Most people buy life insurance when something good happens in their lives, like the purchase of a new home or the birth of a child. These events mean more financial responsibility, and protecting your family with enough life insurance is essential.
So what is the best way to go about shopping for life insurance and deciding how much coverage you need? Most people approach the buying process in the same way: “It’s insurance … I will probably never need it … I just need to find the least expensive coverage possible.”
It’s OK to look for low cost life insurance, of course, but there are some important things to consider when deciding what type of policy—term, whole, or universal life insurance, to name a few—to buy and how to buy it.
Types of life insurance
To make an informed decision, you must first educate yourself on the various types of life insurance products available.
Term life insurance, which provides death benefit protection for a limited number of years (terms), offers the lowest premiums. That’s why most young people start off buying it.
The most popular policy types are 10- and 20-year term life insurance. But five to 30-year terms are available. These policies offer guaranteed level premiums. The longer the coverage period, the higher your premium will be. This is because insurance costs increase as you age. The insurance company calculates a level premium that will cover all the costs over the term period. (Learn more: Not all term policies are equal)
There is also an annually renewable term (ART) policy, where the premium covers one year of coverage at a time. These generally start out with a lower premium than level term, but become more expensive after only a few years. In general, ART only makes sense if you are only going to need coverage for a short period of time.
Beyond term insurance are types of permanent life insurance, generally whole life insurance and universal life insurance, offering a guaranteed death benefit for life, not just a defined number of years. In addition, permanent life insurance policies can build cash value and, in some cases, offer the opportunity to earn dividends, which are not guaranteed. (Related: How whole life insurance can help through life stages)
As a general rule, a term life insurance policy offers the most basic coverage at the most affordable price for many people. Indeed, term insurance is usually quite affordable for those who are young and in relatively good health and is the kind of policy most people start out with. For this reason, the term life insurance market is very competitive.
This leads to some pricing tactics shoppers should be aware of. For example, some companies offer very low premiums for “super” preferred applicants, but only a small percentage of applicants actually qualify for that rate. So you may apply for their best rate, go through a medical exam, and a month later the insurance company offers you coverage, but at a higher premium rate.
Riders and convertibility
Beyond basic price are other factors to consider when shopping for a policy. For instance, there are some additional benefits, often referred to as “riders,” that you may want to add to your policy. (Learn more: Understanding riders)
One is the disability waiver premium rider. This benefit waives your premium and keeps your life insurance in force if you were to become disabled and were unable to work. Look closely at this rider when shopping, because some companies offer very competitive basic policy rates, but their rates for benefits like a waiver may not be that competitive.
Another feature that you may want to consider is buying a term policy with an option to convert the coverage to permanent life insurance at a later date. Many policies offer some type of conversion option. But you should consider which permanent policies you can convert to and how many years you have to decide if you want to convert. Some companies limit the policies you can convert to and exclude their most competitive products, or they have very short conversion periods. (Learn more: The power of a term-perm life insurance combination)
Convertibility is important for a couple of reasons. First, term life insurance only provides coverage for a limited period of time. Your coverage may run out when you still need life insurance. When that happens, you may decide to get a new term insurance policy. But you will be older, so your premiums will be higher.
In addition, if you have developed any health issues, you may not be able to get coverage at an affordable price. Converting some or all of your term life insurance to permanent coverage can help ensure that you have coverage that you can keep for as long as you need it. In fact, it may make sense for you to buy some permanent life insurance while you are young, just because it is far more expensive when you get older.
Another reason that a conversion option is important is if you were to become disabled. If you are permanently disabled and you have waiver of premium on your policy, you can convert your term life policy to permanent coverage, and with many companies the premium for the permanent coverage will be waived.
Another thing to consider is the quality of the company you are buying your policy from. Reliable life insurance companies are generally rated on financial strength by several ratings agencies. These include A.M Best, Moody’s Investors Services, Fitch Ratings, and Standard & Poor’s. Financial strength ratings are a key indicator of a company’s ability to meet its financial obligations. Look for a company that has solid ratings. (MassMutual’s ratings can be found here)
You might also consider how policyowners (and beneficiaries) rate their service. Many good companies have some type of customer service ratings or awards.
How to buy life insurance
Then there is the question of how to buy your policy. There are a number of outlets for term life insurance where you can buy online and many people do. However, it may make sense to buy your policy from an experienced financial professional. Yes, those selling insurance usually get paid on commission. But the policies they offer are, in many cases, the same as the ones you will find online, so typically you won’t pay more for going through an agent. (Related: ‘Direct’ term insurance)
And there can be some advantages. First, a financial professional can help you determine how much coverage you really need, and that may be the most important buying decision you make. Many people try to make an educated guess. And many companies, including MassMutual, offer online calculators to help gauge approximate needs.
But actual life circumstances and financial needs vary from individual to individual and can call for more refined and established methods of determining what type of insurance and how much coverage is needed. Financial professionals can help you make that determination. (Related: Working with a financial professional vs. going solo)
In addition, an experienced life insurance agent can also recommend a policy that is the best fit for you based on your age and financial goals. They also know the companies and policies they sell, and can answer all your questions. They can shop for the best rates and help you through the underwriting process.
Buying life insurance is an important financial decision. That’s why it is important to get the right amount and type of coverage to protect the financial security of the people that depend upon you every day.
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This article was first published August, 2016. It has been updated.