Life insurance coverage can help you plan for the future and provide financial protection to loved ones after your death, but finding the right policy can be overwhelming.
The steps below can help you make important decisions: the policy you choose, the amount of coverage you need, and the insurance company you select.
1. Decide if You Need Life Insurance
Before you begin, one of the first questions to ask is if you need life insurance. According to the Insurance Information Institute (III), most people do. Though everyone’s personal and financial circumstances differ, a life insurance policy can be a valuable safety net. That’s particularly true if any of the following are true:
- Your family or beneficiaries would face financial hardships if they lost your income
- Your dependents would be left with a large amount of debt after you die
- You want to cover end-of-life expenses, including funeral, burial, or medical costs
- You want to pay for a dependent’s tuition, day-care, or retirement costs
What if you already have a policy through your employer? The Life Insurance Marketing and Research Association (LIMRA) cautions consumers against relying solely on their employer-sponsored life insurance coverage, which may not provide a significant safety net should a primary wage earner die. Within six months or less, 44% of U.S. dual-income households would run into financial trouble.
If you have an employer-sponsored life insurance policy, also known as group life insurance, take note of the death benefit, or the lump sum, your beneficiary would receive if you die. If it’s not enough to fit your needs, then a stand-alone policy may be a good option. As Catherine Theroux, Director of Public Relations at LIMRA points out, employer life insurance may not follow you when you leave your job.
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2. Determine How Much Life Insurance You Need
The amount of life insurance you need depends on various factors, including your personal and household income, the needs of your dependents or prospective beneficiaries, and your financial goals. Here are some questions to ask when determining your policy coverage amount:
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- How will the loss of my income affect my dependents?
- How long would I like my income to provide financial support for my beneficiary?
- How much will my dependents or spouse need to cover the mortgage or rent?
- What day-to-day expenses, if any, do I want to cover for my beneficiaries?
- How will my loved ones cover end-of-life expenses, like funeral costs, estate taxes, etc.?
- Do I want my life insurance policy to be used as an inheritance?
- Do I want part of my life insurance policy to go to a charitable organization?
Determining how much life insurance coverage you need can be challenging. The answer often takes into account several pieces of your whole financial picture. As such, it’s a good idea to discuss your concerns and intentions with a trusted financial advisor who can help you identify a policy that supports your loved ones and your larger financial strategy.
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Find out if life insurance payouts are tax-free for beneficiaries.
3. Determine Which Type of Life Insurance Is Right for You
There are two primary types of life insurance to choose from: term life, which lasts for a set period of time, or permanent life, which covers you for as long as you live. Understanding the defining characteristics of each type can help you choose the right one.
Term Life Insurance
Characteristics of term life policies:
- Provides coverage for a limited period, typically between one and 30 years
- Often the most affordable life insurance option
- Predictable premiums and a guaranteed death benefit
Term life insurance is life insurance that provides coverage for a specific period, called a term. Policies can have term lengths that are short, lasting one or five years, or that remain active for longer, like 15 to 30 years.
Term insurance policies typically have fixed, or level, premiums that stay the same for the duration of your policy. Term life insurance also offers a guaranteed death benefit, or a guaranteed sum of money, as outlined in your contract.
With term life policies you may have the option of two types of death benefits. One is level, which means that it will stay the same for the entire time the policy is active. And the other is decreasing. This means that the amount of money your beneficiary would receive will decrease over the life of the policy.
Term life insurance policies may also be renewable, meaning the policy can be renewed at the end of the initial term. They can also be convertible, which means the policy can be converted to a permanent policy.
If you choose term life insurance, the payout will only be received, as outlined in your contract, after your death. This type of policy does not carry an investment component, and you cannot borrow against or withdraw from it while you’re alive.
For more information, visit our What Is Term Life Insurance? guide.
Permanent Life Insurance
Permanent life insurance refers to policies that last for your entire life. As long as you make your regular premium payments, your coverage won’t be interrupted. Like with term life insurance, there is a death benefit that is paid out to beneficiaries after you die.
Permanent life insurance also typically has a separate cash value component, which is separate from your death benefit and functions similar to an investment account from which you can withdraw or borrow available funds. When you pay your premium, part of the payment goes into an investment account.
The cash value can also grow or fluctuate based on the type of insurance policy you have. In some cases, growth depends on interest rates or stock and money market mutual fund performance. In others, the value grows as the insurer distributes a portion of company earnings, also known as dividends, to account holders.
If you’re shopping for permanent life insurance, it’s a good idea to discuss cash value growth options with an agent to determine which policy is best for you.
For more information, see our How Does Life Insurance Work? guide.
Whole Life Insurance
Characteristics of whole life policies:
- Coverage that lasts for the insured’s entire life
- Flexible premium payment options with a guaranteed death benefit
- Opportunity to access the policy’s cash value before death
Like term insurance, whole life insurance offers a guaranteed death benefit, though premiums may change based on the type of policy you choose.
As a form of permanent life insurance, these policies also typically include a cash value that you can access before death, either by borrowing against or withdrawing from the account or using the funds to cover premiums. How the cash value grows depends on the type of policy you choose. There are types of whole life policies where cash value accumulation is set at the beginning of the policy as well as types where it grows based on dividends paid to you by the insurer.
For more information, visit our What Is Whole Life Insurance? guide.
Universal Life Insurance
Characteristics of universal life policies:
- Coverage that lasts for the insured’s entire life
- Flexible premium payments and death benefits
- Cash value that grows through tax-deferred interest earnings
Universal life insurance is another form of permanent life insurance that allows insureds to maintain coverage for life. In this type of policy, premiums and death benefits are not fixed and can be changed by the policyholder. That gives some policyholders the flexibility to adjust their policy based on life circumstances. However, policy value and premiums can also vary based on investment market performance.
Universal policies also offer a cash value that grows based on tax-deferred interest earnings. However, the value can fluctuate depending on how well (or poorly) the company’s investments perform. If you have a universal life policy, you can access the cash value while you’re living or leverage it to pay premiums, as long as the account balance is higher than the premium payment.
There are also variable universal life (VUL) and indexed universal life policies (IUL) which you can read more about in our guide to universal life insurance. The former incorporates features of variable life insurance as well.
No-Exam Life Insurance
Characteristics of a no-exam life insurance policy:
- Does not require a medical exam
- Typically a faster application process
- Available for both term and permanent policies
No-exam life insurance refers to any policy, permanent or term, that doesn’t require a medical exam to get coverage. This may be an attractive option for individuals who want to avoid an exam or want faster and easier access to life insurance.
This doesn’t mean providers approve applications or determine premiums blindly, however. Instead of relying on a medical screening, an underwriter uses available data to approve applications and set life insurance rates. The data may be pulled from a variety of sources, including medical and driving records. Carriers may also rely on information from the MIB Group (formally known as the Medical Information Bureau), an insurance consumer reporting agency.
There are trade-offs. A no-exam life insurance policy is typically more expensive than alternative life insurance plans. These policies may also offer less coverage and less flexibility. For instance, you may not be able to convert a term policy to a permanent coverage policy.
For more information, visit our What Is No-Exam Life Insurance? guide.
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4. Decide if You Need Life Insurance Riders
Riders are additional benefits or options that you can add to your policy to create customized coverage that meets your specific needs. There are several types of riders available to policyholders, and each can impact your premium.
The following riders are frequently offered for life insurance policies:
Children’s Term Rider
This rider allows parents to cover their children under the policy. If the child dies before reaching the age specified in the rider, the insurer will pay out a death benefit to the policyholders.
Accelerated Death Benefit Rider
By adding this rider, you may be able to access your death benefits before you die if you’ve been diagnosed with a terminal illness or disease.
Accidental Death Benefit Rider
Also referred to as a double indemnity rider, this increases the death benefit paid out if you die from injuries sustained due to a covered accident.
Waiver of Premium Rider
Adding a waiver of premium rider to your policy may protect you if you can’t pay the required premium due to an injury or illness that leaves you disabled.
If you’re interested in adding riders to your policy, be sure to discuss them with your agent, broker, or carrier first. Availability, eligibility, and restrictions can vary by company and policy, so it’s important to thoroughly understand the rider and the triggering circumstances before adding it to your policy.
5. Choose a Life Insurance Company
Today’s robust life insurance market gives consumers their fair share of providers and policy choices. Consumers also have the option to work with an insurance agent, insurance broker, or insurance company. Understanding the difference between each term can help you find a company and policy that meets your needs.
Insurance Agent
An insurance agent is a licensed professional who sells insurance products, like life, auto, or home insurance, to consumers. They can be a captive agent, which means they represent a single insurance company, or they can be an independent agent, meaning they may represent multiple companies.
Insurance Broker
Instead of representing one or more insurance companies, the broker acts as the middle-man between their clients and the insurance market. Insurance brokers work with individual consumers to help them find, review, and compare insurance policies from multiple companies. They do not, however, underwrite, bind, or otherwise oversee policy sales.
Insurance Company
Also referred to as a provider, insurer, or carrier, an insurance company is an entity that packages, sells, underwrites, and binds insurance policies. They are also the entity that processes and pays out claims.
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Tips for Selecting an Insurance Company, Agent, or Broker
Regardless of which you choose, there are a few things you can do to ensure that you’re working with a quality agent, broker, or company and find a policy that’s best suited for you and your beneficiaries.
Check Licensing
Both insurance companies and agents must be licensed to sell insurance in your state. Any reputable agent or carrier should be able to provide this information, but you can also check with the department of insurance, department of finance, or similar governing body that oversees insurers in your state.
Review Company Ratings
Several independent agencies rate insurance companies based on their financial strength, or ability to pay out claims. Before you purchase insurance, it’s a good idea to review ratings from two or more of the most prominent agencies.
Get Reviews & Referrals
Official ratings can give you a good indication of a company’s financial strength, but the experiences of others may also provide useful guidance. Referrals and reviews from friends, family, and trusted financial professionals, like an advisor, can also help you narrow down your search for a life insurance agent, broker, or company.
Check for Bundling Discounts
Many insurance companies offer discounts to customers who bundle policies. If you currently carry another insurance policy, like homeowners or auto insurance, check with your carrier to see if they offer life insurance and, if so, if they offer a multi-policy discount.
Shop Around
One of the best things you can do before purchasing a new policy is to shop around and compare insurance companies, policies, and premiums. An insurance broker can help you do that. You can also get a free insurance quote through a carrier or agent. The Insurance Information Institute (III) recommends comparing at least three quotes before you decide.
Consider Your Preferences
Your personal preferences and expectations can also help guide your choice.
Some questions to ask yourself:
- Did the agent or broker listen to your needs and answer your questions?
- Do you prefer to manage everything online, or would you prefer an in-person agent?
- Do you want a company that offers no-exam insurance?
When all things are equal, sometimes the best insurance provider, agent, or broker is the one that makes you feel comfortable and aligns with your preferences and goals.
How Important Is an Insurance Company’s Financial Rating?
The financial rating of an insurance company can tell you important information, such as how likely it is they can pay out insurance claims. As such, you generally want to choose a company that is considered capable of fulfilling eligible claims.
Several independent agencies monitor and rate insurance companies, and you may want to consider checking with two or more of the following before purchasing a policy. The most notable agencies include AM Best Company, Inc.; Fitch Ratings; Kroll Bond Rating Agency, Inc. (KBRA); Moody’s Investor Services; and Standard & Poor’s (S&P) Insurance Rating Services.
Each agency has its own ratings methodology and scoring metric. The major rating agencies typically use a variation of ratings, starting with a variation of A (e.g., A++, AAA) for top-rated insurers.
Generally, the higher the rating, the more reliable the insurance provider. Life Happens, a consumer-focused insurance educational resource cautions consumers against making decisions based on ratings alone, primarily because ratings can vary from agency to agency.