world of life insurance coverage and choose the best possible plan for your specific needs, we put together a life insurance buying guide consisting of the following six recommendations:
- Understand the different kinds of coverage available
- Calculate the right amount of coverage for your needs
- Accommodate for possible changes throughout your life
- Lower your costs as much as possible
- Know how your returns are calculated and your payouts distributed
- Research your life insurance provider
Understand the different kinds of coverage available
Firstly, you have to decide if Group or Individual coverage better fits your needs.
Group coverage protects you as part of a larger group and is typically the type of life insurance coverage offered by workplaces.
Compared to Individual coverage, Group coverage is much more convenient to apply for and benefit from.
It usually only requires you to fill out a short questionnaire about your health history, after which premiums are automatically deducted from your paycheck.
Individual coverage is coverage you apply for and own yourself (any Group coverage provided through work is owned by your company).
While it’s not as easy to get and benefit from, typically requiring some sort of medical exam, detailed medical history, and background check, Individual coverage provides its own unique benefits, which include:
because you’re the owner of your Individual coverage, you may have more options available than you would with Group coverage).
Individual coverage applies no matter where you go, whereas Group coverage from your work ends when you leave your job.
- Level Premiums:
most Individual policies benefit from having level premiums for the duration of the contract.
Another benefit to using Individual coverage over Group coverage is that with Group coverage, employers typically only pay an amount equal to one or two years of your salary. Depending on your needs, this may not be enough coverage.
After deciding if Individual or Group coverage better suits your needs, there are two basic types of life insurance coverage to consider: Term and Permanent.
Term coverage provides coverage only for a specific period of time. Usually, this period of time is anywhere from 5 to 30 years.
Due to the fact that you are only paying premiums for the number of years agreed upon in your policy, Term policies are typically cheaper than Permanent policies, which require you to pay premiums for your entire life.
The amount you pay for premiums is agreed upon during the initial signing of your policy and stays the same throughout your Term. This is also referred to as a “guaranteed level premium”.
Term coverage may be more suitable than Permanent coverage in the following situations:
- If you need life insurance but can’t yet afford Permanent coverage
- If you have a mortgage and want to leave your family enough money to pay it off in case you die
- If you’re older and purchasing life insurance for the first time (although there is typically an age cutoff for Term coverage)
- If life insurance is required for a business partner or lender
- If you have young children who need to be provided for
- If you’re planning to retire and only need coverage for as long as you expect to work
Whereas Term coverage only provides life insurance for a set period of time, Permanent coverage provides life insurance for your entire life (or for as many years as premiums are paid).
Within the general category of Permanent coverage, there are two additional types of coverage to choose from: Whole Life and Universal.
Whole Life coverage offers guaranteed level premiums (defined above) with little to no room for customization, whereas Universal coverage allows for more flexibility.
For example, with Universal coverage, you can adjust:
- Premium amount
- Death benefits
- Accumulation portion of your policy
While Universal coverage does allow for these types of customization, keep in mind that you can only make changes to the degrees set in place by your contract.
Permanent coverage may be more suitable than Term coverage in the following situations:
- If you’re worried about forgetting to renew your life insurance and just want a “get it and forget it” life insurance solution
- If you want your premiums to stay the same throughout the course of your coverage
- If you know, for whatever reason, that you want and/or need life insurance for the rest of your life (life-long financial obligations and/or support like family or debt)
- If you want a more accurate idea of your Death Benefit, or how much your beneficiaries will be paid at the time of your death. Guaranteed premiums with whole life coverage allow for this.
- If you were turned down for term life insurance (due to age, health, or other factors)
With a solid understanding of exactly the kind of coverage you need, the next step is to calculate how much coverage you need.
Calculate the right amount of coverage for your needs
No two insurance providers use the same formula to calculate your specific insurance needs, but two consistent considerations are:
- the amount of money it will take to pay off your debts
- how much your dependents (husband, wife, children, etc.) will need to continue their accustomed lifestyle after you pass
However, instead of just relying on your insurance provider to calculate your coverage needs, it’s important that you do your own research into your coverage needs.
As a starting point, add up your long-term financial obligations and subtract the value of your assets. The remaining amount is the minimum amount of coverage you need.
It’s also critical that you make sure that non-typical debts are factored into your equation (such as high medical bills, for example).
For a slightly more sophisticated understanding of your coverage needs, you can also use this incredibly helpful calculator from Nerd Wallet.
Lower your costs as much as possible
The most common factors taken into consideration by insurance providers when deciding your costs are:
- Your age
- Your medical history
- Any use of cigarettes and alcohol
- Any risky pastimes
Realistically, you have complete control over three of these four things: age, use of cigarettes and alcohol, and risky pastimes.
If there’s one rule that applies across all life insurance covers, it’s that the more likely you are likely to die, the more you are going to pay for life insurance.
With this in mind, the biggest thing you can do to reduce your life insurance costs is to get coverage when you’re younger and healthier.
Even if you don’t consider yourself “young” anymore, the earlier you apply for life insurance, the cheaper it is likely going to be
Use of cigarettes and alcohol
Generally speaking, you can control how much alcohol you drink and whether or not you smoke cigarettes.
The less you partake in these two things, the lower your costs will be.
If you skydive every chance you get, that’s going to reflect on your life insurance costs.
This applies to any activities you do that have a higher-than-normal risk of death or serious injury.
Beyond these factors, policy type, policy coverage, any customized features, and the number of years you need to have your coverage in place can all affect your cost as well.
Know how your returns are calculated and how your payouts are distributed
You should also understand your options for how your payout is distributed to your beneficiaries (family, for example) in the case that you do die.
While this is highly individualized, here are some of the most common ways:
- Lump-sum payout
- Monthly payments
- Payments into specific accounts, such as individual retirement account (IRA)
Keep in mind that for both Term and Permanent coverage policies, it’s not uncommon to have to wait several years before your policy actually starts generating positive returns. This is mainly important to keep in mind if your purchasing Term coverage.
As a tip, to make sure your beneficiaries get as much payout as possible, look for policies that either automatically adjust for inflation or offer it as an additional feature.
Research your life insurance provider
There are multiple ways to purchase your life insurance.
For Term policies, you can buy from a number of online companies. Based on the information you provide, these companies try to find you the policy with the lowest associated cost.
You can also ask your employer about their group coverage options.
For Permanent or more individualized life insurance, it’s best to connect with an experienced insurance agent.
These agents not only find you the best life insurance options for your specific needs, but they can also answer any questions you may have for your own understanding.
Regardless of the way in which you prefer to work with your insurance provider, it’s more important to know and trust the provider you ultimately choose.
At the very least, you want to know how long have they been in business, their size and evolution, and how they are rated by their customers.
On an individual level, you also want to ask your life insurance agent what kind of experience he or she has.
As a general rule, prioritize agents with any of the following accredited titles:
- Chartered Life Underwriter
- Certified Financial Planner
- Chartered Financial Consultant
Congratulations on making it the end!
Armed with the knowledge above, you can now go about choosing the best possible life insurance for you and your loved ones.