How to Buy Life Insurance

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 a multitude of reasons. In general, life insurance helps provide future financial security for your loved ones in case you die unexpectedly and cannot provide for them. The death benefit — the money the insurance company pays your beneficiary upon death — can be used for various purposes. It can help:

• Replace lost income to support your spouse, children, or other relatives who depend on you financially, especially if you are the primary wage earner.
• Continue to pay the mortgage.
• Cover childcare expenses and tuition costs.
• Fund your children's college education.
• Pay outstanding debt, including credit cards and student and personal loans.
• Pay for final expenses, such as funeral and burial costs and unpaid medical bills.
• Pay for everyday expenses, like home maintenance, groceries, gas, and auto repairs.

If you own a business, consider buying life insurance to help safeguard the lives of your business partners so that the company can continue to operate if something happens to them. Life insurance also can allow you to leave a charitable legacy to a church, university, hospital, organization, or other institution.

Figuring out if you need life insurance and why can help you determine the death benefit amount and the type of life insurance best suited to your needs.

When should I get life insurance?

There are several different life situations in which getting life insurance for your loved ones could be beneficial:

• You have a family – a spouse and children or other relatives – for whom you want to help provide financial security for after you are gone. Without your income, they might experience financial hardship.
• You have debt – a mortgage, student loans, or credit card debt – that you want your death benefit to cover in case something happens to you so that your heirs are not burdened with excessive debt.
• You want to ensure your final expenses – your funeral and burial costs, unpaid medical expenses, and other outstanding debt – are paid for with your life insurance.

2. Determine How Much Life Insurance You Need

Figuring out how much your death benefit should be to help pay for expenses in the future will require some educated estimation based on several considerations. The goal is to avoid being underinsured — in which case your death benefit would be too low and provide insufficient financial support for your loved ones. However, you don't want to be over insured and pay too much.

Here are some factors that you should consider when determining your face value:

• Family Size — The larger your family, the higher your death benefit may need to be.

• Employment Status — If you are employed, you need to consider how much would be required to replace your income.

• Age — Someone who is young and single will need less than someone who is older and married with several children. Consider your current age in determining how many years of replaced income you may need.

• Being a Business Owner — Think about how much you might need to protect your business, business partners, and employees if you die.

• Income — The higher your salary, the more income you will need to replace.

• Anticipated Final Expenses — Consider how much money will be needed for funeral costs, medical bills, and legal fees to process your will through probate.

• Outstanding Debt — The more debt you owe — such as mortgages, home equity loans, student loans, car loans, and credit card debt — the more life insurance you might need.

• Current Life Insurance and Assets — Assess your other assets and consider any current life insurance when determining your target death benefit. You may need a lower death benefit if you have liquid assets and existing life insurance.

• Future Goals — Your life insurance needs may not be that high or urgent at this point in your life. However, if you plan to have a family, that could change. Keep in mind that getting a policy while you are young and healthy may qualify you for a better rate.

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, you may need $300,000 to replace your income, $150,000 to pay off your debt, and $25,000 to cover final expenses. If you currently have $100,000 in life insurance from your employer, you would estimate your additional death benefit amount to be $375,000 ($300,000 + $150,000 + $25,000 - $100,000).

3. Choose the Best Type of Life Insurance for You

Life insurance comes in different types that are designed to fit particular needs. Life insurance can be either permanent (lasting for your entire lifetime) or temporary (lasting for a limited period of time). Whole life and universal life are both types of permanent life insurance. In contrast, term life is temporary, giving you coverage only for a specific number of years. No medical exam life insurance are policies that do not require you to undergo a medical exam to obtain coverage.

Review the different types of life insurance below, including explanations of their various features and benefits, to help you decide which one may be the best choice for you.

Permanent life insurance

Permanent life insurance provides you with coverage for your entire life (as long as you continue to pay your premiums). There are four main types of permanent life insurance: whole life, universal life, variable life, and variable universal life. Their differences are based on whether the premiums can change over time and how their cash value is managed.

With whole life and variable life insurance, your premiums remain the same. Universal life and variable universal life insurance policies permit you to adjust your premiums. Your cash value in a whole life policy grows yearly at a guaranteed fixed rate. With universal life, your cash value is based on market interest rates, which could change annually. Variable life and variable universal life insurance policies allow you to invest your cash value in mutual funds, which means your cash value will fluctuate based on what happens in the market, so your investments can potentially gain or lose money over time.

Whole life insurance

Whole life insurance is a type of permanent life insurance that offers you coverage for your whole life. Your policy remains in force as long as you continue to pay your premiums. The insurance company will pay your beneficiary the death benefit amount upon death. The main benefits of whole life insurance are lifetime coverage, fixed premiums, and potential cash value accumulation, money that can be withdrawn or borrowed against while you are alive.¹

Universal life insurance

Universal life insurance is another type of permanent life insurance that provides coverage for your entire life, as long as premiums are paid, and offers you a potential accumulation of cash value. However, universal life gives you greater control in managing your policy. You can adjust your premiums yearly according to your life and personal budget changes.² In addition, some universal life policies permit you to adjust your death benefit over time.³

Term life insurance

Term life insurance is an affordable option that offers you coverage for a specific duration — usually 10, 15, 20, or 30 years. After this term expires, your coverage comes to an end. Unlike whole life and universal life insurance, term life builds no cash value. The potential benefits of term life include its affordability, flexibility, and simplicity. Because permanent life insurance often lasts longer, you usually pay more premiums than term life. Term life allows you to select how long you want coverage and offers fixed premiums that do not increase over time.

No medical exam life insurance

Some life insurance policies do not require a medical exam before getting coverage. It mainly depends on the life insurance company. Some insurers require medical exams for all of their policies. In contrast, others may specialize in offering no medical exam life insurance. Foregoing a medical exam can simplify the application process, but there can also be a downside. Keep in mind that no medical exam life insurance may be more expensive because it involves a higher level of risk for the issuing insurance company. In general, no medical exam policies are available for both term and whole life insurance. Because they do not check or reject insurance applicants for health issues, these no medical exam policies are often referred to as simplified issue policies.

Can I buy more than one life insurance policy?

Absolutely. There is no limit to the number of life insurance policies you can have. Still, just like you want to avoid inadequate coverage, you also don't want to be overinsured. An additional life insurance policy should have financial justification. For example, a new baby in the family may prompt you to supplement your current policy from your employer or purchase an additional term life insurance policy. The key is ensuring your death benefit amount is sufficient to help protect your family's future.

4. Decide If You Need Life Insurance Riders

Riders are optional benefits you can add to your insurance policy to customize your coverage. Depending on your financial situation and insurance needs, you may want to have certain riders on your policy. 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 a life insurance quote is relatively easy these days. Life insurance companies often provide free online quotes for specific policies through their websites. You may be able to start getting a ballpark figure for a quote online, but you will more than likely need to work with a life insurance financial representative to complete your purchase. A licensed agent can answer any questions and provide a more thorough understanding of the details, features, and benefits of the specific policy that is right for you. In addition, if you are required to complete a medical exam for coverage, you will need to do this in person.

Life insurance premiums vary depending on a combination of different factors, including the death benefit amount, the type of life insurance policy, and any additional riders. Other factors determining your premium quote are your age, gender, overall health, tobacco use, family medical history, and other personal risk factors like your lifestyle activities and occupation (i.e., engaging in dangerous hobbies or working in a hazardous field).

Where should I buy life insurance?

It's important to buy life insurance from a company that you trust. Research various life insurance companies with a proven track record and that can offer you helpful financial planning expertise and superior customer service. Most importantly, assess the selected insurance company's financial strength. Review the ratings they receive from independent rating agencies, including A.M. Best, Fitch, Moody's, and Standard & Poor's.

What is insurable interest in life insurance?

Insurable interest is a legal concept that pertains to the financial or economic stake someone has in another person's life. In life insurance, insurable interest means the policyholder would experience a financial loss if the insured person were to pass away.

For example, a parent has an insurable interest in their child's life because they would be financially responsible for their child's care if the child died. A spouse also has an insurable interest in their spouse's life because they would lose their partner's income and companionship if the spouse died.

Before issuing a life insurance policy, insurance companies require proof of insurable interest. This requirement prevents individuals from taking out life insurance on someone else to profit from their death.

6. Purchase Your Life Insurance

Once you have assessed your life insurance needs and selected the type of life insurance and carrier you want, it's time to purchase your life insurance policy.

Keep in mind that the time it takes to get life insurance coverage in place differs based on the policy type. Some policies provide instant protection, but policies requiring evidence of insurability and underwriting may encounter delays before coverage begins.

Here are the five steps of the purchasing process:

1. Complete the Life Insurance Application
2. Schedule a Medical Exam
3. Go Through Underwriting
4. Choose a Beneficiary
5. Accept the Policy and Pay Your First Premium

Now let's walk through what's involved in each step.

Complete the life insurance application

The first step is to complete your life insurance application online or in person. Again, it can be helpful to work with a licensed insurance agent to help you through the application details and answer any questions you have. The application will typically ask you for the following:

• Basic contact information
• The type of policy you intend to buy
• Social security number and driver's license number for identification
• Date of birth, gender, and marital status
• Work occupation
• Personal financial information like your salary and overall net worth
• Health and medical history
• Whether or not you use nicotine or tobacco
• Beneficiary designations with their personal information

If you complete your application online, you will have a follow-up phone interview with a life insurance agent to confirm the answers to your questions and get additional information about your background. 

Schedule a medical exam

A medical examination may be required to get coverage for the particular life insurance policy you want. These exams generally take less than one hour. They are usually performed by a qualified medical professional, like a doctor, nurse, or paramedic. The medical examiner will often come directly to your home. The costs for this exam are taken care of by the life insurance company. This exam usually involves taking bloodwork, conducting general health testing (e.g., blood pressure, pulse, height, and weight, etc.), performing a heart test (electrocardiogram or EKG), and asking a series of more in-depth health questions about your personal medical history as well as your family's medical history.

If you are uncomfortable with receiving a medical exam, you may want to entertain the option of purchasing a no medical exam life insurance policy instead.

Go through underwriting

After you have completed your insurance application and medical exam (if required), your policy application goes through the underwriting process next. Underwriting will review your application and assess any pre-existing conditions to evaluate your coverage eligibility and set a price for the policy.

Underwriting enables an insurance company to select and classify applicants according to their degrees of risk. Necessary requirements to underwrite an insurance application will be determined by age, the amount of coverage you request, and your medical history. The underwriting process can take up to five or six weeks. Sometimes longer if the insurance company needs additional documentation, such as your authorization of an attending physician statement (APS) or a written report describing your medical history submitted by your doctor to the insurer. This extra documentation does not necessarily mean you will be denied coverage or will be required to pay higher premiums, but it can delay the underwriting process. Time to wait and be patient until you hear your insurance company's underwriting decision.

If your life insurance application is approved, it will fall into one of these categories:

• Approved as applied, meaning your rate will be the same as your original quote.
• Approved better than applied, meaning your rate will be less expensive than your original quote.
• Approved other than applied, meaning your rate will be more expensive than your original quote, based on underwriting's review of your medical records.

Choose a beneficiary

A beneficiary is the designated individual or entity you have selected to receive your life insurance policy death benefit after you die. You are free to update your beneficiaries whenever the need arises.

Who you choose as your beneficiary is a personal decision based on your individual circumstances. You may choose your spouse or children as your beneficiaries if you have a family. Remember that you can select more than one beneficiary and decide what percentage of the death benefit will go to each person. For example, if you have a spouse and three children, you could specify that 40% of the death benefit goes to your spouse and 20% to each of your children.

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.

Finally, you should consider selecting both a primary and a contingent beneficiary. After your death, your primary beneficiary will receive the death benefit if they are alive and can be located. However, suppose your primary beneficiary is either dead or unable to be contacted. In that case, your contingent beneficiary will receive the death benefit from your life insurance policy.

Accept the policy and pay your first premium

If you are satisfied with the policy offer and are ready to agree to its terms, the final steps in the process are to accept the policy offer from your insurance company and to make your first life insurance premium payment. Your life insurance policy will not be in force until you do both. Simply receiving a policy offer doesn't mean you automatically have coverage. Keep in mind that you do have a grace period, also known as a "free look period," to evaluate your policy without having any financial obligations.

Your insurer will let you know if your signed policy documents can be electronically delivered or if hard copies must be returned through the mail. Be sure to keep both a hard copy and a digital copy of your policy documents in an accessible but secure location for easy reference. If you end up losing your life insurance policy contract, reach out to the life insurance company for a copy or use online resources to help locate any missing policies.

7. Tell Your Beneficiaries About Your Life Insurance Policy

After you have purchased your life insurance policy, one more important step is to communicate with the people you have named as beneficiaries to let them know. Death benefits go unclaimed yearly because some beneficiaries were unaware they were named as such on a life insurance policy.

You also will want to tell your beneficiaries the name of the insurance company that issued the policy, any instructions regarding the death benefit, and where they can find a hard copy of the insurance policy. Be sure to store your insurance documents securely and inform your beneficiaries how to access them.

How will my insurance company know when I have died?

Your beneficiary must inform your life insurance company by filing a claim. In addition to completing a claim form, your beneficiary will have to provide your insurer with a copy of your death certificate for them to process and pay out the death benefit.

Tips for Purchasing Life Insurance

Buying life insurance may feel overwhelming, but being diligent and inquisitive can help you feel more confident about purchasing the right policy. Here are some helpful tips to keep in mind to help guide you along the way.

• Educate Yourself First — Because you are reading this now, you are well on your way to passing your Insurance 101 class. Seek out the necessary information from trusted sources (including referrals and recommendations from relatives and friends) to determine what kind of life insurance is best for your specific life situation. How much your death benefit should be and how much you are willing to pay. Additionally, try to educate yourself on any insurance scams you might encounter.
• Do Your Research — Once you know what type of life insurance you need, research life insurance companies to see who has the financial strength, competitive price, reputation, and customer service you want and expect.
• Feel Confident About Your Insurer and Agent — You want to feel comfortable with the financial security and integrity of the insurance company and your individual insurance agent's professional experience and expertise.
• Get All Your Questions Answered — Before signing a contract, ensure all your questions have been answered to your satisfaction; if not, keep asking for clarification. You should never feel rushed or pressured into buying life insurance.
• Make Your Checks Payable to the Company — When you are ready to pay for the policy, write your check to the insurance company, not your insurance agent. Don't open yourself up to the possibility of financial fraud.
• Pay Your Premiums on Time — You've invested a lot of time and money in purchasing the right policy to help protect the financial future of your loved ones. Be conscientious in paying all your premiums on time, so your policy remains in force and does not lapse.

Footnotes

1. 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.
2. 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.
3. Increases in coverage are subject to underwriting based on health and other factors.