If you’re an adult with a house, a spouse, kids, or any financial liabilities, and you should consider buying a life insurance policy. You won’t need to worry about what financial burden your loved ones will inherit if you die suddenly.
Here at The Simple Dollar, we’re a big fan of term life insurance since it’s affordable to purchase and fairly easy to qualify for if you’re in good health. Many life insurance agents recommend that you buy life insurance coverage equal to five to ten times your annual income ($250,000 to $500,000 per $50,000). You may require more coverage if there are a lot of assets, children, or future expenses.
Your personal circumstances will also affect the length of your ideal policy. A 30-year policy is ideal for young people who need income replacement throughout their entire careers. A shorter-term policy for life insurance might be more suitable for you if you are older or have fewer debts.
It’s important to consider how much coverage you require and how long that coverage should last. You should remember that coverage is always better than none.
How to Buy Life Insurance
What should you look for when choosing a policy? How can you determine if the life insurance policy you are considering is right for you? It’s wise to do some research before you jump in, due to the variety of life insurance companies available and their policy details.
We interviewed Chris Huntley from Huntley Wealth & Insurance Services, who is the president of Huntley Wealth & Insurance Services. He also wrote “25 Best Ways To Save 50% or More on Life Insurance” – here are the key factors Huntley recommends you look for – and avoid:
Affordability
When I wrote about why I would never buy whole life insurance last year, I shared some basic quotes I received for both whole life and term life insurance as a 37-year-old woman. A 20-year term policy of $750,000 would cost me $717.50 per year, while a whole-life policy with the same coverage would cost $9,875 annually.
This is a significant difference and something consumers need to consider when weighing the pros of buying whole or term life insurance. Whole life insurance offers a death benefit for your entire life (until the day you die), but it is hard to argue that the benefits of perpetual insurance are worth the extra expense.
Huntley points out that finding affordable life insurance policies is not just important for now, but also important for the future. Because life insurance is one of the most important items that people stop paying when things get difficult.
You’ll be more likely to keep a policy if it’s affordable.
Huntley says, “The problem with letting your policy lapse is that it might be incredibly costly to reinstate or impossible if you have changed your health.”
He says the bottom line is to plan for a premium that you can afford long-term.
Instant Payout
Huntley points out that a TV commercial that promises quick and easy coverage without a medical exam is likely to be from a company offering “simplified-issue” life insurance. These policies are easy to qualify for because there are very few questions and no exam.
There is often a waiting period of two to three years after purchasing life insurance before they will pay 100% upon your death. This is not the best way to get life insurance coverage.
Huntley advises that you ensure your policy pays 100% of its “face value” starting from day one. He advises against simplified issues policies, unless you have to.
Underwriting Leniency
Huntley says that buying a policy from a company which does not respect your personal or health needs could prove to be a costly financial error. There are many companies that price risks such as diabetes, smoking, travel to the U.S. or family history.
Huntley says, “Ensure you speak with an independent agent who can shop for rates from different companies to find the best rate for your situation.” You could end up paying too much for life insurance or being denied.
Automated Payments
There are some bills that you might want to pay in person, but life insurance is one of those recurring costs that can be automated. This is especially true for term life insurance, where the premium is not affected.
This is because if you forget to pay your life insurance bill or don’t make payment within the grace period (usually 30 days), your policy could be cancelled. Your issuer might not allow you pay back the premiums that you have not paid and they may not be required to reinstate your policy.
You should look for life insurance companies that allow you to pay your monthly premiums automatically. This will ensure you don’t have to worry about your policy expiring or missing a payment.
Conversion Feature
Huntley warns that term life insurance policies may not allow you to “convert” your existing term policy into a permanent policy. This feature allows you to swap your term policy for a permanent one (such as universal or whole life), without having to prove that you are still healthy.
Huntley says that if you purchase a 20-year term policy and decide after 19 year’s that you no longer need coverage but have had to deal with some medical issues, the conversion feature will allow you to keep your coverage. If you are looking to buy a new policy, you might not be eligible. While most term policies have a conversion option, not all do.
Living Benefits
Huntley states that there are now more options than ever for life insurance, because of a new wave life insurance companies trying to meet consumer needs.
Huntley says that many policies are now able to pay out payments in the event of a chronic illness, or if you need to be admitted to a nursing home. He adds that many companies offer 20- to 25-year grace periods where you can return some or all the premium you paid for the policy, if you decide you don’t need it anymore.
A company that offers cash-out options for your life insurance policy is smart if you are looking to have the cash available in case you become sick or require end-of-life treatment.
Which type of insurance is most suitable for you?
There are two main types of life insurance policies: permanent and term. All life insurance policies provide a death benefit for beneficiaries. However, some can also be used as investment vehicles.
Term life insurance covers an insured for a set period of time, such as 20 or 30 year. The coverage ends when the term expires, unless the policyholder decides to renew it. Most term life policies provide level coverage means that the face value of the policy remains constant from the beginning to the termination.
A decreasing term policy will have a declining death benefit. Term life policies do not have a cash value. The term ends and you are no longer covered. There is no return on the money you paid. To be eligible for this type coverage, you will typically need to pass a medical exam.
Whole life insurance provides a fixed death benefit and covers you from the time you purchase a policy, until you die. Whole-life policies require that you pay a fixed premium on a regular basis. Whole life is different from term life. It has a cash value that is determined by the insurer. If you choose to end your coverage, you have the option of taking out a loan or cashing out a portion.
Universal life insurance is a modern form of whole-life insurance. Although you cannot change the face of a whole-life policy, you can increase its death benefit if you have passed a medical exam, which most insurers require.
After the policy has matured, universal life gives you the option to modify your premium payments. A universal life policy also offers an investment option. This typically earns you money based on a money-market rate.
Term life is the cheapest type of life insurance. It requires monthly payments over the term. This can be set up to automatically. Young adults who are starting families can choose term life. You might purchase a 20 year term policy to protect you and your family until you have children.
For those under 50, universal and whole life policies often don’t require a medical exam. Whole life policies can be more costly, but they offer coverage for your entire life and build cash value.
For different reasons, people buy universal and whole life insurance policies at different times. These policies are often purchased by parents for minor children to give them protection in the event of an unexpected circumstance and get them started investing.
Others purchase whole life policies for their children after they have moved out to provide a death benefit to their spouse. Some adult children also purchase whole-life or universal policies for their parents to provide protection during their golden years and protect them against long-term care expenses.
Long-term care riders are another option commonly offered by life insurance companies. If the insured is diagnosed with terminal illness or requires long-term care, the rider will pay a portion of your policy’s face value. This usually amounts to 1% to 4 percent. These riders usually limit the amount of benefits.
Are you looking to invest in life insurance?
Term life is not the right choice if you are looking for an investment vehicle in your life insurance policy. Term life provides only a death benefit and does not build a cash value.
While whole life insurance can build a cash value over the long-term, universal life offers potential higher dividends because it accumulates value based upon a money market interest rate. Two other types of life insurance are better investments, but you need to have investment experience.
Variable life policies feature a death benefit, along with a savings account. Flexible policies allow you to choose where you want to invest your savings: in stocks, bonds or money market mutual funds. Variable life policies are more risky than universal and whole life policies. You could lose your investment and receive a lower death benefit if it doesn’t perform.
Variable-universal policies combine flexibility and investment options with variable life coverage. This policy allows you to adjust your death benefit, premiums, and also lets you choose the type investment for your savings account. Variable-universal policies, just like variable life, can lead to loss of part of your death benefit or savings if investments fail.
How does my budget and bad credit affect my life insurance application?
Term life coverage is the best type of life insurance policy for most people. A 25-year-old, non-smoking mother in good health can often purchase a 20-year, $500,000 term life policy for as little as $16 per month.
You might consider buying a policy that is based on what coverage you require, but with a shorter term if you have a tight budget. Although term life policies allow you to renew at any time during the term, they will usually charge a higher rate. You can afford to renew a 10-year policy if you have 20 years of coverage, expect an increase in your income over the next ten years, and buy a 10-year policy.
Most states allow insurance companies to consider your credit rating when determining your premium, because statistically, people with poor credit file more insurance claims. You can expect to pay more for car insurance if you have poor credit. Your credit score is less important when you are buying life insurance.
Underwriting guidelines vary among companies, but most insurers place more emphasis on a life insurance applicant’s life expectancy, than their credit rating.
For example, when reviewing applications for term life policies, Haven Life, whose policies are underwritten by MassMutual, does not consider an applicant’s credit score when determining eligibility or rate. If you ever filed for Chapter 7 or 13 bankruptcy, a provider may deny your application, but only if you’ve recently filed or you’ve fallen behind on payments in the last couple of years.
How to Save Money on Life Insurance
You now know what you should look for in life insurance policies. Now you want to know how to get the best price. These money-saving tips will help you save money when shopping for life insurance.
- Before you purchase, compare the cost of whole and term life insurance. If you decide whole life insurance is best for your needs, that’s perfectly fine. You might still want to compare the costs of term life insurance. As I showed above, whole-life insurance would have cost me $9,000 per year to get the same coverage as a term policy. If this is the case, it might be worth looking into term life insurance and saving the difference.
- Get several quotes online. It is smarter to apply online for life insurance coverage or with a broker who sells multiple policies than it is to visit a life agent who only works with one company. Ideally, you’ll want to get life insurance quotes from several companies so you can compare costs as well as policy details.
- Do not buy more coverage than you actually need. One way to reduce costs is to buy the right amount of insurance. You can use a life insurance calculator to determine how much coverage is necessary.
- Do not wait to buy. Last, but not least: don’t delay your life insurance policy another year or another week. No matter what, the rates you pay for coverage will increase every year. You have a better chance of getting the coverage you need the sooner you purchase.
Simple Life Insurance Policy:
- Term life insurance is the best type of life insurance.
- Avoid simplified issue policies as they do not offer immediate payouts.
- Ask for quotes from multiple insurers or brokers to avoid overpaying.
- To prevent coverage lapses, set up automatic payments.
- Term life policies allow you to convert to permanent coverage.
- Look for policies that provide a long-term care rider.
- There are two types of life insurance policies that are most popular: whole and universal, which create cash value over time, or term life, which provides only a death benefit.
- While variable life and variable-universal policies are the best options for investment, they can also pose greater risks if investments fail to perform.
- People with bad credit are not charged more by life insurance companies.
