In this article:
- 1. How Much Insurance You Need
- 2. Different Types of Life Insurance
- 3. Policy Riders
- 4. Medical Exam
- 5. Insurance Providers’ Costs and Benefits
Understandably, most of us don't like to think about what will happen after we're gone. Perhaps that's one reason over 100 million Americans say they don't have adequate life insurance, according to the 2023 Insurance Barometer Study from LIMRA and Life Happens.
Still, it's essential to make financial plans for after you're gone, especially if you have dependents who rely on your income. Insurance policies can often be complex, so getting the right insurance policy with the coverage you need can be challenging. Here are five factors to consider when buying life insurance to find an affordable policy with sufficient coverage.
1. How Much Insurance You Need
The most important factor you must consider when it comes to buying life insurance is how much coverage you need. That will likely depend on your life situation. For example, if you're single with no dependents, a group policy through your work may be enough to cover your burial and final expenses when you die. On the other hand, if you're married and have dependents, you probably need more comprehensive coverage with a death benefit worth enough to cover their needs.
Generally, it's wise to get a policy that lasts until you retire, grow a substantial savings account and pay off your home and other debts. Some experts recommend a policy with a death benefit worth 20 or 30 times your annual salary. While this formula may get you close to the amount of coverage you need, you may need to fine-tune your ideal coverage amount with further considerations, such as:
- Assets: You may not need 30 times your annual income if you've already built up your savings, pension and retirement accounts. Also, be sure to factor in any of your other assets, such as real estate and your Social Security benefits.
- Financial obligations: As you run your numbers, add up all the debts you're responsible for, including mortgage, health insurance, utilities and loan payments. Consider adding the cost of these household obligations to your coverage amount so your loved ones aren't saddled with the debts when you pass.
- Family needs: Do you want to cover a child's wedding or college tuition? Factor in the costs of any life events you want the death benefit to cover.
Another strategy to determine how much insurance you'll need is the DIME method, which stands for debt, income, mortgage and education. More specifically, you can determine your insurance needs by adding up your debt, income needed to support your dependents, mortgage balance and your children's college education costs.
2. Different Types of Life Insurance
Another important consideration when getting life insurance is to determine the type of insurance you need or want. This decision generally involves the two most common forms of life insurance: term life and whole life.
Here's a breakdown of how term life and whole life insurance work.
Term Life Insurance
- Affordable: Typically, term life insurance is more straightforward and less expensive than other types of insurance, including whole life insurance.
- Temporary coverage: Term life insurance covers you for a specific period, usually from one to 30 years. Once the term expires, you must renew or replace the policy, potentially with higher premiums.
- Fixed payments: Term life insurance usually comes with level payments while the policy is in force.
- Includes death benefit: This benefit pays out when you pass away, so long as you're up to date on your payments.
Whole Life Insurance
- Permanent insurance: Whole life insurance is the most common type of permanent life insurance, which covers you for your entire life (or up to age 99 depending on the policy), or as long as you make on-time payments.
- Savings growth: A portion of your payment can accumulate in a cash value account with a minimum rate of return.
- May access account funds: You can withdraw or borrow funds from the cash value account, but conditions may apply.
- More costly: Whole life insurance is five to 15 times more expensive than term life insurance. The policy's lifetime protection, cash value account and other benefits account for the higher cost.
- Other benefits: A universal life insurance policy—a type of whole life insurance—may offer the opportunity to increase the policy's death benefit or modify monthly premiums.
Term life insurance may be sufficient if you simply need coverage for a specific period, such as while you're raising kids or paying off your mortgage. By contrast, you may get more value from a whole life insurance policy if you want lifelong coverage with an investment option.
3. Policy Riders
Whether you choose term or permanent life insurance, your policy will come with primary benefits that should meet most of your needs. However, you may have additional coverage needs. In such cases, you may want to supplement your coverage with life insurance riders.
Riders are add-on benefits that don't come with your standard policy. Ask your agent or a customer service representative what policy riders are available to customize your coverage, such as:
- Waiver of premium: This rider pays your premiums if you become disabled.
- Guaranteed insurability: With this add-on, you can increase your death benefit without taking a medical exam.
4. Medical Exam
Insurance companies set their rates based on several factors, including your location, age and health. You may need to fill out a medical questionnaire or undergo a medical exam to help your insurer determine the state of your health. Generally, the healthier you are, the less risk you present to the insurance company, which could lead to lower premiums.
If required, your insurer will send a medical technician to your home or another designated location to conduct a basic physical. You'll likely be asked to provide blood and urine samples. It's essential to answer health-related questions as truthfully as possible. Even if you inadvertently provide incorrect details about your health, your insurer could cancel your policy or deny your beneficiaries a payout.
Remember, you're unlikely to be disqualified from coverage for many medical conditions, though some non-life-threatening conditions could lead to higher premiums. As a general rule, the only conditions that could result in a denial of coverage are life-threatening chronic conditions.
5. Insurance Providers' Costs and Benefits
It's a best practice to review quotes from several insurance companies to compare benefits, term lengths and premiums. As you shop around, consider the following factors to find the best life insurance company with enough coverage to meet your needs.
- Affordability: The biggest advantage of comparing different insurance carriers is discovering who offers the most coverage at the best price. While you're reviewing life insurance costs, compare how much riders cost with each company. What may be a rider with one company may be included with standard coverage with another. You may also save money by asking your agent about any discounts you might qualify for. This includes a bundling discount, especially if you have an existing auto or homeowners policy with the insurer.
- Coverage options: Look closely at the different coverage options each life insurance company offers, including term, whole and universal life insurance. Some policies may offer more flexibility, such as the ability to boost your coverage amount or convert a term policy to a permanent one.
- Financial strength: Any insurance policy you're considering must be backed by an insurer with the financial stability to pay your beneficiaries when they need it most. You can review financial strength ratings from credit rating agencies like AM Best to gain insight into an insurer's ability to meet its financial obligations, including paying out claims.
- Customer satisfaction: Another tool you can search to evaluate an insurance company is the complaint index operated by the National Association of Insurance Commissioners (NAIC). This tool calculates index scores for most insurers based on the number of consumer complaints a company receives compared with their market share. The standard score is 1.0, so a score higher than that means a company gets more complaints than usual. Look for an insurance company with a complaint index score lower than one, which indicates fewer complaints than their competition.
Don't Forget About Your Credit
Most states allow life insurance companies to consider a credit-based insurance score when underwriting your policy and setting your premiums. If you live in a state that permits this practice, consider improving your credit score before you shop for life insurance since it can affect your insurance premium. Check your Experian credit report and score for free and address any issues you discover on your report.
