When your dreams for the future become intertwined with someone else’s dreams for the future, it’s time to think about buying life insurance.
Life insurance policies come in many different shapes and sizes, ranging from the simple to the elaborate. Many shoppers get bogged down in the complexities of coverage and never get around to buying a policy.
It takes only a few minutes to learn how to get coverage that could protect your dreams if the unforeseen happens and you’re not around to help achieve them.
What Is Life Insurance?
Life insurance helps you provide someone you care about — your spouse, children, business partner, or someone else — with a large amount of money if you died with the policy in force. In insurance terminology, the person you want to help is called the “beneficiary” of your policy.
In exchange for leveraging this large sum of money, you pay a much smaller premium each year, quarter, or month. A life insurance policy details this contract.
How do policies work? How long do they last? How much should you pay in premiums for your coverage? Answering these and a few other questions will help you find the right kind of coverage.
Why Buy Life Insurance?
The most important question should be this: Why are you buying coverage to begin with? Some common reasons to buy life insurance include:
- Replacing income: If the people you care about depend on the money you earn, life insurance could help replace your income if you died unexpectedly.
- Preserving savings: If the worst happened, life insurance could prevent your loved ones from having to use savings or investments to survive as they built a new life.
- Paying off the mortgage: Your life insurance payout could pay off your house so your family wouldn’t have to worry about it. Mortgage life insurance provides the same service but without as much flexibility.
- Paying final expenses: Burial or cremation costs typically exceed $10,000. A life insurance payout could cover those costs so your family doesn’t have to.
- Protecting a business: When you own a business, your employees and business partners depend on you. A life insurance payout could help your business keep running smoothly while your associates recover from your loss.
- Getting a loan: Some lenders require borrowers to use life insurance as collateral for the loan. If you died, the insurance policy could repay your debt.
- Saving for the future: The money you plan to earn in the coming decades could pay for your retirement or your kids’ college degrees. If you’re not around to earn those funds, your life insurance payout could replace that work.
You can probably think of several more good reasons to get life insurance coverage. Your reason for shopping for coverage should be your guide as you decide what kind of coverage and how much coverage to buy.
Types of Life Insurance
Life insurance can serve dozens of purposes, but it tends to come in only two forms:
- Whole life: Coverage that can last the rest of your life and is highly customizable.
- Term life: Coverage that lasts for a set amount of time and usually offers the best value.
Every life insurance shopper has unique needs, so you’ll have to decide for yourself whether to get term or whole coverage. However, this basic breakdown can help you get started:
- Who should buy term life? Often, younger life insurance shoppers prefer term life coverage because they can get a larger amount of coverage — $1 million or more — for an affordable price. Younger people who have dependent children and less financial security need more coverage for less money. Term policies excel at replacing income, preserving savings, and paying off large debts like mortgages.
- Who should buy whole life? People in their 50s or 60s or older often prefer whole life coverage, especially if they need a smaller coverage amount or want to take advantage of the added flexibility a whole policy provides. Whole policies tend to have lower coverage amounts but offer flexible features and an additional cash value.
Of course, with all its complexities, real life never seems to fit so nicely into these categories. Let’s take a closer look term and whole life characteristics to see what your family needs.
About Term Life Coverage
Term coverage offers life insurance at its simplest: As a policyholder, you’ll trade regular premiums for knowing your beneficiary could access your policy’s coverage amount if you died.
A term life policy has no value beyond this agreement, and the policy lasts for a predetermined amount of time, usually 10, 15, 20, or 30 years.
When the coverage expires, you could renew the policy each year at a significantly higher cost, convert the policy to whole life coverage, or let the policy expire and buy another policy. Or you can go without coverage if you no longer need it.
Because term insurance expires and does not accrue additional value, term life allows for larger coverage amounts — sometimes up to $2 million or more — at more affordable rates.
Your health, age, and other factors specific to you will determine your rate. We’ll get more into those details below.
About Whole Life Coverage
When you buy a whole life policy, you’re getting coverage that can last the rest of your life, and you’re funding an additional cash value you can use later in life.
This added cash value grows, making your policy more valuable over time. The cash value remains separate from the policy’s actual coverage amount, which insurers call your “death benefit.”
You could access the cash value yourself later in life by borrowing against it or canceling the coverage and redeeming the cash value. You could also donate the cash to a charity or your heirs. You could use it to help pay for your children’s college tuition.
Because of this added value, and because of its permanence, whole coverage typically costs significantly more than a term policy with the same coverage amount.
Whole coverage also comes with several variations which make it even more flexible:
- Traditional Whole Life: You’ll pay a level premium and have a set coverage amount and a separate cash value that grows like a savings account.
- Universal Life: The cash value in a universal policy can interact with your coverage amount, allowing you to reduce your premiums or change your coverage amount.
- Variable Universal: You can invest your cash value into securities accounts of your choice. Most policies have safeguards protecting your coverage amount, but it is possible to lose your accrued cash value.
- Indexed Universal: You can invest your policy’s cash value in specific securities indexes such as the S&P 500, making your investment more secure but still not completely safe from losses.
Many shoppers prefer to work with a financial advisor or an independent life insurance agent before finalizing a whole life insurance contract, especially one with an investment component.
Health Factors Affecting Life Insurance Coverage
Whether you opt for whole or term life coverage, the insurance company you choose will want to know something about your life. If you’re getting a medically underwritten policy, which can lead to the lowest premiums, expect to share a lot with your insurer.
Medically Underwritten Life Insurance
To unlock the largest coverage amounts the life insurance industry has to offer, you’ll need a medically underwritten policy.
In the vast majority of cases, medical underwriting requires applicants to undergo a routine medical exam. The exam usually includes giving blood and urine samples and measuring vital signs, including blood pressure, resting pulse, height, and weight.
The healthiest applicants can usually access the lowest rates for life insurance. Less healthy applicants will typically pay more. It’s possible for your health condition to render you ineligible for coverage with some insurers.
No-Exam Life Insurance
People concerned about taking a medical exam to get insured like no-exam insurance policies. Instead of meeting with a medical professional, you can answer a series of health-related questions about yourself and your family.
The insurer will also consult databases to learn what medicines you’ve been prescribed, to learn about medical exams you may have undergone for previous insurance policies through the Medical Information Bureau, and to learn whether you’re a safe driver through your state’s Department of Motor Vehicles.
Since insurers know less about your health at the time of your application, no-exam policies cost more and offer less coverage. In fact, you shouldn’t expect to find more than $250,000 to $350,000 in coverage from a no-exam, simplified issue policy.
Guaranteed Issue Life Insurance
Guaranteed issue policies seek even less information than simplified issue insurance. In fact, almost anyone who is not in the advanced stages of a life-threatening illness can get guaranteed issue coverage.
Since guaranteed issue insurers have so little information about you, expect to pay significantly higher premiums for small coverage amounts topping out around $25,000 to $35,000.
You can also expect the insurance company to require a waiting period before your coverage becomes active. It may take two to three years before your coverage becomes fully available to your beneficiary.
Other Lifestyle Factors Affecting Your Coverage
Unless you’re getting a small, guaranteed issue insurance policy, your life insurance underwriters will want to know even more about your life beyond your health status.
This personal information helps underwriters gauge the risk your policy would present to their company’s bottom line. Knowing this risk helps underwriters decide whether to approve your policy and how much you should pay for your coverage.
Lifestyle factors insurers consider will include:
- Your Job: A dangerous job like roofing or logging can increase your rates.
- Your Age: Younger people usually get lower life insurance rates.
- Your Hobbies: Scuba divers, skydivers, rock climbers — these kinds of hobbies can lead to higher rates.
- Your Tobacco Status: Smokers and other tobacco users pay significantly higher premiums for the same coverage amount.
- Your Driving Record: Speeding or other forms of reckless driving can jack up your life insurance rates.
- Your Credit Score: Many insurers now use a portion of your credit score known as your insurance score to set your premiums. A lower credit/insurance score tells underwriters you take more financial risks which correlates with other kinds of risk-taking.
You’ll need to honestly answer your insurer’s questions about your lifestyle factors. Failing to report a risky behavior could negate your coverage when your family most needs it.
Some lifestyle factors can make it seem impossible to get affordable coverage, but the right independent life insurance agent can help steer you toward the insurance companies most likely to extend you a better deal.
How to Shop for Life Insurance Coverage
In a perfect world, everyone could build their policies and compare quotes from several insurers online. In fact, many shoppers do have this luxury.
If you’re relatively healthy, relatively young, and in the market for a simple policy such as a term life contract, you can shop exclusively online.
In most cases you’ll still have to wait for your medical exam to confirm your health information before your coverage gets finalized, but this may take just a few weeks.
People with more complex health histories and shoppers in need of more elaborate insurance policies such as variable universal life usually need expert help.
Financial advisors, independent life insurance agents, and even tax advisors can help guide you through the implications of different life insurance options.
Consumer Protections for Life Insurance Shoppers
Whether you’re shopping online or seeking expert help to solve a life insurance puzzle, you can help yourself by seeking only quality life insurance coverage.
Independent life insurance ratings agencies can help. A.M. Best, Moody’s, Standard & Poor’s, and Fitch Ratings regularly assess the financial stability of the nation’s insurance companies. These agencies give grades so consumers can learn about an insurer’s financial health.
While there is plenty of nuance in the way each agency grades insurers, the highest grades always include multiple As or As with plus signs. Ratings of B or lower should give consumers reason to be at least a little concerned.
You can also learn a lot from other customers’ experiences, too. Forums such as TrustPilot and even Facebook can offer insights from existing policyholders or even customers who have filed claims.
As with any online reviews, remember you’re reading someone’s opinion and not necessarily the results of research. However, when a lot of people have the same experience with a company, you should take note.
Controlling Costs for Your Coverage
The price you pay for life insurance depends on many factors you can’t easily control such as your health and occupation. In other ways, however, you can control the price you pay for coverage:
- Getting Just Enough Coverage: Like any other product, getting more requires paying more with life insurance. With occasional exceptions, higher coverage amounts and longer terms of coverage lead to higher premiums. By getting just enough coverage and not too much, you can keep costs lower.
- Reducing or Eliminating Riders: Insurers use the word “rider” to describe optional features you can buy when you get coverage. Riders can make your coverage more flexible and useful in the future. For example, an accelerated death benefit rider could let you access your coverage before death if you’re diagnosed with a terminal illness and need help paying medical bills. Each rider you opt for will add to your premiums, so choose them wisely.
- Shopping Around for Coverage: Comparing quotes from different insurers is easy to do, especially when you shop online, yet some shoppers buy coverage without shopping around. When you work with an independent insurance agent, he or she can help you compare policies from a variety of companies.
Bottom Line: Life Insurance Can Alleviate Stress
When your life becomes intertwined with someone else’s life, your death would be emotionally devastating. Your death could also require the people you care about to struggle financially as they make changes.
Life insurance can help alleviate the financial stress your life partner, business partner, or children would have to endure as they recover from losing you.
So take a few minutes today to start looking for the right amount of coverage for the right amount of time. If you need help, find an independent agent nearby you can talk to or check with your financial advisor.
The time and money you spend now can have an exponential impact later for the people you care about.