Life insurance can be a vital tool for financial planning, but finding coverage that meets your goals and budget can be challenging without guidance. A seven simple steps will help you focus on the essential aspects of buying a policy that fits your needs. Each comes with potential pros and cons, as well as a wide range of premiums.
Purchasing life insurance may seem complicated if you have never done it before. There are many different types of life insurance policies (see Most Common Life Insurance Myths).
The decision to purchase a life insurance policy is a significant step in securing financial stability for loved ones in the event of one’s passing.
Life insurance provides a safety net that can help ease the financial burden for beneficiaries, ensuring they can maintain their standard of living and cover essential expenses such as mortgage payments, education costs, and outstanding debts (see 10 Dos & Don’ts Of Getting Your First Life Insurance).
According to Triple-I guide, before buying a life insurance policy, assessing your financial needs and obligations is essential. The coverage you need will depend on various factors, including your income, debt, assets, and the number of dependents you have.
To determine the appropriate coverage amount, consider your current expenses, future financial goals, and any debts, such as credit card balances or student loans (see Life Insurance a Good Way to Save Money).
Purchasing life insurance is much different than buying home, renters or auto insurance, and it’s generally a longer process.
For instance, if you have young children and a mortgage, you will likely need a higher coverage amount than someone who is single and has no dependents. Buying life insurance does not have to be difficult or confusing.
1. Verify what you need life insurance coverage
Although some life insurance policies can be purchased online, it’s more common for life insurance policies to be purchased through an agent.
Life insurance is useful but it is not necessary for everyone. Consider purchasing a policy if any of these conditions apply to your situation.
- Someone depends on you financially and would likely still need significant financial resources after your death.
- Your estate won’t have enough liquid assets (cash, investments, property, or other saleable items) to cover its taxes and debt, eroding the inheritance you plan to leave behind.
- You wish to cover your funeral and burial expenses at least so that your assets remain intact for your legacy and heirs.
Otherwise, it is possible you don’t need life insurance. You may also consider life insurance as a viable strategy to leave a charitable legacy for a cause you support.
2. How much life insurance coverage you need?
The coverage limit that is right for you will depend on your reason for buying a life insurance policy. If you want coverage to provide financial protection while you pay down a mortgage, for example, you may only need enough coverage to allow your beneficiary to pay the loan balance.
In general, you should probably consider buying enough coverage to support your financial dependents for several years after your death, based on your current lifestyle and financial situation.
The amount of life insurance you need depends on your goals for the policy. If you’re buying term life insurance to provide financial security to your partner as you pay down your mortgage, you might only need enough coverage to cover the principal of your loan. If you want to provide money to send children to college, replace your lost income for your family, or leave a financial gift to your loved ones or an organization, you might need more coverage.
This part of the process can be daunting for many people, but it need not be. Take a quick snapshot of your finances and answer the following three crucial questions:
- What financial resources will be available to your survivors or heirs after your death? Look at three primary categories of resources:
- Social security and other retirement-related survivor benefits;
- group life insurance (e.g. a policy you may have through an employer); and
- other assets and financial resources
- When will these resources become available? For example, social security survivor benefits are payable immediately to a surviving spouse if there are dependent children. If not, social security may not be available to your spouse until after age 60.
- Determine what your survivor’s financial needs may be after your death. For simplicity, you might focus on three categories of requirements: final expenses, debts, and income needs.
Although there are many ways to calculate a potential coverage limit, one popular method is the DIME formula, which takes into account your debt and final expenses owed, total income based on what might be needed after your death, the amount left on your mortgage and any outstanding or expected expenses for your dependents’ education or schooling.
Next, subtract your survivors’ financial resources from their financial needs to determine how much coverage to buy. Many people are underinsured, often because they skip these steps or take a shortcut (such as simply buying a multiple of annual income).
Life Insurance Value Chain — Distribution & Product Management. Traditional problems that have plagued the Life Insurance industry for decades—such as earnings sensitivity to external factors and opaque risks that investors are challenged to underwrite—will remain.
3. What type of life insurance for your financial needs?
Whole life insurance
You may have heard about various categories of life insurance, including term life, whole life, and universal life. Each of these comes with fundamental distinctions. Consider how these differences might work for you.
Within permanent insurance, the two primary types are whole life insurance and universal life insurance.
Whole life insurance is a type of permanent life insurance that pays a death benefit when you die. These policies, which include traditional whole life, universal life and variable life, provide life insurance protection for your entire life. They also offer level premiums, meaning your monthly payments will remain the same (see Distribution Model in Life Insurance).
Term life insurance
Term life insurance is usually less expensive with fewer benefits, while permanent life insurance is typically more expensive as it offers more benefits (see Term Life Insurance vs. Whole Life Insurance).
Term life policies offer payment of a specified death benefit for a specific term of your life, such as five, ten, 15, or 20 years. Term life insurance coverage for most people tends to involve lower premiums; however, the longer the term, the more expensive your premiums may be. If you want insurance coverage for only a specific period or are on a limited budget, a term life insurance policy may be a good fit.
Term life insurance is a type of temporary life insurance that covers you for a specific period of time — usually between 10 and 30 years.
If you pass away during the coverage period, your beneficiaries receive a payout from the policy, which they can use to cover funeral expenses, household bills, or any remaining debts you may leave behind (among other things).
Term life insurance is attractive to young people with children. The parents can obtain substantial coverage for a low cost. If the payout is needed, the family can rely on it to replace lost income.
Payouts for term life insurance policies vary, but most companies offer options well into the millions. However, what if you want to purchase insurance coverage for several decades until your death.
Universal life insurance
Or, perhaps you’d like the option to use some of your premiums to accumulate savings? A whole or universal policy might be a good option in either of these cases. Basic whole life insurance involves a fixed premium and promises a minimum rate of return on the dollars invested, which builds the policy’s cash value. A universal life insurance policy may offer the potential to increase the death benefit or adjust premium payments.
Universal life insurance is another type of permanent coverage. It also accumulates cash value, but the policy is flexible to allow you to change your death benefit and premium to fit your changing needs. There are several forms of universal life insurance, including variable universal life insurance and indexed universal life insurance.
4. Research life insurance programs from different insurers and compare insurance quotes
When choosing a life insurance company, search the website and look at the policy options. The best life insurance company for you may offer a combination of coverage options that fit your insurance needs and a positive customer service experience.
When it comes to life insurance policies, it’s essential to shop around and compare policies from different insurance providers.
Policies can vary significantly in terms of coverage, premiums, and benefits. Look for policies with a reputable insurer that offers competitive rates, flexible payment options, and comprehensive coverage that meets your needs.
Consider working with an independent insurance agent who can help you compare policies and provide expert advice on the best policy for your unique situation. By shopping around, you can find the best policy at the best price, ensuring that you receive the coverage you need while also staying within your budget.
When you request to receive a quote, you will typically be asked to provide some personal information, including your age, address and gender.
Additionally, you will likely need to submit basic information about your medical history. This typically includes information about your lifestyle, smoking history, past surgeries and medications you are taking.
Once you have selected a handful of potential providers, you can get quotes from each company. Most companies do not include the price of premiums on their website because rates are highly dependent upon your personal and health metrics.
The overall reason for buying life insurance is to leave behind financial resources for who or what is important to you.
Premiums payments to the insurance company go toward the death benefit, the financial payout after your death.
For many insurance carriers, the distribution function holds a place of pride and significance beyond all other functions. And many insurers are now thinking about earnings streams from distribution in different ways.
5. Find the best life insurance coverage and decide on your financial goals
Many people plan for this money to take care of their final arrangements, cover living expenses for loved ones, or support a favorite cause. However, you can also use a life insurance policy to accumulate savings, maximizing the income you will have for your retirement or providing an income stream after your death for your survivors.
There are many ways to save money when buying life insurance, but they don’t always entail paying a lower premium immediately.
Life insurance is a very competitive business, and, therefore, quotes can vary significantly between companies.
Consider that what’s important is that you get the coverage that fits your budget and financial goals. If you choose to work directly with an agent, make sure your agent knows about your financial situation and takes time to explain your options in easy to understand terms.
You may have the option to pay an annual lump sum or spread out the yearly cost over smaller, more frequent payments. It may be more cost-effective to pay annually as often there may be a relatively large additional charge for paying in installments. Decided what works best for you.
If you have dependents, buy enough life insurance so that, when combined with other sources of income, it will replace the income you now generate for them, plus enough to offset any additional expenses they will incur to replace services you provide.
Also, your family might need extra money to make some changes after you die. For example, they may want to relocate, or your spouse may need to go back to school to be in a better position to help support the family.
You should also plan to replace “hidden income” that would be lost at death. Hidden income is income that you receive through your employment but that isn’t part of your gross wages. It includes things like your employer’s subsidy of your health insurance premium, the matching contribution to your 401(k) plan, and many other “perks,” large and small. This is an often-overlooked insurance need: the cost of replacing just your health insurance and retirement contributions could be the equivalent of $2,000 per month or more.
Of course, you should also plan for expenses that arise at death. These include the funeral costs, taxes and administrative costs associated with “winding up” an estate and passing property to heirs. At a minimum, plan for $15,000.
6. Add any riders to the life insurance policy
Life insurance policies offer primary benefits according to the type of policy you purchase. But your coverage can be expanded or personalized through riders, optional additions to a life insurance policy that provide supplemental coverage or benefits you wouldn’t receive with a standard policy.
Life insurance companies typically offer riders, but the options can vary. When choosing a life insurer, it may be worth checking that it has riders that suit your needs, such as a return of premium rider or child term rider. If so, consider how adding riders impacts the premium, and how that affects the coverage you’re able to afford.
Adding some riders may increase your premiums, while other riders might be free. There are two riders that you may want to consider: waiver of premium and guaranteed insurability.
Some policies come with one or both included with the basic contract, but if not, it is generally a good idea to add them. Waiver of the premium pays the life insurance policy premium for you if you are disabled.
Guaranteed insurability permits you to add to the death benefit without providing additional evidence that you are in acceptable health.
After choosing the provider that fits your needs, the next step is to fill out an application.
You will be required to include basic personal information, as well as your Social Security number and driver’s license number. Additionally, you might need to submit an Attending Physician Statement (APS), which helps the insurance company verify your medical history.
Many life insurance companies and policy types require applicants to get a physical exam before they can be approved for coverage.
The life insurance medical exam is like a regular doctor appointment, but the insurance company’s medical examiner may be able to visit your home or office to see you.
They will generally take your vitals, like weight and blood pressure, and draw blood. The exam usually takes about 30 minutes, and you may be able to schedule it during your phone interview.
7. Choose and inform your beneficiaries about your life insurance policy
If you get approved and are happy with the quoted premium, you will be sent the policy documents to sign and approve. While traditionally, this process is conducted with a physical copy, technology sometimes allows this paperwork to be completed with a digital signature.
Once the policy is purchased, tell your beneficiaries which company issued it, where to find the paper copy of the policy, and any specifics about what you want them to do with the death benefit.
While it is rare for people to be unaware they are the beneficiary of a life insurance policy, it does happen, and benefits may go unclaimed. Don’t forget to store your documents so that your beneficiaries can easily access them. After the policy documents are signed, you might be asked to mail a physical copy to your insurance company.
Getting your life insurance policy can seem overwhelming, but it’s an essential step towards securing your financial future and providing peace of mind for your loved ones. By following these 7 steps, you can make an informed decision about the type of policy that best suits your needs.
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Edited: 
Nataly Kramer
Fact checked: 
Oleg Parashchak
