How to Buy Life Insurance

Life insurance provides essential financial protection to your family or other beneficiaries. It’s also a complex product that can be much more challenging and time-consuming to buy than car or homeowners insurance.

That’s why it’s so important to take a deliberate approach to choosing the life insurance company and the policy that's right for you. Here are some steps to help ensure you get the coverage you need.

How to buy life insurance in 7 steps

1. Determine your objective

Life insurance can be purchased to suit different purposes. So before you proceed, establish your objectives for buying coverage. These might include:

• To provide financial security to your family in the event of your death.
• To provide financial security and diversify your savings/investment portfolio.
• To ensure your family has enough money to pay for your end-of-life expenses, including medical bills and funeral costs.
• To help ensure your business partners have funds to continue your small business after you pass away.

2. Decide how much life insurance you need

There are multiple types of life insurance policies available. They all require you to choose a level of coverage—the “death benefit.” This is the amount the insurance company will pay your beneficiaries after your passing.

You want to be sure the death benefit is sufficient to achieve the objective you defined in Step 1. If your policy needs to provide financial support to your family, you might apply the 10X formula to determine your needs.

1. Multiply your annual income by 10.
2. Add $100,000 per child to cover the cost of college.

As an example, say your current income is $150,000, and you have four children:

$150,000 * 10 = $1,500,000

$100,000 * 4 = $400,000

$1,500,000 + $400,000 = $1,900,000

In this example, you should estimate a life insurance death benefit of $1.9 million.

When buying insurance for other needs—to pay for end-of-life expenses, for example—you’ll need to estimate those costs to, in turn, estimate your death benefit. An insurance agent or financial advisor can help you with this process.

3. Choose your policy beneficiaries

The beneficiary is the person (or people) who will receive the policy’s death benefit payout. If you’re planning for your family’s financial future, your spouse/partner and children may be the beneficiaries. It's also common to have the policy pay into a family trust if the children are still minors.

A small business owner buying insurance to ensure their company’s continuity may choose their business partners or family members entrusted to take over.

4. Choose a policy type

Next, you’ll need to decide on a type of policy to buy. Two common types of policy are term life and whole life.

How to buy term life insurance

A term life policy expires after a set number of years (typically between 10 and 30). These policies provide a death benefit that is paid to your designated beneficiaries. Term life policies are generally the simplest and cheapest form of life insurance. Fabric by Gerber Life, for example, offers term life insurance with term lengths ranging from 10 to 30 years and coverage amounts up to $5 million.

How to buy whole life

As a form of permanent insurance, a whole life policy stays in force until your death. In addition to a death benefit paid to your beneficiaries, these policies feature a savings/investment component called cash value, which you may be able to access while living. Because of these additional features, whole life insurance usually costs many times more than term life. Ethos Life offers whole life insurance with coverage of up to $30,000 for individuals aged 66 to 85.

5. Comparison-shop among companies

As with car or home insurance, life insurance costs vary between companies. So you owe it to yourself to get quotes from several carriers. Be sure to quote the same type of policy and coverage amounts each time to be sure you’re doing a fair comparison.

An independent insurance agent who sells life insurance can help you do this shopping. These agents typically represent multiple companies, making it easy to get several quotes. You can also check with an online broker such as Everyday Life, which offers whole and term life insurance from several companies.

6. Consider third-party ratings and reviews

While getting the best price is important, it shouldn’t be your only consideration when looking at life insurance companies. A company's financial strength and stability are also crucially important—you want them to be around when it comes time to pay a claim. And you probably want to work with a company that provides excellent customer service.

Checking independent ratings and reviews can help you gain insight into these factors.

• AM Best provides analytics and ratings specializing in the global insurance industry. Its trusted and well-known ratings indicate an insurance company’s financial strength and ability to pay claims.
• JD Power provides annual rankings of U.S. insurance companies for many types of coverage. Its annual review of life insurance customer satisfaction rates companies on a 1,000-point scale then ranks those companies in order of their rating.

7. Apply for coverage

Applying for life insurance can be time-consuming, although some companies help you save some time by offering online applications.

Companies will want to know about your health, medical history, family, tobacco use, and more. And unless you’re applying for a policy that does not require it, expect to take a medical exam that may include blood and urine screening. Be sure to answer accurately and truthfully. It’s common for insurers to use third-party services to verify information, and discrepancies may jeopardize your application.

More considerations when buying life insurance

Understand cash-value risks and rewards

If you're interested in a policy with cash value, such as whole life, universal life, or indexed universal life, be sure you understand your policy's financial risks and rewards. Some types, such as whole life, offer returns that are guaranteed but modest compared to other investment products. Other types, such as indexed universal life, offer returns tied to stock market performance. These policies offer greater potential rewards but also some investment risk. A financial planner can help you better understand these options.

No-medical-exam options

Life insurance policies typically require a medical exam. But some carriers offer policies that skip this step, and instead rely on you to complete a questionnaire covering your medical history and overall health. These options are sometimes marketed as "guaranteed life" policies that can be purchased regardless of your health. Such policies often cost more and provide less coverage than a standard policy requiring an exam.

Riders and other features

Riders are coverage add-ons that amend a standard policy, allowing you to customize it to your needs. Common riders include adding coverage for a child, accelerated death benefit payments (allowing you to use some of the death benefit for medical expenses if you become terminally ill), or waiver of premium if you become disabled and unable to pay for the policy.

Some policies offer features that provide added flexibility. Ladder Life, for example, offers term life policies with adjustable coverage. This means you can change your death benefit up or down as your needs change.

Group coverage

According to the Bureau of Labor Statistics, 57% of U.S. employers offer group life insurance as an employee benefit. These policies typically have only modest coverage, but they can be supplemented by additional policies. If you have a group policy, you should consider it when deciding on how much insurance to buy.

Consult with an expert

As we’ve seen, there’s a lot to think about when buying life insurance. The good news is that help isn’t far away. An independent insurance agent can help you understand your options. And as these agents typically represent multiple companies, they may even do some of the shopping legwork for you.

TIME Stamp: Take a step-by-step approach to buying life insurance

Life insurance is a pillar of financial planning. It can also be a complex product that is challenging to buy. Follow our seven steps to help ensure you get the coverage you need at a price that suits your budget.

Frequently asked questions (FAQs)

At what age should you buy life insurance?

The age at which you buy life insurance should depend on your needs. It’s common for young people starting families to buy life insurance to protect their children’s financial future. However, seniors can buy life insurance to help their families pay for end-of-life expenses. And it’s not uncommon for parents to buy life insurance for their children to help ensure those children always have coverage even if they become uninsurable as an adult.

What are the best life insurance companies?

The best life insurance companies provide the policy options and coverage maximums you need. They should demonstrate financial stability as measured by their AM Best rating. And they should provide high levels of customer service—JD Power regularly rates leading life insurance companies for customer satisfaction.

How can you use life insurance to buy a house?

You can use life insurance to help buy a house in a couple of ways.

The first is by using a life insurance policy as collateral for your mortgage. In this scenario, the lender is the policy beneficiary and receives the death benefit if you die before paying off the mortgage. Having collateral when applying for a loan could make the lender more likely to approve your application. It may also help you qualify for a lower interest rate.

The second is by tapping into the cash value of a permanent life insurance policy. In this case, you make a withdrawal, take out a loan, or surrender (cancel) your policy to gain access to these funds. You can then use the money to augment your down payment or monthly mortgage payments.

How can you buy life insurance for your parents?

You might consider buying life insurance for your parents to help ensure there's money available to help settle their debts, pay their medical bills, or cover other end-of-life costs, such as funeral services.

Importantly, you’ll need your parents’ consent to buy a policy. And either the insured (the parent) or the beneficiary (you) can own the policy and make the premium payments.