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How to buy life insurance and buy it wisely
Don't pay for more coverage than you need.
A key part of your financial plan, a life insurance policy can provide peace of mind that your family will be taken care of when you die. With so many providers and policies on the market, purchasing a policy can be confusing.
This is what you can expect when you’re shopping around for life insurance — and how you can go about buying a policy.
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The steps to purchasing a life insurance policy
To find the right policy for you and your family, follow these steps:
1. Research life insurance companies, and compare policy features and riders.
Then, get quotes from your shortlist of providers.
2. Select the policy that suits your needs and budget.
Life insurance is an investment, so you want to make sure you buy a policy that you can afford.
3. Apply for coverage.
Typically, you’ll need to provide your personal and contact details, and fill out a health questionnaire. You can expect to be asked for the following information:
- Name
- Age
- Gender
- Phone number, address and email address
- Height and weight
- Employment and income
- Lifestyle and hobbies
- Smoking status
- Alcohol and drug use
You might also need to provide these documents:
- Proof of identity (e.g. driver’s license, passport or state-issued ID)
- Proof of income (e.g. a pay stub or recent tax return)
- Proof of residency (e.g. a copy of your lease or utility bill)
4. Take the medical exam.
Most policies require a medical exam, which helps the insurer get a complete picture of your health. The exam is usually free, and your insurer will send a medical technician 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 can be significantly more expensive.
5. Wait for your application to be reviewed
After you’ve completed the health questionnaire and medical exam, an underwriter will assess your application. They 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.
6. Sign off on your policy and send it back to the insurer
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.
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.
How to buy life insurance
If you’re ready to purchase a policy, there are a few ways to go about it:
- Go straight to the provider. This is the most independent and straightforward way to buy coverage – but you’ll need to do your research. Along with looking at policy features, riders and exclusions, confirm each company’s financial strength and customer reputation. Once you’ve compared carriers and picked a policy that best suits your needs, you can apply directly with the provider. This method has other benefits, too. Bigger insurers 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 providers 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. Reputable companies will provide quotes anonymously, or only ask for basic health and contact details.
- Speak to an agent. Insurance agents usually represent one or more providers. 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. Since brokers aren’t tied to a particular provider, they may be more objective.
- Get coverage through your employer. This is called ‘group insurance,’ and it’s typically offered as part of your workplace benefits. If you decide to opt in, you won’t be able to choose your provider, but you may be able to select a term or riders. You can either make an annual payment, or have the premiums deducted from your paycheck.
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What type of life insurance policy should I buy?
When purchasing life insurance, consider the two types out there — term and permanent.
Term life insurance
Younger people in good health are typically more likely to be sold term life insurance. This type of insurance typically lasts for 10, 15, 20, 25 or 30 years. During the term, premiums may increase every few years on a set schedule.
Because the term ends, this type of policy is less expensive than a permanent policy. Once the term ends you could have an option to convert it to a permanent policy or reinstate another term.
Permanent life insurance
As the name implies, permanent life insurance lasts as long as you do — as long as you pay your premiums. This is where life insurance divides again, splitting into three major types.
- Whole life. As you pay your whole life premium, your account builds a cash value that you can withdraw, tax free. This is money that’s accumulated, so if you don’t use it by the time your death benefits, you can lose it.
- Universal life. A certain amount of flexibility is allotted with universal life policies. You may increase or decrease your coverage and change the amount and frequency of your premium payments throughout the length of the policy rather than keeping them static. Cash value is based on a variable rate that you may be able to borrow against or use to limit payments.
- Variable life. You’ll find that variable life has many similarities to universal life. You get an amount of flexibility with premiums and your benefit. The biggest difference is that you’re able to invest what would go into the cash account into securities, such as stocks, bonds and mutual funds.
What affects how much coverage I need?
Aim to buy a policy with a face value that matches your financial obligations. To calculate how much coverage to buy, factor in DIME: Debt, Income, Mortgage and Education.
- Debt. Any debt that’s still owed needs to be dealt with by your family. Outstanding auto and private student loans and credit card balances should be carefully considered when you’re choosing a coverage amount.
- Income. Consider your income when choosing a coverage amount. Some agents say to shoot for 15 times your annual income, while others recommend more than three times your income, plus any out standing debt. The goal is to supplement what you would have contributed to your family’s finances for that length of time.
- Mortgage. Similar to debts, you may want to include the amount left on your mortgage.
- Education. This one is specific to those who have children. The cost of going to college, or even to a private school, can be quite a burden. By adding it into your coverage amount, you can potentially help ease that weight.
Other factors to consider:
- End-of-life expenses. Though it may seem grim you’ll likely need to nail down your end-of-life plan or at least have be able to make a reasonable estimate. Curious types may even enjoy looking at potential green alternatives to traditional burial such as hydro cremation or burial pods.
- Inflation. The coverage you get now will likely not be worth the same in 30 years. Accounting for inflation may be especially important for those who are interested in policies without flexible coverage amounts.
- Local and federal taxes. Though estate taxes are usually only applied to large amounts, there are six states that assess an inheritance tax. Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania have inheritance taxes that vary based on which state you’re in. Exceptions do apply for some beneficiaries though, so you may want to consult with a tax adviser or an adviser who works in estate planning.
- Number of policies. You’re not restricted to buying just one policy. Opting to buy more than one means taking into consideration the total coverage you need and how you want to partition that amount.
How do I compare life insurance companies?
- Policies offered. A good way to start filtering companies is to check if they have the type of policy and riders you’re looking for.
- Coverage options. How much you need is another good way to filter your options. Not all providers will offer $1 million in coverage, and those that do may not offer as low as $2,000.
- Cost of coverage. Consider what you can afford. Starting a life insurance plan that has premiums you can’t keep up with will likely just lead to a lapse in the policy.
- Financial strength. Many insurance companies are rated on their financial strength — their ability to pay out benefits. A.M. Best, Fitch, Moody’s and Standard & Poor’s are four insurance rating organizations and each has its own rating system.
- Customer ratings. The experiences of other consumers may shed light on certain aspects of the provider that would otherwise be difficult to assess without already being involved with them.
- Customer service availability. Applying for life insurance or settling a claim can be a lengthy and confusing process. Having helpful customer service can make all the difference.
- Claims process. The last thing anyone wants is for their family to jump through hoops to receive benefit. Take a look at a provider’s claims process and note what’s needed and who’s required to file it.
What affects my life insurance premiums?
Each insurance provider has its own underwriting process. As such, some put more weight on certain evaluation factors over others. Take a look at a few points that will be assessed:
- 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.
- Certain health indicators. When a medical exam or medical questions are involved, your weight, height, blood pressure and any history of major diseases or conditions help determine your premiums.
- Family health history. Major health conditions and diseases in your immediate family are likely taken into account. Cancer, cardiac arrest, kidney disease and stroke are among what may affect your premiums.
- Smoking. Frequency and the last time you smoked will likely be considered when determining how much you’ll pay in premium. If you are a smoker, you might want to read up on our life insurance for smokers guide
- Substance use. Alcohol use that has resulted in doctor-mandated rehabilitation and illegal substance abuse are likely to increase your premiums.
- High-risk occupations and hobbies. Certain occupations and hobbies are considered riskier than others. Being a lumberjack is objectively more dangerous than working in accounting. Likewise, skydiving will earn your application more scrutiny than needlepoint.
- Driving and criminal records. Several tickets within a short period of time, DUIs and arrests can contribute to what your policy costs.
Bottom line
There are various ways to buy life insurance, including through agents and brokers and directly from providers. But before you commit to coverage, crunch the numbers to work out how much life insurance you need.
Then, compare life insurance providers to find the best possible policy and premium.
Frequently asked questions
Ask an Expert
Can I get term life insurance of 250,000 or 300,000 coverage vs whole life.
Hello Joyce,
Thank you for your comment.
Whole life insurance premiums are much higher due to its coverage lasts for a lifetime while the term life insurance provides coverage for a certain time period. Generally, when you compare the two, whole life insurance is expensive.
This page explains how these two differs. I hope this helps.
Regards,
Jhezelyn