Understanding how to buy life insurance is essential to protecting your loved one's financial future. Before you jump into the buying process, it's important to first explore your life insurance options and discover which type of policy best fits your needs.
1. Decide If You Need to Purchase Life Insurance Coverage
People buy life insurance for many reasons. In general, life insurance helps provide future financial security for loved ones if you die unexpectedly and can no longer provide for them.
The death benefit, which is the money paid to your beneficiary after death, can be used in several ways, including to:
- Replace lost income for a spouse, children, or other dependents
- Continue making mortgage payments
- Cover childcare and tuition costs
- Fund a child’s college education
- Pay outstanding debt, such as credit cards, student loans, and personal loans
- Cover final expenses, including funeral, burial, and unpaid medical bills
- Handle everyday costs like home maintenance, groceries, gas, and auto repairs
If you own a business, life insurance may help protect business partners so the company can continue operating if something happens to one of them. Life insurance can also be used to leave a charitable legacy to a church, university, hospital, or other organization.
Understanding whether you need life insurance and why can help determine the coverage amount and the type of policy that fits your situation.
2. Determine How Much Life Insurance You Need
Figuring out how much your death benefit should be to help pay for expenses takes educated estimates based on your situation. The goal is to avoid being underinsured, which could leave loved ones with limited support. At the same time, you want to avoid buying more coverage than necessary.
Here are some factors that you should consider when determining your face value:
- Family Size: Larger families often need a higher death benefit may need to be.
- Employment Status: If you are employed, consider how much income would need to be replaced.
- Age: Younger, single individuals typically need less coverage than those who are older with children. Your age helps estimate how many years of income replacement may be needed.
- Business Ownership: Consider what may be needed to help protect your business, partners, and employees.
- Income: Higher income usually means a greater amount to replace.
- Anticipated Final Expenses: Account for funeral costs, medical bills, and legal fees related to probate.
- Outstanding Debt: Mortgages, home equity loans, student loans, auto loans, and credit card balances can increase coverage needs.
- Current Life Insurance and Assets: Review existing policies and liquid assets. These may reduce the amount of additional coverage needed.
- Future Goals: Your needs may change if you plan to start or grow a family. Applying when you are younger and healthier may lead to better rates.
Example
A quick way to determine how much coverage to purchase is to add up the value of all your life insurance needs. Consider each factor and how much money you think would be needed. For example:
- Income Replacement: $300,000
- Debt Payoff: $150,000
- Final Expenses: $25,000
- Existing Employer Coverage: $100,000
Total Estimated Additional Death Benefit Needed: $375,000 ($300,000 + $150,000 + $25,000 − $100,000)
This approach provides a practical starting point for estimating how much coverage to purchase.
3. Choose the Right Type of Life Insurance for You
Life insurance comes in different types designed to fit specific needs. Coverage can be permanent (lasting your entire life) or temporary (lasting for a set period). Whole life and universal life are permanent options, while term life provides coverage for a specific number of years. Some policies are also available without a medical exam.
Review the options below to help you decide which one may be the best choice for you.
Permanent Life Insurance
Permanent life insurance provides lifetime coverage as long as premiums are paid. The four main types are whole life, universal life, variable life, and variable universal life. They differ based on premium flexibility and how cash value is managed:
| Policy Type | Premiums | Potential Cash Value |
|---|---|---|
| Whole Life | Fixed | Grows at a guaranteed fixed rate |
| Universal Life | Adjustable | Based on market interest rates |
| Variable Life | Fixed | Invested in mutual funds |
| Variable Universal Life | Adjustable | Invested in mutual funds |
Whole life and variable life have fixed premiums. Universal and variable universal life allow premium adjustments. Cash value growth varies by policy and may increase or decrease depending on interest rates or market performance.
Whole Life Insurance
Whole life insurance provides coverage for your entire life as long as premiums are paid. When you pass away, the insurance company pays the death benefit to your beneficiary.
The benefits of whole life insurance include:
- Lifetime Coverage
- Fixed Premiums
- Potential cash value accumulation that can be borrowed against or withdrawn during your lifetime.1
Universal Life Insurance
Universal life insurance also offers lifetime coverage and the potential to build cash value. It provides more flexibility than whole life.
Some of it's key features include:
- Adjustable premiums based on life and budget changes2
- Cash value tied to market interest rates
- Some policies allow changes to the death benefit3
Term Life Insurance
Term life insurance provides coverage for a specific period, usually 10, 15, 20, or 30 years. Once the term ends, coverage stops.
Key characteristics include:
- Coverage for a defined time period
- Fixed premiums during the term
- No cash value
Because permanent policies last longer, they generally have higher premiums. Term life allows you to choose how long coverage lasts and keeps costs predictable during that time.
No Medical Exam Life Insurance
Some life insurance policies do not require a medical exam, depending on the insurance company. Certain insurers require exams for all policies, while others focus on no medical exam life insurance.
Skipping the exam can simplify the application process, but these policies may cost more due to higher risk for the insurer. No medical exam options are available for both term and whole life insurance and are often called simplified issue policies because applicants are not screened through a full medical exam.
Choose life insurance that aligns with your financial goals. Request a Free Life Insurance Quote
4. Decide If You Need Life Insurance Riders
Riders are optional benefits you can add to an insurance policy to customize coverage. Depending on your situation and insurance needs, certain riders on your policy may make sense.
Some riders may be included as standard features of your policy, while others may be available for an extra cost. Remember to consider the additional cost of riders in your overall insurance policy budget.
5. Request Your Life Insurance Quote
Getting life insurance quotes is relatively easy these days. Many life insurance companies offer free online quotes for specific policies through their websites. These tools can give you a general idea of pricing, but completing a purchase usually requires working with a licensed life insurance financial representative.
A licensed agent can:
- Answer questions about the policy
- Explain features and benefits
- Help confirm which option fits your needs
If a medical exam is required, it must be completed in person.
Life insurance premiums vary based on several factors, including:
- Death benefit amount
- Type of life insurance policy
- Optional riders
Other factors are your age, gender, overall health, tobacco use, family medical history, and other personal risk factors like your lifestyle activities and occupation.
6. Purchase Your Life Insurance
Once you have assessed your life insurance needs and selected a policy type and carrier, the next step is to purchase your policy.
The time it takes to get life insurance coverage depends on the policy type. Some policies offer instant coverage, but others require evidence of insurability and underwriting, which can delay the start date.
Steps to Purchase a Life Insurance Policy
- Complete the Life Insurance Application
- Schedule a Medical Exam
- Go Through Underwriting
- Choose a Beneficiary
- Accept the Policy and Pay Your First Premium
Now let's walk through what's involved in each step.
Step 1: Complete the Life Insurance Application
You can complete a life insurance application online or in person. Working with a licensed insurance agent can help explain details and answer questions. The application typically ask you for:
- Basic contact information
- Policy Type
- Social Security number and driver’s license number
- Date of birth, gender, and marital status
- Occupation
- Financial details such as income and net worth
- Health and medical history
- Whether or not you use nicotine or tobacco
- Beneficiary designations with their personal information
If you apply online, a follow-up phone interview with a life insurance agent is usually required to confirm details and gather additional background information.
Step 2: Schedule a Medical Exam
Some policies require a medical examination. These exams usually take less than one hour and are performed by a doctor, nurse, or paramedic. In many cases, the examiner comes to your home. The insurance company covers the cost.
The exam may include:
- Bloodwork
- Blood pressure, pulse, height, and weight
- An EKG
- Health questions about your medical and family history
If you prefer not to complete a medical exam, you may consider a no medical exam life insurance policy.
Step 3: Go Through Underwriting
After the application and medical exam, your policy goes through underwriting. This process reviews your information, evaluates any pre-existing conditions, and determines eligibility and pricing.
Underwriting requirements depend on your age, requested coverage amount, and medical history. The process can take five to six weeks, or longer if additional documents are needed, such as an attending physician statement. Additional documentation does not automatically mean higher premiums or denial, but it can extend the review period.
If approved, your application may be classified as:
- Approved as Applied: Your rate matches the original quote
- Approved Better Than Applied: Your rate is lower than the original quote
- Approved Other Than Applied: Your rate is higher based on underwriting results
Step 4: Choose a Beneficiary
A beneficiary is the person or entity that receives the death benefit. You can update beneficiaries at any time.
You may choose:
- A spouse, children or other family members
- Multiple beneficiaries with percentage allocations
- A charity, church, or educational institution
- A business or organization
- Your estate or a trustee
If no beneficiary is listed, or the beneficiary cannot be located, the death benefit is paid to your estate.
You also have the option to designate a charity, church, educational institution, non-profit organization, business, or corporation to be your beneficiary. Other possible beneficiary choices include your estate or a trustee. Be aware that if you do not choose a beneficiary or your named beneficiary cannot be found, the death benefit amount will go to your estate.
You can also name both a primary and contingent beneficiary. The primary beneficiary receives the death benefit first. If they are either dead or unable to be contacted, the contingent beneficiary receives the payout.
Step 5: Accept the Policy and Pay Your First Premium
To activate coverage, you must accept the policy and pay your first life insurance premium payment. Coverage does not begin until both steps are completed. Most policies include a grace period, also known as a "free look period," which allows you to review the policy and cancel if needed.
Your insurer will explain whether documents are delivered electronically or by mail. Keep both digital and paper copies in an accessible, secure location. If you end up losing your life insurance policy contract, contact the insurance company or use available resources to locate a copy of any missing policies.
7. Tell Your Beneficiaries About Your Life Insurance Policy
After purchasing a life insurance policy, let your beneficiaries know they are named on it. Death benefits go unclaimed each year because beneficiaries are unaware a policy exists.
Share the following details with them:
- The name of the insurance company
- Where to find a hard copy of the policy
- Any instructions related to the death benefit
Store your insurance documents securely and explain how beneficiaries can access them when needed.
Tips for Purchasing Life Insurance
Buying life insurance can feel overwhelming, but taking a thoughtful and informed approach can help you choose the right policy. Use these tips to guide your decision-making process.
Educate Yourself First
You are already taking a smart first step by learning about life insurance. Use trusted sources, including referrals from friends and family, to understand which type of policy fits your life situation. Consider how much coverage you need, what you are willing to pay, and how to spot potential insurance scams.
Do Your Research
Once you know the type of coverage you want, compare insurance companies. Look at financial strength, pricing, reputation, and customer service to find an option that meets your expectations.
Feel Confident About Your Insurer and Agent
You want to feel comfortable with both the insurance company and the agent you work with. Pay attention to the company’s stability and your agent’s experience and professionalism.
Get All Your Questions Answered
Before signing a contract, make sure every question has been answered clearly. If something is unclear, ask for more information. You should never feel rushed or pressured to buy a policy.
Make Your Checks Payable to the Company
When paying for your policy, write checks directly to the insurance company rather than the agent. This helps reduce the risk of fraud.
Pay Premiums on Time
After choosing a policy, stay on top of your payments. Paying premiums on time helps keep your coverage active and prevents the policy from lapsing.
Final Thoughts
Buying life insurance is a step-by-step process that starts with understanding your needs and ends with keeping your coverage active and your beneficiaries informed. By taking the time to compare options, ask questions, and choose coverage that fits your situation, you can make a confident, informed decision. A thoughtful approach today can help support the people and goals that matter most to you in the future.
Help protect your family's financial well-being with life insurance. Request a Free Life Insurance Quote
Footnotes
- You should always determine whether a withdrawal or loan is preferable for your individual situation. Withdrawals may be subject to charges, withdrawals of taxable amounts are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty and interest is charged on loans, they may generate an income tax liability, reduce the Account Value and the Death Benefit, and may cause the policy to lapse.
- There must be enough cash value in the policy to cover monthly charges if a lower premium is paid than the amount selected at issue or if a premium payment is skipped. Additional premium payments may need to be made to keep the policy in force.
- Increases in coverage are subject to underwriting based on health and other factors.
