Finding the Best Life Insurance Using Five Simple Questions

How do you buy life insurance? A question this simple deserves a simple answer.

But in reality, the wide variety of life insurance coverage options available in the marketplace confuses many shoppers, and they lose track of the coverage they really need.

Shoppers forget to ask:

• Why do I need insurance?
• What kind of coverage do I need?
• What size coverage do I need?
• How much will I need to pay?
• Where should I buy coverage?

Keeping these important and interrelated questions in mind as you shop can help you find the right coverage at the right price.

Question 1: Why Do I Need Life Insurance?

If your family depends on your income, you may wonder how they would survive financially if you died unexpectedly. Millions of people answer this question with a life insurance policy.

Unlike your home or car, you can’t measure the value of your life in dollars. However, you can gauge the financial impact your death would cause your loved ones.

Your life insurance should reflect this cost.

For example, life insurance shoppers with young families may buy life insurance coverage to:

• Replace money they planned to save for their children’s college tuition.
• Pay off your mortgage so your partner and children can stay in your home.
• Set aside money to repay your existing debt such as private student loans or credit cards so your family wouldn’t be responsible for it.
• Give your stay-at-home partner more freedom to remain home with the children rather than having to find a job.

Life insurance isn’t only for replacing lost income. Even if you aren’t your family’s primary breadwinner, your death could have a financial impact on your family.

Life insurance could:

• Help your working partner provide child care or other duties you currently handle.
• Replace the income you bring in from part-time work or freelancing.
• Take away the burden of earning an income to allow for a period grieving.

Life insurance payouts also can have other versatile applications beyond replacing income and paying off debt. Some people buy insurance to:

• Cover their final expenses and burial expenses.
• Fund a legacy gift such as a scholarship or a charitable donation.
• Provide some liquidity to give their estate time to sell assets such as real estate or securities on their own terms.
• Serve as collateral on a business loan.

Knowing why you need life insurance coverage will help you determine how much coverage you should buy.

Question 2: How Much Life Insurance Coverage Do I Need?

Unless you can predict the future, you won’t know exactly how much money your family would need if you died unexpectedly at some point in the future.

You can, however, find a good estimate based on how much money you make, how much money you spend, and how much money you have saved.

Let’s start with this general rule of thumb: Your life insurance should replace your income for seven to 10 years. If you make $100,000 a year, this rule would require a $700,000 to $1 million policy.

Who Needs More Coverage?

Like all general rules, this one won’t always offer the best advice to everyone. For example, you may need even more life insurance coverage if:

• You expect to be making significantly more money in five or so years than you’re making now.
• You have two or three (or more) children to put through college in the coming decades.
• You have a lot of debt, either secured or unsecured.
• You have dependents with special needs who would need to hire a caregiver.
• You have other unusually high financial demands.

Who Needs Less Coverage?

Not everyone needs to max out their life insurance coverage. You may need less coverage if:

• You depend less on your income and more on your investments for living expenses.
• Your children are, or will soon be, financially independent.
• You’ve paid off your home and have only small debts.
• You’ve already saved enough money for your family to live comfortably without your income for 7 to 10 years.

Coverage for a Specific Reason

When your reason to buy life insurance has a more specific purpose, finding the right coverage amount requires less estimating:

• Collateral assignment: Getting life insurance to meet the requirements of a business loan? You’ll need enough coverage to repay the loan, maybe in the form of collateral assignment.
• Burial insurance: Final expenses average about $10,000, making burial insurance a viable option for many people.
• To pay off your home: Some people buy life insurance specifically to repay their mortgage. Make sure your coverage will cover the loan balance.
• To pay estate taxes: Despite tax reforms, your survivors would still need to pay taxes on your estate. Your tax professional or financial adviser can help you estimate current estate taxes.

According to the results of your financial underwriting process, you may need only $5,000 in coverage, or you may need $2 million or more. Whether you can get the coverage you need will also depend on the kind of insurance you buy.

Question 3: What Kind of Life Insurance Do I Need?

From the broadest perspective, life insurance can be divided into two types:

• Temporary life insurance, better known as term life.
• Permanent life insurance, better known as whole life.

Term Life Insurance

With term life insurance, you have coverage for a specific period of time. During that time you pay a set, or level, premium. Common terms last 10, 15, 20, or 30 years. At the end of your term, your coverage expires.

At that point, you could renew the same coverage amount at a much higher price or, in some cases, convert part of your term coverage into a whole life policy.

An expiration date for insurance isn’t necessarily a bad feature. Typically, by the time your term ends, you no longer need the same amount of coverage. For example, in 20 years your children may be grown and your house may be paid off, meaning less of your financial security would depend on your income.

For most people, especially young adults who are in good health, term life insurance offers the most coverage for the lowest price. It’s common for a young adult to buy $1 million or more in life insurance coverage.

Whole Life Insurance

Unlike term life, whole life insurance coverage can last the rest of your life. Because of its permanence, whole life insurance typically costs more than term life and has lower caps on coverage.

Just like term life, whole life can provide a payout to your survivors if you die. But unlike term life, whole life also gains cash value, like a savings account, over time. This added cash value also makes whole life coverage more expensive.

How you use the cash value as it accrues helps define the different types of whole life insurance:

• Level Whole Life: Level whole life coverage maintains level premiums throughout the policy. Its cash value works like a savings account you can borrow against or cash out later in life when you no longer need coverage.
• Universal Life: Universal life allows your policy’s cash value component to interact with its coverage amount and premiums. This creates some remarkable flexibility. You could use your accrued cash value to subsidize your premiums later in life, for example. You could even change the coverage amount during the policy.
• Indexed Universal Life: The cash value in an indexed universal policy is connected to a stock index, usually the Dow Jones Industrial Average or the S&P 500. As the stock index gains or loses value, your cash value will also grow or decline. These policies usually cap gains or losses to protect your coverage.
• Variable Universal Life: With this kind of policy, you could choose how the cash value would be invested. At this point, you may be more comfortable working with a financial planner.

No Exam vs. Medically Underwritten

While all insurance can be categorized as either term or whole, several other distinctions can make a big difference.

For example, life insurance underwriters usually require applicants to take a medical exam before finalizing coverage. If the exam reveals a medical condition like high blood pressure or high cholesterol, they will place you in a different life insurance rate class, making your insurance rates will be higher.

On the other hand, if you’re healthy, you’ll have access to lower premiums. Insurers require a medical exam to access their best rates and large coverage amounts such as $1 million or $2 million.

But you can also buy coverage without an exam. No-exam coverage comes in several varieties:

• Simplified issue: Available as term or whole, simplified issue life insurance skips the medical exam but requires a lengthy questionnaire about your health and your family’s health history. Most insurers cap coverage around $250,000. A few companies offer larger coverage amounts, but it would be tough to find more than $350,000, or maybe $400,000, in coverage.
• Guaranteed issue: This kind of policy, available as whole life, asks very little about your health and guarantees acceptance for almost everyone. Expect low coverage caps — $25,000 would be a large policy — and high premiums. These policies also have graded benefits, meaning your family couldn’t claim your entire coverage amount if you died within the first year or two you own the policy.
• Final expense insurance: These no-exam policies have minimum age requirements and offer small coverage amounts designed to pay for a funeral or other final expenses. They’re usually specialized simplified issue policies, though many companies will steer you toward a guaranteed issue policy depending on your health situation.

If you want to achieve the best rates possible on your life insurance policy, you will want to pass the medical exam and show that you are not a high risk for the company to insure.

Question 4: How Much Will I Need to Pay for Coverage?

Everything we’ve discussed so far — your coverage amount and your policy type — will directly impact the price or premiums, you’ll pay for coverage.

So let’s review:

• Term life policies offer the most economical coverage options for many shoppers. Shorter terms cost less; lower coverage amounts cost less.
• Whole life policies offer more features and accrue additional cash but also cost more.
• No-exam policies are more convenient but cost more for less coverage.

All this is true for the average shopper, but life insurance is highly individualized. Factors specific to you will impact your premium. Let’s dig a little deeper.

Extra Features

A car with heated seats surround sound, and a moonroof costs more than the base model. Likewise, an insurance policy with extra features will cost more.

Insurance companies call these features “riders.” Riders adapt your coverage in specific ways. Common riders include:

• Return of Premium: With this rider, you can get all your paid premiums back when your term policy ends. It sounds great, but this rider will make your coverage cost a lot more.
• Accelerated Death Benefit: With this rider, you could access your coverage early under specific circumstances such as becoming disabled or being diagnosed with a terminal condition.
• Waiver of Premium: If you became disabled and could no longer afford your premiums, you could still keep your coverage in place for a while with this rider.
• Accidental Death: A policy can increase your coverage if you die as a result of an accident.

You can also find many more riders, with the above being the most popular. Each rider will add to your life insurance cost, and each one has specific rules about activating them. Statistically speaking, very few people activate riders so you could keep costs lower by declining them.

Your Risk to Insurers

Insurance underwriters’ primary job is to determine how much risk applicants pose to the insurance company’s bottom line.

The higher the risk, the more you’ll pay for coverage.

Underwriters consider a lot of factors to determine your risk:

• Your age and general health: Older people tend to pay more for life insurance; every year your rates go up because of age. People with health problems also tend to pay more. Those with mental impairments are affected, too. If you skip the medical exam, underwriters will usually assume you’re not as healthy and charge you higher premiums.
• Your family’s health history: If several people in your family died of heart disease or a specific kind of cancer, you’ll likely pay more for coverage.
• Your job and hobbies: Police officers or firefighters may pay higher premiums because they’re more likely to die at work. If you climb mountains on the weekends you’ll pay more than someone who writes poetry at the kitchen table on weekends, so be mindful of what kinds of dangerous activities you are involved in.
• Your driving record: People who get a speeding or reckless driving citation every couple of years could face higher life insurance premiums because they’re statistically more likely to die in a car wreck.
• Your credit history: Insurance underwriters have noticed a connection between people with lower credit scores and people more likely to result in a paid claim. Here’s the general thinking: Taking risks with your finances makes you more likely to take risks in other aspects of life.
• Your habits: Those who have habits which impact their overall being in the long run can run into higher premiums, too. Even though you may be 100% healthy in all other respects, smoking, for example, might double or even triple rates because of the long term risks.

You can’t control all of these factors, but you can find insurance companies with underwriting tendencies which are friendlier to your situation.

For example, if you have diabetes, you can find an insurance company with a history of approving policies for diabetics. An independent life insurance agent can be a valuable ally as you look for this, or any, kind of niche coverage.

Question 5: Where Should You Buy Coverage?

The kind and amount of insurance you need should influence where you buy coverage.

If you’re young and healthy and you need a sizeable coverage amount to protect your family, you won’t have trouble finding coverage. You can simply enter your information in the quoter on this page and start comparing life insurance quotes and companies.

No exam coverage can be easy to find online, too. In many cases, you can have no-exam coverage in place within 48 hours or less.

If you’d like the flexibility and permanence of a whole life policy or if you need special attention, you should reach out to an independent insurance agent.

Independent agencies like ours can connect you with dozens of insurance carriers. Access to more carriers means you’re more likely to find the company most likely to look favorably on your life insurance application.

A captive agent who sells only one kind of insurance may simply direct you to a more expensive policy, such as guaranteed issue, to keep your business in the company.

Assessing Insurance Quality

Insurance companies want to know a lot about you before covering you. You should also know a lot about your insurance company.

Companies won’t show you their books, but you can still learn a lot about a company through its financial grades.

Independent ratings agencies such as A.M. Best, Moody’s, Fitch Ratings, and Standard & Poor’s regularly investigate insurance companies.

These agencies issue ratings, usually ranging from A to F. A higher grade means the company is more financially healthy and more likely to be able to pay your claim.

You can’t always take the grades at face value because each ratings agency has its own grading scale. For example:

• Fitch rates companies on a scale of AAA down to D.
• A.M. Best uses a scale of A++ down to F.

This seems simple enough, but you have to pay attention because an A+ at A.M. Best means the company has achieved the second-highest possible rating. The same A+ is Fitch’s fifth-highest possible rating.

Bottom Line: Putting It All Together

Finding and keeping an accurate picture of your life insurance needs will help you cut through the confusion life insurance shoppers often experience.

Knowing your risk factor and the impact of your health — whether good or bad — will give you a reasonable idea how much you should pay for coverage.

By keeping these five questions and their answers in mind as you shop, you can take control of the process and take the mystery out of our simple question: How do you buy life insurance?