Although the idea of not being around to support your loved ones directly may be a difficult concept to consider, it is one that many find themselves planning ahead of time in order to help secure their family’s financial future. When you purchase life insurance, you help ensure the financial security of your family in the event that you pass. As of 2020, more than half of all individuals in the U.S. were covered by a life insurance policy.
Still, because of the many options you have when purchasing life insurance, determining which policy type is best for you and how to get it may seem more challenging than with other standard types of insurance, like car insurance. Fortunately, life insurance policies can generally be purchased in eight simple steps.
How to buy a life insurance policy
Purchasing life insurance can seem complicated if you have never done it before. Unlike home or auto insurance, there are many types of life insurance policies. Each comes with pros and cons and different price tags. If you are in the market for life insurance, here are the steps you may find helpful in purchasing a policy that is right for you.
1. Decide how much coverage you need
Historically, insurance experts suggested multiplying your income by 10 to settle on an amount for life insurance coverage. However, because this approach does not consider the specifics of your financial picture, such as how many individuals you may want to leave care for or your debt to asset ratio, other methods have since been proposed.
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 schooling. With these considerations in mind, you may be able better calculate how much coverage is necessary to sustain your family.
The number you settle on for coverage will depend on several factors, including whether or not you have another spouse’s income to consider. In general, it could help to factor in funeral costs and the age of your loved ones to determine how much income replacement might be necessary.
2. Pick a life insurance policy type
There are two types of life insurance coverage: term and permanent. While there are three types of permanent insurance, the ones we’ll focus on here include whole and universal. Term life insurance is usually less expensive with less benefits, while permanent life insurance is typically more expensive as it offers more benefits.
- Term life insurance: Term life insurance is generally the cheapest and most common option. It provides coverage over a specific term period, usually between 10 and 30 years. Term life insurance is used to provide financial support to your designated beneficiaries. For example, if you pass away during the term, your children or spouse will inherit the money from the insurance company. Once the term is over, the benefits end.
- Whole life insurance: Whole life is a type of permanent life insurance that has consistent premiums and accumulates cash value overtime. If you get insurance from a mutual company, the policy is typically eligible for dividends. With some whole life policies, policyholders have to pay their premium until they die, and other policies only require a premium for a certain number of years.
- Universal life insurance: Universal life is the other type of permanent coverage. It accumulates cash value and comes with investment options. It can also be broken down into variable and indexed universal life insurance. Universal life insurance is recommended for people who are comfortable with financial investments. It can be tricky to navigate universal life insurance, so speak with an insurance agent if you have questions.
You may want to do more research to find out which option will best meet your needs.
3. Research different life insurance carriers
Next, you will want to find a few life insurance companies that are appealing to you. Remember that no two companies are the same. 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 competitive rates, coverage options that fit your insurance needs and a positive customer service experience. You can get an idea of a company’s level of customer service by reviewing J.D. Power studies for life insurance. Check for a company’s financial strength by reviewing ratings from AM Best, S&P and Moody’s.
4. Request multiple life insurance quotes
Once you have selected a handful of potential providers, get quotes from each company. Most companies do not include the price of premiums on their website, so getting quotes will help you determine which provider can give you an affordable rate. Most major life insurance companies have an online quote generator that allows you to get an instant rate quote right from the website. If not, get in touch with an agent.
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. Usually, you are asked about your lifestyle, smoking history, past surgeries and medications you are taking. Generally, there is no need to submit official medical records to get a quote. The insurance company will then use the information provided to calculate your rate.
5. Fill out the application
After choosing the provider that fits your needs, you may 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. The APS ensures you get the right policy, and is used when calculating death benefits. Most life insurance applications can be filled out online, and it is usually a quick process.
6. Prepare for your phone interview
After submitting an application, the insurance company might require a secondary phone interview. The interview is mostly used to confirm the information you included on the application, but there may be some additional questions asked. For example, the interviewer will want to know more about your lifestyle and hobbies, your financial health, your income and any other life insurance policies you have. The interview is generally quick and will be scheduled shortly after submitting your physical application.
7. Schedule a life insurance medical exam
Most life insurance companies 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 will visit your home or office to see you. They will take your vitals, like height, weight and blood pressure, and draw blood. The exam usually takes roughly 30 minutes, and you can schedule it during your phone interview.
8. Wait for approval
When the application process is complete, your job is done. The insurance company’s underwriter will take the information they gathered from your application, phone interview and medical exam to determine if you’re eligible for coverage, and if so, what your premium is. Because there is so much information to review, the approval process can take several weeks, or up to a month.
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. You will also decide if you want to pay your premium monthly or annually. After the policy documents are signed, you might be asked to mail a physical copy to your insurance company. It is typically recommended to keep a second copy on hand in your home.
Frequently asked questions
At what age should you buy life insurance?
The younger you are, the less you are likely to pay for life insurance, assuming that you are in good health. However, most people do not need to use life insurance benefits until they are older or retired. If you can afford to purchase life insurance in your 30’s or 40’s, it is typically recommended to do so by insurance experts. Most life insurance companies will allow you to purchase a policy up until age 80.
What are the best life insurance companies?
There is not one life insurance company that stands out as the best for everyone. Look at the customer reviews, financial strength and policy options that each company offers. You might also benefit from getting multiple quotes to determine which company can offer you the best deal.