You may wonder whether you truly need life insurance. In many cases, the answer is yes. A life insurance policy’s death benefit can help replace your income when you pass away. It can also help cover final expenses, settle debts, and pay estate taxes. Some policies also have living benefits, which allow you to use some of the policy’s death benefit while you are still alive as supplemental retirement income or to lower your monthly life insurance premium.
Many financial experts agree that having the right amount of life insurance coverage is a cornerstone of sound financial planning. In fact, 68% of people with life insurance believe they would be financially secure if their household’s primary wage earner died prematurely, compared to only 47% of those who do not have life insurance.
Discover the steps you can take to buy life insurance, from what to consider to where to start comparing your options.
Table of Contents
- 8 Steps to Buying Life Insurance for the First Time
- Step 1: Calculate your coverage needs
- Step 2: Determine your current budget for life insurance
- Step 3: Choose between term life or permanent life insurance
- Step 4: Pick a type of term or permanent life insurance
- Step 5: Compare policy quotes
- Step 6: Apply to your insurer of choice
- Step 7: Get approved and name your beneficiaries
- Step 8: Make your first premium payment and receive active life insurance coverage
8 Steps to Buying Life Insurance for the First Time
While it is clear that life insurance is important, comparing the types of insurance available, coverage amounts, and other important features can be overwhelming. However, the entire process can be broken down into 8 basic steps:
- Calculate your coverage needs.
- Determine your current budget for life insurance.
- Choose between term life or permanent life insurance.
- Pick a type of term or permanent life insurance.
- Compare policy quotes.
- Apply to your insurer of choice.
- Get approved and name your beneficiaries.
- Make your first premium payment and receive active life insurance coverage.
Here’s a look at each of the steps in greater detail.
Step 1: Calculate your coverage needs
The first step is to determine the size of the death benefit you need. Start by considering the following factors:
- Income replacement: How would the loss of your income affect your dependents?
- Housing expenses: How much does your spouse or dependent need to pay for the mortgage or rent?
- Debt: Do you have any debts that would need to be paid off upon your death?
- Services: How much money would your spouse and dependents need to replace services you provide, such as childcare or house cleaning?
- Final expenses: What would it cost to cover the cost of your funeral and burial?
- Future expenses: Do you need to leave money to cover expenses like college or your children’s weddings?
- Taxes: Do you need funds to pay estate taxes?
- Inheritance: Do you want your life insurance policy to provide money for an inheritance?
- Charitable giving: Do you want your policy to make a charitable donation upon your death?
Considering each of these questions can give you an estimate of the death benefit you need. Since this step can be challenging, it may be helpful to consult with a financial professional before moving on to the next step.
Do you need special riders or considerations?
A life insurance rider is an additional benefit you can add to your policy, typically for an additional cost. These can help you create customized coverage so you can build a policy that meets your unique needs. Some common life insurance riders include:
- Accelerated death benefit rider: This rider allows you to access your death benefits while living if you are diagnosed with a terminal illness or disease .
- Children’s term rider: This rider adds your children to your life insurance policy, which will pay if the child dies before a specified age.
- Waiver of premium rider: This rider helps pay the required premium if you have an illness or injury that leaves you unable to work.
- Accidental death benefit rider: This rider increases the death benefit if you die from a covered accident.
In addition to riders, consider if you need any other special considerations. For example, insurance companies may categorize you as “high risk” if you have below-average health or you have an occupation or hobby that puts you in potentially life-threatening situations. This can impact the cost of your premium and may limit the types of life insurance coverage you can purchase.
Step 2: Determine your current budget for life insurance
When learning how to shop for life insurance, it is essential to determine how much you can spend and compare the costs of each policy you are considering. Remember that a policy with a low premium is not automatically the most affordable. Instead of focusing on premiums alone, it is important to consider a variety of factors that contribute to a policy’s cost and value. This may include:
- Premium: This is the monthly, quarterly, or annual amount you pay the insurer in exchange for your coverage.
- Term length: This is the amount of time you are covered by a term life insurance policy (e.g., 10, 15, 20, or 30 years).
- Cash value: This is the portion of a permanent life insurance policy that earns interest and may be available for you to withdraw or borrow against while you are still alive.
- Death benefit: This is the amount paid to your beneficiaries when you die.
Keep in mind that your age, gender, health, and lifestyle can impact the premiums you pay for your life insurance coverage. When deciding how much to charge for a life insurance policy, the insurer considers how long you are likely to pay premiums before you die. If the insurer determines that you may have a shorter life expectancy, you may find yourself paying higher premiums.
You typically have to undergo a medical exam to determine your health status. In addition, the underwriter may consider other factors such as your driving record, occupation, hobbies, and lifestyle.
Step 3: Choose between term life or permanent life insurance
With your budget in mind, it is time to think about whether you can afford a permanent life insurance policy or if you need to stick with term insurance. Since term insurance only covers you for a specified amount of time, it is typically less expensive. Here is a closer look at each option.
Term Life Insurance
Term life insurance covers an individual for a set number of years. If you die during your coverage period, your beneficiaries receive a death benefit. However, the death benefit is not paid out if you outlive your coverage period. Once the term ends, coverage ends. In some cases, you may have the option of renewing your policy for a new term or converting it to a permanent policy. However, renewal and conversion options are typically more expensive than the original term premium.
Many term policies offer coverage periods of 5, 10, 15, 20, 25, or 30 years. This can be beneficial if you only need coverage for a certain period, such as until you pay off your mortgage or until your children finish college.
Permanent Life Insurance
Unlike term insurance, permanent life insurance stays in place throughout your lifetime as long as you pay your premiums. Since the insurer eventually has to pay a death benefit, this type of insurance tends to be more expensive than term insurance.
In addition, many permanent insurance policies also build cash value. Each time you pay a premium, a portion of this money goes into a separate account. Depending on your policy type, the money in this account may grow or fluctuate based on underlying investments, dividend distributions, or other factors.
A permanent policy with cash value typically allows you to withdraw or borrow against it. This can help pay for your retirement or cover emergency expenses and other costs.
Term vs. Permanent Life Insurance Pros and Cons
If you are not sure whether you need term or permanent life insurance, you are not alone. Weighing the following pros and cons may help you make your decision.
Term Life Pros:
- Premiums are typically less expensive than they are for permanent coverage.
- You can choose a term length that matches your needs.
- Multiple term lengths offer additional flexibility.
- This can be an affordable temporary solution until you can afford a permanent policy.
- It may allow you to pay a lower premium and invest extra money into an investment vehicle with better returns.
Term Life Cons:
- The policy expires after a set amount of time.
- There is no opportunity to build up cash value, so you cannot access cash while you are living.
- Premiums are based on age, so they typically increase each time you purchase a new term policy.
Permanent Life Pros:
- Coverage lasts a lifetime.
- In many cases, it can accumulate cash value.
- It may pay annual dividends.
- It may allow you to lock in a lower rate when you are young.
Permanent Life Cons:
- Premiums can be much more expensive than they are for a term policy.
- This can be an expensive way to invest.
Step 4: Pick a type of term or permanent life insurance
Once you have decided on term or permanent coverage, you need to choose a policy type. As you compare your options, remember that shopping for life insurance is a deeply personal process. A policy that meets one person’s needs may not be right for someone else. Consider your unique circumstances and goals before making your final decision.
Types of Term Life Insurance
Your options for term policies are typically based on how the premiums and death benefits work and whether you can renew or convert your coverage once the original term has ended. Here’s a closer look at some of common options.
With a level-term policy, the death benefit and the policy premiums remain level throughout the coverage period. This is considered a standard term policy. Except for a decreasing term policy, most term policies are level term.
A decreasing term policy has premiums that remain level throughout the term and a death benefit that steadily decreases. This type of policy typically covers debts, such as a mortgage or business loan. The death benefit decreases as the debt decreases.
Return of Premium
These policies repay you either the entire premium you have paid or a portion of your premiums if you outlive the coverage period. With a return of premium term policy, you can receive a lump-sum payment from the insurer once the term ends. However, this feature comes with an additional cost.
Yearly Renewable Term
A yearly renewable term policy guarantees that you can renew your coverage one year at a time after your policy has expired. While there is no requirement to reapply or requalify after the term ends, the new rate is higher each year you renew as you age.
This type of policy allows you to convert your term insurance into permanent insurance without having to answer medical questions or undergo a health exam. Some term policies offer this as a rider, while others make it a standard policy feature. Some also only allow you to convert within a specified period, such as within the first 10 years.
Types of Permanent Life Insurance
The different types of permanent life insurance are typically based on whether the premiums and death benefits are flexible, whether the policy offers any guarantees, and how the cash value grows. Here is a look at some common options.
Whole life is generally considered the primary type of permanent life insurance. These policies have level premiums, a guaranteed minimum death benefit, and a guaranteed cash value. The cash value grows at a modest level based on a predetermined interest rate set by the insurer.
Unlike many types of permanent life insurance, final expense insurance does not have a cash value. Final expense insurance is designed to pay end-of-life expenses, such as funeral and burial costs. These policies may offer low death benefit amounts, typically around a maximum of $50,000. There are two primary types of final expense insurance: simplified issue and guaranteed issue.
Simplified issue policies do not require a medical exam and have fewer questions about the applicant’s health history. While there is still an underwriting process, it is faster and easier than other types of policies. These policies are typically more expensive than policies that require full underwriting.
Guaranteed-issue life insurance policies do not require underwriting and do not ask any health questions. This may be a good choice for individuals who have significant health issues that may preclude them from getting other types of life insurance coverage. Guaranteed-issue life insurance is typically more expensive than traditional and simplified issue policies.
Universal life insurance is considered a more flexible type of policy. You can increase your death benefit if you pass the medical exam. As you build up cash value in your account, you may also be able to adjust your premium payments. Insurers set the growth rate on your cash value. However, these policies offer a guaranteed minimum death benefit and cash value.
In a variable life policy, the cash value grows or declines based on the performance of mutual funds offered by the insurance provider. There is no minimum cash value, so you could bear the brunt of a bear market. However, if the funds perform well, you may also experience faster growth than other policies. Variable life policies have level premiums and do not offer any guarantees on your cash value. The death benefit is also variable; however, there is typically a minimum guarantee regardless of fund performance.
Variable Universal Life
A variable universal life (VUL) policy combines features of universal life and variable life policies. With a VUL policy, you choose the investments for your cash value based on options offered by the insurer. The death benefit and the premium can fluctuate, and the death benefit is also adjustable. VUL policies do not have a guaranteed cash value or a guaranteed minimum death benefit.
Indexed Universal Life
Indexed universal life policies have a cash value that can fluctuate based on the performance of an investment index. Typically, the insurer offers multiple indexes for the investor to choose from, and the index fund’s performance determines the cash value gains. These policies also usually have flexible premiums and an adjustable death benefit. Indexed universal life policies typically do not offer guaranteed minimum performance. However, a guaranteed cash value protects you if the index has negative returns. The tradeoff is that there is also a cap on the maximum return you can earn.
Guaranteed Universal Life
A guaranteed universal life (GUL) policy offers a guaranteed death benefit, fixed premiums, and a minimal cash value. With a GUL policy, you choose the age your coverage ends, typically between 90 and 121 years of age. So, although there is a set term, you can select one you are unlikely to outlive. GUL policies may also offer the ability to adjust your coverage amount, frequency of payments, and policy length.
Step 5: Compare policy quotes
A life insurance quote is an estimate of the premium cost for an insurance policy based on the coverage you have selected and the information you have provided. It is critical to keep in mind that this is just an estimate. Your final price may be higher or lower, depending on the underwriting results and other factors.
It is also important not to choose a life insurance policy based on premium cost alone. Be sure to consider other factors, such as the insurer’s reputation and whether the policy type meets your needs.
Step 6: Apply to your insurer of choice
Once you have selected the insurer and policy you need, it is time to complete your application. To do so, you may need the following items:
- Driver’s license
- Social Security number
- Basic financial information (e.g., salary and net worth)
- Proof of income (e.g., pay stubs, tax returns, or letter of employment)
- Proof of residency (e.g., mortgage bill, property tax statement, or signed lease)
Be prepared to answer questions for the full application. You will likely be asked about things such as:
- Marital status
- Basic health information, such as your height, weight, and any medical conditions
- Lifestyle information, such as tobacco use, recreational drug use, and alcohol consumption
It is imperative to answer as truthfully as possible because if your insurer issues you a policy based on what you noted and it is later discovered that you had lied, your policy could be terminated.
What to know about life insurance underwriting, or the medical exam
Insurance companies generally require medical underwriting before issuing a policy unless you purchase a simplified issue or guaranteed issue life insurance policy. This helps the insurance company determine whether you are insurable and choose the maximum amount of coverage and premium.
This process typically begins with a phone interview followed by a scheduled medical exam. The exam is similar to a yearly physical and may include a blood draw. The insurer may also need you to sign a HIPAA Compliance Waiver, permitting them to pull your medical records and review your medical history.
As you prepare to go through underwriting, you may be able to speed up the process by making a list of:
- Each of your medical providers and their contact information
- The prescription drugs you are taking, including dosages and the conditions they are treating
- A list of health issues you’ve been diagnosed with, including treatment and prognosis
Once the underwriter has gathered and analyzed this information, they assign an insurance classification rating. Better ratings mean you are in better health and have fewer risky habits, which typically results in lower premiums.
Step 7: Get approved and name your beneficiaries
A beneficiary is a person or entity you legally designate to receive the death benefit from your insurance policy upon your death. If you fail to name a beneficiary or your named beneficiaries die before you, the death benefit is typically paid out to your estate. This is not ideal, as it requires the funds to go through a long and potentially expensive probate process.
Many individuals name their spouse, children, or other loved ones as their beneficiaries. Depending on the purpose of the insurance, you may also decide to name a business, charitable organization, or trust.
Insurance policies allow you to name primary and contingent beneficiaries. The primary beneficiary is the first person to receive the death benefit. Contingent beneficiaries do not receive any portion of the death benefit unless the primary beneficiary has died, refuses the death benefit, or cannot be located.
Step 8: Make your first premium payment and receive active life insurance coverage
After your policy is approved and you have named your beneficiaries, the final step is to make your first premium payment. Once the insurer receives your payment, your policy officially becomes active.
If you have purchased a term policy, your coverage continues until the end of the defined term. For permanent policies, your coverage continues for the rest of your life.
However, it is important to note that coverage could lapse for each type of policy if you fail to pay your required premiums on time. Consider setting up an automatic payment plan to help avoid unintentionally missing any of your premium payments.