How to Buy Life Insurance. If you’re just starting the process of shopping for life insurance, you may be feeling a little overwhelmed. Thinking about your priorities can help set you on the right track. The main factors to consider when shopping for life insurance include what kind of policy is best for you, how much coverage you need and why, what life insurance company to use, and how life insurance will further your overall financial strategy. These are big questions, but this guide will help you with each of them.
To purchase a life insurance policy, follow these eight steps:
- Decide if you need life insurance.
- Determine which type of life insurance is right for you.
- Decide how much life insurance you need.
- Select a life insurance policy.
- Choose a life insurance company.
- Find the right life insurance agent or broker.
- Choose the right life insurance riders.
- Purchase your life insurance policy.
Decide If You Need Life Insurance
The first thing to consider when shopping for life insurance is whether you need it in the first place. Life insurance is primarily designed to provide financially for your dependents after you die, although it also can be used for things such as benefiting a charity or keeping a business going if one of the key employees dies. If none of these rationales applies to you, there’s a good chance you don’t need life insurance and would be better off investing your money elsewhere.
Determine Which Type of Life Insurance is Right for You
If you decide you need life insurance, the next step is to choose what type of policy is best for you. The main types of life insurance are:
Term Life Insurance
Term life insurance policies provide affordable coverage for a specific death benefit over a predetermined period, such as 10, 15, 20, or 30 years. It can be a smart choice for certain customers, like parents who want to ensure their children are provided for until they reach adulthood. However, once the term is complete, the policy is worthless. Instead of starting over from scratch, many life insurance companies offer the option to convert a term policy to a permanent one, such as a whole life or universal life policy. The costs and terms of these options vary by company and policy, and they are worth taking the time to discuss with a financial advisor before purchasing a new term life policy.
Permanent Life Insurance
A category of coverage that includes whole life and universal life. These types of life insurance are more expensive than term but offer more benefits.
In particular, permanent life insurance policies accumulate cash value over time. With a policy that accumulates cash value, a portion of your premiums grows tax-deferred. Some companies offer different investment options to help cash value grow faster, but this approach often carries financial risks. The upshot is that not all policies will accumulate cash value at the same rate. The advantages of cash value are that you can take out loans or make partial withdrawals against your policy, and you may be able to use the cash value to cover premiums. However, these options can significantly reduce your death benefit if you die before the cash value is replenished. A policy with cash value generally will cost more for the same coverage than a policy without cash value, but if you plan to take advantage of the benefits, it may be worth the extra expense
Whole Life Insurance
Whole life is permanent coverage with consistent premiums and guaranteed accumulation of cash value. This policy type may be eligible for dividends from a mutual company and typically is expensive. Whole life insurance is both predictable and flexible, and for those reasons, it can be confusing. Some whole life insurance policies specify how long you will have to pay premiums. With some policies, you pay premiums until you die, and with others, you pay for a specific period, either in a number of installments or until a certain age. Some whole life insurance policies will even insure you for life after you make just a single, relatively large premium payment. This is a case in which an agent or financial advisor can help you make the best call for your situation.
Universal Life Insurance
Universal life is permanent coverage that builds cash value with investment options. It is frequently offered with flexible premiums, although those premiums affect the cash value and death benefit. Because of all the options it entails, universal life is more complicated than the other types of life insurance and is only suitable for those who are comfortable with complex financial investments. Two common types of universal life insurance include:
- Variable universal life: a type of universal life policy that ties cash value to a number of investment options.
- Indexed universal life: a universal life policy that accumulates cash value based on the performance of certain indices; it is typically less expensive and less risky than variable universal life because there is no actual investment in an index.
No-exam Life insurance
With this type of policy, you don’t have to take a medical exam during the application process, although you may still need to answer questions about your health and provide medical records. This may be a good option if you have health problems that could disqualify you from obtaining a traditional life insurance policy.
Decide How Much Life Insurance You Need
To decide how much life insurance coverage you need and for how long, the Insurance Information Institute recommends considering the following factors:
- Your loved ones’ financial resources after you die, broken down into Social Security and other retirement-related survivor benefits, group life insurance, and other assets and resources.
- Your loved ones’ financial needs after you die, broken down into final expenses, debts and income needs.
Subtract the amount of resources from the amount of financial needs to determine the correct amount of coverage. The Insurance Information Institute says most people underestimate this step and end up with too little life insurance coverage. To determine how long you need coverage, consider your priorities. If you want to build a financial asset and provide lifetime coverage for your dependents, you need a permanent policy rather than a term policy.
Select a Life Insurance Policy
When comparing life insurance policies, whether different policies from the same company or similar policies from different companies, there are a number of factors to keep in mind. First, you should generally ensure you’re comparing the same type of policy, such as term life, whole life, or universal life. Once you decide on a policy, consider the following questions, as well as anything else that’s important to you:
- Are the policy’s premiums guaranteed-level, flexible, or increasing on a periodic basis?
- Are the policy’s fees built into the premiums?
- Is a medical exam required?
- Is the approval process fully underwritten, simplified issue, or guaranteed issue?
- For a term life insurance policy, is the term length you want available?
- For a term life policy, can it be converted to a whole life policy, and how?
- Does cash value accumulate, and if so, how?
- Is the policy eligible for dividends?
- Are the riders you want available?
Choose a Life Insurance Company
Although price might not be the primary consideration in choosing a life insurance company and policy, it’s always helpful to know what you get for your money. Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute, suggests comparing life insurance quotes from online brokers and talking with agents who represent multiple life insurance companies.
John Gibbons, a partner in the insurance practice of the law firm Blank Rome in Washington, D.C., generally agrees but says this isn’t a hard-and-fast rule. “I like people who have the ability to look at multiple companies, but I wouldn’t necessarily rule out dedicated agents,” he says. “If you have a strong relationship with someone who works for a single company, I wouldn’t shy away from them.”
As you compare quotes from competing companies, you might wonder why premiums vary among companies even for the same amount of coverage. This is because no two insurance companies’ policies are exactly the same, even for a given type (such as whole life insurance). Each company uses its own algorithms and writes the coverage in its own way. For example, if you’re comparing $1 million whole life policies from two different companies, one company might set your expected mortality at age 90, while the other might set it at age 121, which would affect the premiums quoted. Some policies also build in common benefits, while others charge fees for those benefits via optional riders.
Your premium might not seem to have much relation to the amount of coverage you receive, but it is carefully calculated by your insurance company. Gibbons explains that insurance companies calculate your premium based on statistics that show how likely they are to turn a profit on your policy before paying out your death benefit. Further complicating the matter is that an insurance company’s financial rating is based on liquid assets, i.e., how much money is available to pay out benefits.
How Important is an Insurance Company’s Financial Rating?
Five different independent agencies rate insurance companies based on financial strength: A.M. Best, Fitch Ratings, Kroll Bond Rating Agency, Moody’s, and Standard & Poor’s. Each of these agencies uses its own scale and criteria. The Insurance Information Institute offers the following advice for considering financial ratings:
Don’t accept what the insurance companies themselves say about their ratings because they’re likely to share only the most favorable information. Do your own research. Check the ratings regularly while you’re shopping for insurance because they change frequently. Go with an insurance company that has favorable ratings from two or more agencies because they often disagree.
Weisbart advises to steer clear of life insurance companies with bad financial ratings. He also notes that about half of the companies in the market are financially very strong, and most others have decent financial strength. “A company’s financial health matters a lot,” Weisbart says. “After all, life insurance policies are long-term financial instruments, and so you need to buy from a company that is likely to be in business for, perhaps, the next half century.”
Best Life Insurance Companies of 2021
|COMPANY||SAMPLE MONTHLY COST||A.M BEST RATING||LEARN MORE|
|Northwestern Mutual 4.6 out of 5||N/A||A++|
|Haven Life 4.3 out of 5||$10.93||A++|
|State Farm 4.2 out of 5||$15.02||A++|
|Banner Life 4.1 out of 5||$8.78||A+|
|Principal 4.0 out of 5||$9.00||A+|
Any rates listed are for illustrative purposes only. You should contact the insurance company or insurance agent directly for applicable quotes.
Another potential indicator of an insurance company’s financial health is its size. Companies that hold the most assets are likely to be the most solvent, and therefore are less likely to run into financial trouble that will leave you or your loved ones holding a worthless policy. The other main advantage to picking a large insurance company is that if you need a jumbo policy with a high payout, a large insurance company will probably be more willing to back it. Advantages to using a smaller life insurance company include more personalized customer service or a more community-oriented atmosphere.
Regardless of size, “If a death occurs, you want to make sure the company will be available to pay the claim,” says Theodore Affleck, an insurance industry consultant at Newington, Connecticut-based consulting firm CLU & Associates LLC. “There aren’t too many instances of a company failing to pay a claim, but it’s still an issue to consider.”
Gibbons agrees, saying, “Knowing you’re with someone with a lot of financial means is something people look for because it provides certainty.” In addition, he notes that a larger company can spread insurance risks over a larger group of policyholders, which can lower premiums.
Other Factors to Consider When Choosing a Life Insurance Company
Before deciding on an insurance company, check to see if there are any complaints. Two good resources are the National Association of Insurance Commissioners (NAIC) and the insurance department in your state. Both keep records of complaints against life insurance companies and make that information available to consumers. You can use the NAIC’s website to search for complaints in your state and the organization’s map to find contact information for your state’s insurance commission. However, Weisbart says that complaints against life insurers are very rare.
Another factor to consider is that some life insurance companies operate as mutual companies as opposed to stock companies. There are other ownership structures, but stock and mutual companies are by far the most common, and it might make a difference to you when shopping for life insurance. Some consumers think that a stock insurance company is a better choice because the responsibility to create profit for outside investors will help ensure the company is managed well, while other consumers prefer a mutual insurance company because they want the opportunity to earn dividends if the company performs well.
Not all insurance companies offer insurance in all states. Furthermore, some insurance companies may sell some, but not all, of their policies in a certain state, based on that state’s laws or restrictions. Each state’s insurance department can help consumers with problems (including if a life insurance company becomes insolvent), and can step in and help with companies licensed in that state. Consumers who have questions about life insurance companies that are licensed in their state should contact their state’s insurance department.
Find the Right Life Insurance Agent or Broker
Finding the right agent or broker is another key to finding the right life insurance policy. Some companies allow you to get a term life insurance quote online, and a few, such as Haven Life, use an online application process exclusively without personal interaction with an agent.
If you prefer to work with an agent or broker in person, look for someone licensed by your state’s insurance department, and if you can’t develop a rapport with your agent, find someone else. You need a comfortable working relationship with an agent or broker who understands your financial situation, answers your questions in a way that makes sense to you, clarifies how your life insurance plan benefits you and supports your goals, and will work with you until you are satisfied with your decision.
“Get a trustworthy insurance broker who has a good understanding of your goals and financial needs,” Gibbons says. “You need to trust their judgment and trust that they understand what your goals are.”
As a starting point, try asking friends and family for recommendations. Also, find out whether your agent works on commission or on a fee basis and what that means for you. Although some people are uncomfortable with agents who work on commission for fear that their recommendations depend on the size of their commissions and not on what’s best for consumers, Weisbart says he finds that this concern is usually unfounded.
“The most important characteristic is the extent to which the agent understands the needs of the buyer and the degree to which the buyer is confident that he/she understands what they are buying,” Weisbart says. “The manner of paying the agent is, to my mind, secondary.”
Some policies have innovative options, such as discounts for wearing a fitness tracker and meeting certain fitness goals. Weisbart says that while such policies can be beneficial, not many companies offer them.
Although insurance companies aren’t exactly transparent about how rates are calculated, there are a few truly hidden costs to a life insurance policy. One example of a hidden cost is that companies charge an effective interest rate, which can be quite high, for paying premiums more frequently than annually. Another factor to consider, while not a hidden cost per se, is that dangerous hobbies such as scuba diving or skydiving can make your rates very high.
Choose the Right Life Insurance Riders
A rider is a provision of an insurance policy that usually adds benefits, although some add restrictions. Riders are a way to customize coverage and make a policy fit your individual needs. They do add cost to an insurance policy, so the consumer must consider the benefit of a particular rider against the extra expense, because many riders are designed to provide benefits for a specific situation that might not occur. For example, an accelerated death benefit rider enables the policyholder to claim the death benefit while still living if he or she is diagnosed with a terminal illness. Some people might feel that it’s worth the extra expense to take that chance, while others might not. Some riders must be added at the beginning of the policy, and others can be added at any time. Your life insurance agent or broker will help you sort through the available riders and determine which make the most sense for you.
Affleck says one of the most common and useful riders is a disability waiver of premium rider. Under this type of rider, the insurance company will waive premium payments for a certain period (often six months) if the policyholder becomes disabled. By contrast, he says accidental death benefit riders, under which the insurance company doubles the death benefit if the policyholder dies in an accident such as a car crash, are generally not worth the cost because policyholders statistically are much more likely to become disabled at some point in their lives than to be killed in an accident. Another helpful rider for many people is a guaranteed insurability rider, which allows the policyholder to increase insurance benefits at certain intervals (usually every three years until age 40) without undergoing another medical exam or otherwise demonstrating eligibility for the extra coverage. “For a younger person, guaranteeing insurability is a good thing,” he says. “You never know what’s going to happen in your life and how it will affect your insurability.”
Other common riders for life insurance include: long-term care, generally available with cash-value policy types to access the death benefit to use for specific long-term care needs; term conversion, to convert a term policy to a permanent policy under the same terms; waiver of premium, which covers premiums if the policyholder becomes ill or disabled; and guaranteed insurability, which lets you add to the death benefit without providing more health information. Of these common policy riders, the Insurance Information Institute recommends the latter two. Additional common life insurance riders include children’s protection, spouse protection, estate protection, and lapse or overloan protection.
Life insurance benefits typically are paid out in a lump sum as the default method, but many life insurance companies now offer additional options to beneficiaries. Those who don’t want the full death benefit all at once may be able to choose investment accounts or installment payments over a specified time period, or roll the benefit into a new life insurance policy.
Purchase Your Life Insurance Policy
Life insurance can be purchased online or in person at an agent’s or broker’s office. Buying online involves going through a single life insurance company or an online broker that works with multiple insurance companies. The advantage of using a broker (online or in person) is that they can help you find the best policy and company for your situation rather than presenting quotes from just one company.
The process of purchasing life insurance from an online broker will vary somewhat depending on the broker you use. However, generally speaking, the process is as follows:
- Enter your date of birth, gender, and zip code to get a general quote for the type of policy you want. You can adjust the term (if it’s a term policy) and the death benefit at this point to see how it affects the quote.
- Answer a few questions about your height, weight, and family history. You will then see more specific quotes from several companies for the type of policy you want, utilizing this new information. You can adjust the term and death benefit here as well to see how the quotes are affected.
- Choose a company and policy based on the quotes you received.
- Fill out an online application with questions about where you live, contact information, marital status, driving infractions, international travel plans, military membership, health status, and other things that will affect your premium. The application typically takes about five minutes.
- The online broker uses all of the information you’ve provided thus far to generate a more precise quote, and perhaps advise you to switch to another company for a better value.
- If you want to proceed with the broker’s recommendation, he or she will schedule a call with the chosen insurance company, which will verify that all of your information is correct, ask more questions about your health history, and collect information about your beneficiaries.
- About 30% of life insurance applicants can now sign the final policy documents (this is usually done electronically) and receive an offer of insurance within a day or so, based only on the information collected up to this point.
- Based on their medical history, about 70% of applicants will have to first undergo a physical exam before the insurance company can underwrite a policy, unless you are buying a no-exam policy. In addition, the insurance company might request medical records. The exam is conducted at your home, your office, or the medical professional’s office. Your height, weight, and blood pressure will be measured, and blood and urine samples will be collected and sent to a lab for analysis of cholesterol levels, the presence of drugs, and other health indicators. An underwriter at the insurance company will use all of this information, along with the other information collected during the application process, to select the appropriate risk category or table rating for your policy.
Buying a policy from a broker or agent in person involves a similar process. Remember that just like online, an in-person broker will show you rates and policy options from multiple insurance companies, while an agent will only discuss policies that his or her company sells.
The Insurance Information Institute suggests storing policy documents in at least two places to help safeguard them and ensure that your beneficiaries can find them and file a claim should something happen to you. For each individual life insurance policy, you should record:
- The full name of the life insurance company that issued the policy, along with the city and state of its corporate offices.
- If the insurance company belongs to a group of companies, the name of the group and the location of its U.S. headquarters.
- The policy type, number, date of issuance, and death benefit amount.
- The name and address of your agent or broker.
- The original policy’s location.
If you have group life insurance through your employer, the III suggests keeping a record of:
- The name of the employer or group sponsoring the policy.
- Who to contact when filing a claim.
- The policy’s certificate number.
- The date that coverage started.
- The death benefit amount.
Store a copy of this information in your home where your survivors can easily find it, such as with your other financial records, and tell them where it is. Store another copy outside of your home, like in a safe deposit box, to guard against loss from fire or theft. Make sure both copies say when they were last updated so the most recent copy can be identified.