What is the Guide to Choosing the Best Life Insurance? You might experience a lot of difficulties when selecting a life insurance policy and making a decision, especially if you’ve never done it. Before you get started, it helps to understand not only the different options you have but some basic terms and criteria so you pick the right policy for your circumstances.
Types of Life Insurance?
Life insurance comes in many different forms from short-term contracts to lifetime coverage. The best life insurance option for you depends on certain conditions which include your financial goals, health status, age, and a variety of other factors.
Here’s a quick overview of each type of life insurance, and who it is best suited for:
- Term. Term policies offer temporary life insurance coverage for a fixed length of time. Most policies range from five to 30 years in length and typically offer a high death benefit for a lower premium. The term is best for young, healthy individuals looking for low-cost coverage.
- Whole. Whole life insurance is a type of permanent life insurance designed to cover individuals for their lifetime. Policies may accrue cash value that earns interest and can be borrowed against on a tax-free basis.
- Universal. Universal life insurance is a type of permanent life insurance, that offers flexible benefit amounts and premiums. Policies may accrue cash value that can be invested for additional growth, and borrowed against on a tax-free basis.
- Indexed. Indexed life insurance is a type of universal life insurance that allows individuals to invest the cash value accrued within the policy in market indices (such as the S&P 500) for tax-deferred growth. The cash value balance can be borrowed on a tax-free basis.
- Guaranteed issue. Guaranteed-issue life insurance policies are a type of permanent life insurance that offers guaranteed approval for a small amount of coverage, regardless of the applicant’s health status. No medical exam is required for approval of coverage.
- Final expense/burial. Final expense life insurance is a type of permanent life insurance designed to cover end-of-life expenses, such as funeral and burial costs. These policies are typically smaller amounts and many offer coverage with no medical exam required.
- Annuities. An annuity is an insurance contract designed to provide a steady income stream in retirement. Annuities are typically funded in a single lump sum, or with multiple payments during the accumulation phase. Payouts start at the “annuitization” phase and vary depending on the details of the contract.
Life Insurance Terms You Need to Know
To fully understand what is included by the insurance, you’ll need to learn some phrases when doing your study on it.
- Face value. The face value of an insurance policy is the amount of money your beneficiaries would receive should you pass away while the policy is in force.
- Death benefit. The death benefit is the same as the face value of the policy, which is the payout upon death to your beneficiaries. Policy death benefits may be reduced if any payouts are taken from the policy due to an accelerated benefit provision or if any withdrawals or loans are taken against the cash value of a policy.
- Cash Value. Some life insurance policies use a portion of the premium to accrue cash value within the policy. This cash value can earn a fixed amount of interest, or be tied to an investment index for more growth. The cash value is tax-deferred savings and can be borrowed on a tax-free basis.
- Riders. A rider is a life insurance policy enhancement that offers additional benefits or custom coverage options to the insurance policy. This may include coverage for a spouse or children, additional payouts for accidental death, or the ability to access policy funds early. Rider fees are typically billed as a small percentage of the policy premium or as a flat annual fee.
Who Needs Life Insurance?
Life insurance is designed to protect your assets and pay your obligations should you pass away. A few reasons you may need life insurance include:
- You are married
- You own a house with a mortgage
- You are the sole provider for your family
- You want to cover funeral and burial expenses
- You want to build tax-deferred cash value
- Do you want to supplement your retirement income
- You own a business
- You have large debts
This is not an exhaustive list of reasons for life insurance, and most everyone benefits from having some type of life insurance coverage.
How Much Life Insurance Should I Get?
The cost of life insurance varies significantly depending on several different factors. One of the biggest cost factors will be the type of life insurance you buy. For example, a term life insurance policy is significantly less expensive than a whole life insurance policy for the same amount of coverage.
The amount of life insurance coverage you should carry depends on a few factors:
- Your age
- Your debt obligations
- Your income
- Years until retirement
- Your family
Here are some of the most common factors affecting life insurance rates:
- Age. The younger you are when you buy a policy the less you’ll pay. That’s because your chance of death is smaller.
- Sex. Females have a life expectancy that is nearly five years longer than males, according to the National Center for Health Statistics. This means that men generally pay more for life insurance than women (except in Montana where insurers must provide gender-neutral life insurance rates).
- Health. Your health has a major impact on your life insurance rates. The insurer will evaluate your past and current medical conditions in order to calculate your life expectancy.
- Lifestyle. Your driving history (such as a DUI conviction), criminal record, and dangerous occupations and hobbies (such as scuba diving) can all result in higher life insurance rates.
Many financial professionals recommend coverage of at least 10 times your annual salary as income replacement but you may need more or less, depending on your circumstances.
For instance, if you have a large mortgage and are the sole breadwinner for your family, you may opt to get more than 10x coverage on yourself. Or this may be a simple final expense policy that covers end-of-life costs.
How to Choose the Best Life Insurance
The best type of life insurance is the one that fits you and your family. This includes understanding how much coverage you want, and what the money would be used for if you pass away. You will also want to consider whether you want temporary or lifetime coverage.
You may want lifetime coverage, but then learn that term policies would save a significant amount of money, as well as cover you for the highest risk years (more debt, more familial obligations).
Finally, figure out what you can afford. Most policies charge a monthly or annual premium, with additional costs for riders. If you are looking for a low monthly cost, term policies may be a better fit, but if you want to use your insurance policy to grow your wealth, a whole or universal life policy may fit the bill (though it is more expensive).
Compare costs between term and permanent policies to find what fits best in your budget. For example, a 30-year-old man with a 20-year $500,000 policy will pay an average of $27.69 a month. A 30-year-old man with a $100,000 whole-life policy will pay $89 a month, payable to age 99.
This is more than double the cost of term life while providing less coverage, but covering you over a longer and more risky time of your life.
To get the best life insurance policy for your situation, and one that fits your budget, follow these steps:
- Step 1: Decide what kind of policy you want: term or permanent.
- Step 2: Figure out how much coverage you need and how long you want to be covered. If you’re buying a term policy, figure out how long of a term you need. If you are looking to purchase a permanent life policy for lifetime coverage, figure out how the cash value component fits into your overall financial plan. You may want to talk to a financial planner about what makes sense for you and your family.
- Step 3: Talk to a life insurance broker and ask them to pull quotes for the type of life insurance you’re interested in. If you’re not sure whether to choose term or permanent life insurance, ask the broker to get quotes for both kinds.
- Step 4: Compare quotes from different providers and choose one that meets your requirements and fits your budget.
- Step 5: Schedule a medical exam if necessary. If not, apply and wait for the company to approve you for the policy.
Remember that it’s OK to get several different quotes to find the best policy. Do your research, ask questions, and/or speak with a financial or insurance professional if necessary.
How to Get Life Insurance Quotes
According to the Insurance Barometer Report, 15% of people think they can’t afford life insurance. At the same time, many consumers overestimate the cost.
The only way to know what you will pay is to get life insurance quotes from a few companies. Quotes are free. An experienced life insurance agent will know what companies tend to give the best prices based on your age, health, and desired coverage amount.
Expect to be asked about your age, health, tobacco use, your family health history, driving record, and any dangerous occupations or hobbies. When you have a quote that you like, you can start a formal application. You answer more questions in detail and apply for a specific policy type, amount of coverage, and policy length (if you’re buying term life insurance).
Once you’ve submitted the application, some insurers may require a life insurance medical exam. These exams can take place at your home, work, or sometimes a local exam office. The time it takes to process an application varies significantly among companies and policy types.
- Some insurers offer fast life insurance, including instant approval, to people who qualify, who are generally younger (under age 60), and without medical issues.
- Some insurers use “accelerated underwriting” to skip the medical exam and process applications in a day or a week, depending on the company.
- And some insurers use a traditional process with a medical exam and an approval process that can take over a month.
How to Choose a Beneficiary
A life insurance beneficiary is a person who can claim the death benefit after you pass away. You can name multiple beneficiaries and decide what percentage they each will receive when you die. Additionally, you should add contingent beneficiaries who will receive the death benefit if your primary beneficiaries have died.
Not everyone names people as beneficiaries. Some people name trusts. By creating a revocable living trust and naming it as the life insurance beneficiary, you can ensure that the money is used according to your wishes. For example, the trust money could be used to take care of children.
If you decide to name a trust the beneficiary of your policy, make sure to work with an attorney to structure the trust correctly. It’s also wise to work with a financial planner so that it is part of your larger financial plan. It’s crucial to update and review your beneficiary selections regularly. For example, life events such as a marriage or a divorce can impact your selection.
To update your beneficiaries, contact your life insurer and submit a change of beneficiary form. Making changes only on a will won’t affect the insurance.
How Does a Beneficiary Make a Claim?
Claims can be paid quickly—in about a week, assuming the insurer has all the documents it needs. Don’t assume the insurance company will contact you. It’s unlikely they know that your relative died. While some insurers are proactive in monitoring insured customers who have passed away, they won’t discover a death immediately.
- Death certificate: To start the claim process you’ll need to submit a certified copy of the death certificate. The insurer won’t send it back. Therefore, you may want to request a few certified copies if you need them for multiple purposes.
- Contact the insurance company right away: While you may have a lot on your plate after a loved one passes away, the sooner you contact the insurer, the sooner you can get the money.
- Verify you have met all claim requirements: Once all of the claim paperwork is done, make sure you have all supporting documentation attached. This can include a claim form and a death certificate.
The Company typically pays Claims within 30 days after the insurer receives the necessary documents. You don’t need an original copy of this insurance policy to make a claim. You only need to know the name of the insurance company and contact them to initiate the claim.
That’s why it’s important to let your beneficiaries know that you have a policy and tell them the name of the insurer. And insurers are contractually obligated to pay only the people listed on the policy.