Buying a life insurance policy can help provide financial security to your family, such as by covering educational expenses for your children if you pass away before they finish school. Or, you might want to pass on money to a charity and see life insurance as a good vehicle to do so (see Why You Should Get Life Insurance?).
Whatever your exact reasons might be, life insurance often helps people gain a form of financial protection and peace of mind. But policies can vary significantly in terms of how much protection they provide and how they work.
Life insurance can give you peace of mind by providing a financial safety net for your loved ones after you pass away. When you purchase life insurance, you’ll have to choose between term life insurance or a permanent (whole) policy.
Unlike permanent life insurance, which lasts your entire life, term life insurance lasts for a specific time period, typically from one to 30 years (see Largest Life Insurance Companies).
Term life insurance is the most popular type of life insurance because it’s significantly less costly than other options while still covering the financial needs of your beneficiaries once you pass.
If you’re in the market for life insurance – or simply want to increase the protection you already have – speak to an expert who can help you.
How term life insurance can protect your family
Term life insurance is flexible and cost-effective, offering a specific death benefit for a defined term, such as five, ten, 15, 20 or 30 years. Some policies cover you up to a specific age, such as 65.
Once your term expires, you may renew your policy. You may also be able to convert your policy to a whole life insurance policy without taking a medical exam, as permanent policies usually require. Be aware, however, that a permanent life policy will likely be more expensive than a term life policy (see about Digital Life Insurance).
Insurance companies set your premium rates based on several factors, including age, gender, health and coverage amounts. Premiums are typically paid monthly or annually.
Most term policies come with a level death benefit, which means your premium and the value of the death benefit stays the same for the entire term, whether you die in the first year or near the end of your policy term. By contrast, you can opt for a renewable term policy with premiums that may increase yearly.
Some policies come with a return of premium feature, which refunds a portion or all of the premiums you paid if the death benefit isn’t paid out at the end of a level term period. However, policies with this option are more expensive.
Life is significantly less costly than permanent life insurance for similar coverage amounts, mainly because it only lasts for a specific period rather than your whole life. If price is a concern, term life may make sense for you, according to Life Insurance Industry Results.
Keep in mind, term life insurance will cost you more as you get older, even if you’re in good health. Generally, men pay more than women for term coverage.
It’s always wise to consider both the benefits and the downsides of any financial product before making a decision. Here are some of the disadvantages of life insurance:
- Rising premiums: The primary downside of term insurance is that your premiums increase every time you renew your coverage because the likelihood of dying increases with age. Consequently, term insurance can become too costly when you are older and need it more.
- Limited coverage period: Term life insurance offers temporary coverage, which can expire without paying out a death benefit if you don’t pass away during the term.
- No cash value: Unlike permanent life insurance, term life doesn’t build cash value, a savings account that grows tax-deferred over time. If you cancel your term policy, you won’t receive any refund or cash out unless your policy has a return of premium feature. By contrast, permanent life insurance provides surrender value based on your cash savings account value, minus fees, balances owed and other circumstances.
Determine your needs
The first step for buying life insurance is to figure out what you’re trying to accomplish by purchasing a policy.
If you’re just looking to pass on a small amount of savings to your children, for example, you might find that you’re better off setting up your own savings account.
But if you’re trying to protect against larger issues that you can’t accomplish via savings, like covering your spouse’s and kids’ living expenses for several years in case you pass away, then you might decide to take out an insurance policy (see Life Insurance Value Chain).
Your needs around the value of insurance coverage, length of coverage, and ability to access coverage (e.g., some policies let you access some of your death benefits while still alive, such as in the event of a critical illness) can all affect your purchase of life insurance.
Know your budget
The next step is to see how your budget compares with the coverage you’re looking to buy. Life insurance premiums can vary widely based on factors like your age and health but also based on levers you can control, like coverage limits and length.
So, if you know you can only afford $40/month in life insurance premiums as opposed to, say, $100/month, then that will often change the type of coverage you look for.
Keep in mind, however, that you might have some flexibility in your budget based on what life insurance can provide.
For example, you might be willing to pay a little more in whole life insurance premiums rather than setting aside money in a savings account each month. Others, however, would prefer to set a lower insurance budget and use extra money elsewhere, so they might go with a term life insurance policy.
Pick the type amount
Depending on your budget and needs, you can choose the right type and amount of life insurance for your circumstances. As mentioned, for example, you might be deciding between whole life insurance vs. term life insurance.
If your needs mainly include protecting against your loss of income if you pass away while your kids are relatively young, for example, then you might choose a term policy. After, say, 10 or 20 years, you might be okay with coverage expiring.
Others, however, want whole life coverage. That can increase costs, but you might be willing to pay higher premiums for the peace of mind that can come with lifetime coverage.
For example, you might like the idea of not having to re-qualify for life insurance after a term policy expires. So, you might choose a whole life insurance policy from the get-go. Or, you might use options like converting a term policy to a permanent one, which many insurers offer.
Once you have a good sense of what life insurance you want to buy and how much you can afford, you can go deeper by shopping around.
Not only might you want to compare different types of insurance policies, but you might want to see how policy details and costs differ among various life insurance companies.
Much like shopping around for different car insurance policies for the best rates, for example, you can shop life insurance providers online to see who can give you the best mix of affordable premiums and quality coverage. Use the table below to get started.
Buy life insurance policy, add beneficiaries
If you find a good deal on life insurance that you want to purchase, you can go forward with actually buying the policy. In many cases, doing so then requires getting a medical exam to get approved. However, no-exam life insurance policies do exist, they just tend to cost more.
When finalizing a life insurance purchase, you’ll also add your beneficiaries, such as your spouse and children.
This step is critical, because if you don’t add the right information, then your life insurance might not pay out to those who you’re looking to protect, or it could become complicated for them to make claims.
You can add multiple beneficiaries, and you can also add contingent beneficiaries in case your first choices pass away before being able to make claims.
Following these five steps can help you buy life insurance that’s right for your situation. There can be many nuances to weigh, however, so don’t feel like you have to rush. Take your time to explore your options and see if there’s a particular life insurance policy that makes sense for you.
by Yana Keller