If your loved ones depend on your income, consider buying life insurance as a key part of your financial plan. These are the nine steps to finding the coverage you need at a price you can afford.
Key life insurance terms
These are the common terms you might come across when you’re shopping for life insurance:
- Beneficiary. The person, people or organizations that will receive the proceeds from your life insurance policy when you die. You can nominate multiple beneficiaries, and allocate what percentage of the death benefit should go to each.
- Death benefit. The amount of money that will be paid out to your beneficiaries when you die. Depending on your provider and policy, the death benefit can be as low as $10,000 and as high as $10 million.
- Face value. Also called the “coverage amount,” this is the value of your policy. It’s directly linked to the death benefit. If you purchase a policy worth $250,000, your beneficiaries will receive $250,000 when you die.
- Premium. The fee you pay to keep your coverage in effect.
- Term. The period of time your policy is in force — like 10, 20 or 30 years.
Step 1: Choose a path to purchasing a policy
There are a few ways to go about buying a policy independently:
- Go straight to the insurer. This is the most independent and straightforward way to buy coverage – but you’ll need to do some research on your own. This method cuts out the middleman and can potentially lead to discounts, especially with bigger insurers. They often sell multiple types of insurance, and offer discounts for combining life insurance with auto or home insurance.
- Shop online. Many companies now offer online quotes, which makes it easy to compare coverage and rates from a few insurers at once. If you go down this route, don’t give out sensitive information – like your Social Security Number – until you actually apply for a policy.
- Speak to an agent. Insurance agents usually represent one or more companies. Think of them as a conduit between you and the insurance company. An agent can guide you in choosing the right policy for your needs and budget. They can also help you to fill out your application and gather documents.
- Work with a broker. While agents sell policies from specific companies, brokers work directly with the buyer – a.k.a you. An insurance broker will assess your unique needs and answer any questions you have. They’ll then use their knowledge and expertise to find you the best possible policy.
What’s the best way to buy life insurance? It’s really up to you. If you’re familiar with life insurance policies or are willing to do the majority of the legwork, comparing policies online or going directly to an insurer could save time. But if you have complex life insurance needs — such as a pre-existing medical condition, a poor driving record or a history of substance abuse — an agent or broker can help you navigate your options.
Step 2: Decide on a policy type
Most life insurance policies fall into one of two categories: term or permanent. For most people, term life insurance is the cheapest, most straightforward to cover expenses during key working years.
Term life insurance
The simplest and most straightforward policy, term life insurance lasts for a set period of time — like 10, 15, 20, 25 or 30 years. If you die during the term, your beneficiaries will receive a death benefit equal to the value of the policy.Because this type of coverage is temporary, term life is less expensive than a permanent policy.
Permanent life insurance
Performance life insurance policies offer lifelong coverage — as long as you pay your premiums. They offer a guaranteed death benefit and also earn cash value over time. Since they have an investment component, these policies cost more.
What are the most common policy types?
- Whole life insurance. The most basic permanent plan, whole life insurance earns a fixed rate of return set by your insurer.
- Universal life insurance. The cash value of universal policies is tied to a stock index, such as the S&P 500, and earns interest based on the current market rate.
- Variable life insurance. With variable life, the cash value is invested in a portfolio of stocks, bonds and mutual funds of your choice.
- Variable universal life insurance. Variable universal life is a hybrid policy that offers flexible premiums and the ability to invest your cash value in investments that match your risk tolerance.
Step 3: Determine how much coverage you need
Once you’ve settled on a policy, think about how much money your beneficiaries will need to maintain their lifestyles when you’re gone — and aim to take out a policy to match.
To crunch the numbers, take these factors into account:
- Income. The general rule of thumb is to buy a policy that would replace your income and cover your family’s cost of living for five to 10 years. An easy way to do this is to multiply your salary by five or 10.
- Assets. Over time, you may have acquired assets such as a house, car, savings account or 401(k). Your life insurance policy should protect these assets, so total them up and add that amount to your coverage.
- Debt. Your debt doesn’t die with you. To prevent that burden from landing on your beneficiaries, consider any outstanding debt — such as a mortgage, student loans or credit cards.
- Financial obligations. Add up all of your other expenses now and in the future — like childcare or college tuition.
Step 4: Research life insurance companies
The US has the largest life insurance market in the world, so you have plenty of options. To filter your list of reputable insurers, consider:
- Policy features
- Available riders
- Minimum and maximum coverage amounts
- Financial strength. An insurers’ financial strength points to its ability to pay claims. Look for insurers with an A.M. Best rating of A or higher.
- Cost of coverage
- Customer reviews
- Claims process
Then, compare quotes from your shortlist of companies. Most insurers will offer anonymous quotes, or only ask for basic health and contact details to give you a rate.
Step 5: Select a policy that suits your needs and budget
Consider coverage amounts and premium prices, and settle on a policy that meets all of your needs. Life insurance is an investment, and you need to be able to pay your premiums to keep your policy in force.
What are the most common life insurance riders?
Most insurers allow you to customize your coverage with riders, such as:
- Accelerated death benefit rider. If you’re diagnosed with a terminal illness, this rider pays out a portion of the death benefit.
- Critical illness rider. If you’re diagnosed with a critical illness, this rider pays out a lump sum. Heart disease, cancer, stroke and kidney failure are among the common covered illnesses.
- Disability income rider. If you become totally disabled and can no longer work, this rider will pay a monthly cash benefit for a specific period of time.
- Term conversion rider. Gives you the option to convert your term life insurance policy to a permanent policy within a certain time frame.
- Waiver of premium rider. Pauses your premiums if you become unemployed or fully disabled and can’t work.
- Child term rider. Pays out a death benefit if your child dies, and usually expires when your child gets married or turns 25.
- Return of premium (ROP) rider. Reimburses you for any premiums paid if you outlive your term life policy.
Ask the experts
Ask an expert: What are the most common mistakes people make when buying life insurance?
1. Buying life insurance can feel like a complex and unpleasant process, so people often take the first option to just get it over with asap, even though it may cost them thousands of dollars extra over time. The insurance companies know you want to do this and are quite happy to charge you quite a bit extra for that convenience. A life insurance policy is a big ticket item — you wouldn’t take a shortcut on your house or car, right?
2. Shopping based on budget, rates and product features (i.e. the way the insurance companies want you to shop) as opposed to taking the time to truly understand your needs and then going from there. These are big, long-term contracts. It’s worth figuring out what you need before you go shopping around, and considering how your needs are going to change over time.
3. Remember that insurance agents are salespeople, not financial advisors. In most cases, they’re not required to act in your best interest. So, it’s a mixed bag in terms of the quality of advice you will get from them, and it pays to get a second opinion. As a rule of thumb, most healthy-ish people should be able to get all of their life insurance needs met at a cost of less than 1% of their income. In other words, if you’re making $50,000/year and the agent is recommending a policy that costs more than $500/year, tell them to take a hike!
Ask an expert: What are the most common mistakes people make when buying life insurance?
The biggest mistake people make is thinking life insurance advertisements are real. We all see ads that say “buy $500,000 of life insurance for $29 per month.” While that technically is a real offer, people fail to realize the specifics behind it. Offers like that are quotes for a young healthy female buying a policy that lasts only 10 years.
Life insurance advertisements greatly distort the public’s perception of what life insurance will — and should — cost. This causes a lot of people to put off getting insurance because they think if they just keep looking around, they’ll eventually find an offer that mirrors what they see on TV.
The other mistake people make is to avoid a medical exam. While getting a policy that’s approved in 24-48 hours is really nice, you pay for that convenience. People are busy these days and often want to skip carving out an hour for the exam, but it comes at a great price. When shopping for life insurance, you should be open to doing a medical exam to get access to much lower rates.
Ask an expert: What are the most common mistakes when people buy life insurance?
Chartered Life Underwriter (CLU) and author
The most common mistakes include not considering all of their options. When looking for term insurance, insurance companies have varying underwriting parameters for their preferred rate classes, and if consumers only receive offers from one or two companies, they may not be getting the lowest rate class.
It’s important that consumers work with an agent or broker that represents multiple insurance companies. One company may view a certain condition such as build (height/weight) as a standard risk while another company will view it as a preferred risk and offer a premium that is significantly lower.
Lastly, it’s important to match your insurance needs to the insurance product. Insurance is about protecting a financial risk and there’s no need to have a cash value, as that adds significant costs to the premium.
Step 6: Apply for coverage
Typically, you’ll need to provide your personal and contact details, and fill out a health questionnaire. To speed up the application, keep this information handy and answer your insurer’s questions as quickly as possible.
How do I apply for coverage?
You can expect to be asked for the following information:
- Height and weight
- Phone number, address and email address
- Employment and income
- Lifestyle and hobbies
- Smoking status
- Alcohol and drug use
You might also need to provide these documents:
- Social Security Number — though an insurer should only ask for this when you’re applying, not during the quote process
- Proof of identity (driver’s license, passport or state-issued ID)
- Proof of income (a pay stub or recent tax return)
- Proof of residency (a copy of your lease or utility bill)
Step 7: Take the medical exam
Most policies require a medical exam, which helps the insurer get a complete picture of your health. It’s similar to a basic physical, and your insurer pays for it. They’ll send a medical professional to your home or office at a time that’s convenient for you.
During the exam, the technician will record your height, weight, blood pressure and cholesterol, and take a blood and urine sample. They may also ask you about your personal and family medical history.
If you’d prefer to skip the medical exam, many insurers offer no-exam policies, though they’re significantly more expensive.
Step 8: Wait for your application to be reviewed
After you’ve completed the health questionnaire and medical exam, an underwriter will assess your application. They’ll cross-check the information you provided to determine your risk and how much you’ll pay for your coverage. This process can take anywhere from a few business days to eight weeks. And it could take longer if the underwriter discovers any red flags or missing information.
Step 9: Sign off on your policy
Once the underwriter approves your application, they’ll send you the policy documents for review. Double-check all the details, including the premium, coverage and riders. If you’re happy with the policy, sign the documents and authorize a method of payment for your premiums.
You can also decide whether you’d like to pay your premium monthly or annually.
Compare life insurance companies
What affects my life insurance premiums?
Each insurer has its own underwriting process. As such, some put more weight on certain evaluation factors over others. To determine your premium, your insurer will assess the following:
- Age. How old you are plays possibly the biggest role in determining your premiums. The younger you are, the lower your premiums will typically be.
- Gender. Women typically end up with lower premiums than men, mostly due to women having a higher average life expectancy.
- Health. Your insurer will ask about your weight, height, blood pressure, cholesterol, and whether you have any preexisting health conditions.
- Family health history. If you have a family history of cancer, cardiac arrest, kidney disease and stroke, you’ll likely pay more for coverage.
- Smoking. Since smoking is connected to a host of health issues, smokers always pay higher premiums. If you’re a smoker, learn about your options with our life insurance for smokers guide.
- Substance use. If you have a history of alcohol or drug abuse in the past 10 years, your insurer will likely raise your rates.
- High-risk occupations and hobbies. Certain occupations and hobbies are considered riskier than others. If you’re in a hazardous profession or spend your spare time skydiving, scuba diving or doing other risky activities, your insurer may charge a higher premium.
- Driving and criminal records. To score a low premium, you’ll typically need a driving history free of traffic violations and DUIs in the past three to five years, and no criminal record.
There are various ways to buy life insurance, including through agents and brokers and directly from insurers. But before you commit to coverage, do the math to work out how much life insurance you need.
Then, compare life insurance companies to find the best possible policy and premium.