How to Buy Life Insurance in 8 Steps
Buying life insurance is a crucial step in financial planning, yet it can feel overwhelming. With various policy types, coverage options, and application processes, it’s easy to get lost. This guide simplifies the life insurance buying process, ensuring you make informed decisions.
1. Determine Your Coverage Needs
Before you begin comparing quotes, assess your individual needs. Ask yourself, “Why am I buying life insurance?” For some, it’s to provide for dependents, cover end-of-life expenses, or contribute to a charity. Others use life insurance for estate taxes or business succession. These goals will influence whether term or permanent life insurance is best.
Some common reasons for needing life insurance include:
- Financial support for dependents
- End-of-life expenses
- Funeral costs
- Debt management
- Income replacement
- Business protection
While several formulas can estimate coverage needs, one popular method is the DIME formula (Debt, Income, Mortgage, Expenses). Consider the total of your debts and final expenses, how much income your family would need, mortgage balance, and any expected educational costs for dependents. A simpler method is to take out a policy with a death benefit that equals 10 times your current income. An online coverage calculator can provide a more accurate estimate. Working with a licensed insurance agent or financial advisor is another option.
2. Choose a Life Insurance Policy Type
There are primarily two categories of life insurance: term and permanent. Permanent policies include whole life and universal life. Term life insurance is generally more affordable with limited benefits, while permanent options are more expensive but offer added advantages.
- Term life insurance: This is often the most cost-effective option, providing coverage for a set period (10 to 30 years). Beneficiaries receive a payout if the insured dies within the term. Some policies are renewable or convertible, although premiums typically increase.
- Whole life (WL) insurance: This type of permanent life insurance offers lifetime protection, as long as premiums are paid. Premiums are fixed, and the policy accumulates cash value, earning a guaranteed interest rate. Participating whole life policies may also pay dividends.
- Universal life (UL) insurance: Another type of permanent coverage, this provides flexible options for death benefit and premiums. UL also builds cash value; the interest rate can vary based on the specific universal life policy. Examples include variable universal life and indexed universal life insurance.
Before purchasing a policy, research options to find what meets your specific requirements.
3. Research Life Insurance Carriers
With several insurance companies to choose from, it is essential to do your homework and compare. Look at how each company presents its policy options. Customer service ratings from J.D. Power studies, and financial strength ratings from agencies like AM Best, S&P, and Moody’s, can help you narrow your choices. Research different life insurance riders, which are add-on coverage options. Consider using an independent agent or broker who can obtain quotes from multiple providers.
4. Request and Compare Life Insurance Quotes
Obtain quotes from your chosen companies. Provide personal information such as name, age, and health history. Be prepared to answer health-related questions. Insurers use this data to calculate a life insurance quote. However, the final amount may change after a medical exam and review of records. Independent agents can provide quotes from multiple companies quickly.
5. Fill Out the Application
After selecting a provider, complete their application. You’ll need personal details, your Social Security number, and driver’s license. An Attending Physician Statement (APS) might be requested to verify your medical history. Some applications are online, and it’s best to have your medical details available. It is essential to share any chronic, pre-existing conditions, or medication details.
6. Prepare for Your Phone Interview
The insurance company may schedule a phone interview to confirm your application information. Additional questions regarding your lifestyle, hobbies, financial health, income, and current life insurance policies may also be asked.
7. Schedule a Life insurance Medical Exam
Many insurers require a physical exam before approving coverage. The exam takes about 30 minutes, and the examiner can meet you at your home or office. Not all policies require a medical exam; if you meet certain criteria, you may be able to get approved without one.
8. Wait for Approval
Once you’ve completed the application process, the underwriter will review all submitted information to determine your eligibility and your premium. Approval may take several weeks. If you’re satisfied with the offer, sign the policy documents. If you are not satisfied, you can work with your insurance provider to adjust the policy. Most policies offer a free look period of 10 to 30 days to confirm you are satisfied.
Other Considerations When Shopping for Life Insurance
Riders and Employer-Sponsored Coverage are important considerations to keep in mind:
- Riders: Investigate available riders, such as return-of-premium or child term riders, to maximize the value of your policy.
- Financial goals: Consider how a lack of income would affect your important milestones.
- Employer-sponsored coverage: Determine whether your employer-sponsored coverage is enough.
- Captive vs. independent agent/broker: A captive agent works with one insurance provider. Independent agents can offer quotes from several insurers.
What are Some Common Mistakes When Buying Life Insurance?
- Delaying the purchase: Rates are generally more affordable when you’re younger.
- Not assessing your needs: This may lead to inadequate or excessive coverage.
- Not understanding the different policy types: Deciding which type of insurance works best before you purchase life insurance is critical.
Frequently Asked Questions
- At what age should you buy life insurance? The ideal time is when you recognize the need for it. Generally, it’s best to buy it when you are younger.
- How much life insurance should I buy? This depends on your goals. You may want only sufficient coverage to pay off a mortgage or a larger payout to send your children to college.
- What are the best life insurance companies? The best company varies for each individual. Consider customer reviews, financial strength, and policy options.
- What should I know about beneficiaries? A beneficiary receives the death benefit. You can name more than one beneficiary and allocate a percentage or dollar amount to each.
- Is life insurance taxable? Proceeds are generally not taxable when a beneficiary takes the full amount in a lump sum. Installment payments may incur taxes on the interest earned.
