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How to buy life insurance and buy it wisely
Don't pay for more coverage than you need.
Balance the cost of a life insurance plan with your income, expenses and future family needs to make sure your family is financially stable after you die. Things like your age, lifestyle and health determine what you’ll pay for a policy.
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Why we like: Policygenius
Compare quotes from 16 life insurance companies side by side.
- Get the coverage amount and term that's right for you.
- Choose between term or whole life insurance.
- Easy online application process.
How to buy life insurance
If you’re considering life insurance, you have a few ways to get it.
- Online. Startups have made getting quotes for policies a breeze. The biggest benefits of getting life insurance online is that you can easily compare quotes from multiple providers at once.
- Agent. Agents work with one or more insurance providers, and generally try to sell you a policy from them. Agents can guide you to determine the right policy for you and find one you can afford. Agents help you with your application, gather documents and implement your plan once it’s approved.
- Employer. Usually considered group insurance, organizations like universities, unions and employers can offer life insurance through one provider. If you decide on purchasing a plan through your employer, you won’t have a choice of provider, but you should be able to choose the term, riders and coverage. You make payments either through paying annual dues or it comes out of your paycheck.
- Direct provider. The most independent and straightforward way to purchase coverage. You compare providers on your own and choose the plan that is best for you. This may mean you need to do your research so you are confident you get the right coverage and don’t purchase more than you need.
What should I expect when I apply for life insurance?
Once you determine the kind of life insurance is right for you, applying can be done online or with an agent, depending on your provider.
You may be expected to provide the following information:
- Phone number
- Verifiable income
- Smoking status
- Alcohol and substance use
A cover letter may be necessary to include details about any of the listed information that aren’t requested in the application.
The insurance company will likely send out a medical representative to your home or office, rather than sending you to a clinic. The exam usually includes a blood and urine sample, blood pressure, questions about your and your family’s medical history.Some insurance companies have no-medical-exam policies, however you can expect to pay more for those.
Your application and medical exam is reviewed by an underwriter. They determine your risk and how much you’ll pay for your coverage. This process can take only a few business days to as long as eight weeks. And it could take longer if they have any re-flags as to false claims or incorrect information.
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Which 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.
Term life insurance guide
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?
One method to determine what you’ll need is 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.
To get the most out of your life insurance, talk over plans with your spouse, research companies thoroughly and compare life insurance providers to find the policy that best fits your needs.
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