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Shopping for a life insurance policy is as much about calculating how much coverage your family needs as it is about determining how much you can reasonably afford.
Indeed, a $2 million term or whole life policy won’t do your family a bit of good if it lapses because you can’t keep up with the payments. Similarly, if you have the means, but underinsure, you may unnecessarily leave your loved ones in a financial lurch in the event you, the policyowner, pass away prematurely.
To purchase the right amount of insurance coverage at a cost that fits your budget, start with a more holistic approach to financial planning, said Peter Glassman, a financial professional with Wealth Insight Partners in Bethesda, Maryland. Before you even consider life insurance, he said, define the financial goals you seek to accomplish with finite cash flow.
“Even before talking about your budget, there needs to be a conversation about your values and priorities,” said Glassman. “People spend more time planning their vacations than they do thinking about these important life decisions. You need to have a good, healthy understanding about what’s important to you.”
Once you delineate your top priorities, said Glassman, you can then craft a more cohesive plan to meet your short- and long-term financial objectives, which may include paying off debt, college savings for your kids, purchasing a house, saving for retirement, and protecting your loved ones from financial risk.
The steps to finding the best life insurance coverage for you include:
Determining your budget for life insurance
If life insurance is among your top priorities and you’re working within a budget (who isn’t?), you’ll need to determine how much coverage you should have to protect your loved ones if your paycheck suddenly stopped.
It’s not enough to pull a number out of the air, said Glassman. A $500,000 term life policy might sound like plenty, but if you earn $50,000 a year, that death benefit would only replace your income for a total of 10 years. It may not be sufficient to get your kids through college, or help your surviving spouse maintain his or her standard of living.
“Whether you are looking at a $1 million policy, or some other death benefit amount, you need to understand what that figure actually means,” said Glassman. (Related: Ultimate life insurance guide)
Note that your life insurance safety net may not need to replace your entire paycheck, depending on your financial position and your spouse’s income or earnings potential.
To determine whether a lesser coverage amount may be sufficient, said Glassman, “look to your savings and assets and reverse engineer.”
Social Security, annuities, pension plans, tax-deferred retirement accounts, and taxable brokerage accounts may all be sources of income for your surviving spouse, which could help offset the loss of a policyholder’s paycheck. But keep in mind they may not be available for a number of years. Life insurance can potentially be used to fill the gap.
Likewise, it may be sufficient to replace only a portion of your income if your spouse, if not currently employed, is willing and able to work in the event you passed away. If your children are still young, however, factor in the cost of any child care that might be required, said Glassman.
Finding insurance coverage you can afford
Generally speaking, term life insurance is the most affordable option, offering the biggest potential death benefits for the lowest price. Why? Term policies only offer coverage for a fixed period of time — often 10 or 20 years — and they do not offer a cash value component. If you outlive the policy’s term, the death benefit disappears or can potentially be retained by paying higher premiums.
Many employers offer group term life insurance coverage as part of their benefits package, which is a good start. But financial professionals caution that group coverage often falls short as it may not provide the amount of coverage or the type of protection your family needs. (Learn more: Why group life insurance may not be enough)
By contrast, permanent life insurance policies, which include whole life and universal life policies, typically have higher monthly premiums, but are designed to provide a guaranteed death benefit to your heirs, as long as you continue to make your premium payments. They also have the potential to accumulate cash value that can help supplement retirement savings during your lifetime or be passed along to your beneficiaries when you die.
If you stop making premium payments on a term or permanent life insurance product, the policy would lapse and your beneficiaries would not receive a death benefit. Thus, it is important to ensure you purchase a policy you can afford. (Note that there are some whole life policies that allow you to pay premiums for shorter periods of time, such as until age 65, at which time the policy would be “paid up” and premiums would cease while coverage remains in force.)
Families often use term life to maximize their coverage when their family is most vulnerable to financial risk, often until their kids are out of college and the mortgage is paid off. If their income allows, some opt to purchase a permanent life insurance policy as well to meet other financial goals, including estate planning or charitable giving. And some use a combination of term and permanent coverage. (Need advice: Contact us)
“I have found that 20- and 30-somethings think they will only need life insurance until their kids become young adults, the mortgage is paid down, and they have built savings,” said Glassman. “I have watched those clients become 60- and 70-somethings. Sometimes they still need life insurance because things didn’t work out as they had hoped.” (Related: Life insurance to cover your parents)
Those who were financially successful, he said, often still want some amount of life insurance for estate or charitable planning, a safety net, or to make sure their grandkids can go to college.
Consumers, especially those in their 20s and 30s, often overestimate the cost of term life coverage, according to a recent survey from Life Happens, a nonprofit consumer education group funded by the financial services industry.
When asked how much the yearly cost would be for a 20-year $250,000 level term life insurance policy for a healthy 30-year old, more than half (55 percent) of respondents said the policy would be $500 per year or more, which is three or four times more expensive than it actually is. The average cost of such a policy is under $200 per year.1 (Learn more: How much does life insurance cost?)
The Life insurance Barometer Study noted that “the cost of life insurance is difficult for many consumers of all ages and backgrounds to estimate and the perceived expense is a commonly referenced rationale for not purchasing life insurance.” (Calculator: How much life insurance do I need?)
Comparison shopping for coverage
In most cases, all it takes to fit life insurance into your budget is to modify your spending habits. “It’s really a matter of making it a priority,” said Feldman. “First, figure out how much you need and then buy as much as you can afford. The important thing is to get some sort of coverage. Even a few hundred thousand dollars of term coverage is often not very expensive compared to other things we buy.”
Consumers should also be value conscious, as one of the best ways to save on life insurance is to shop around. (Related: Shopping for life insurance)
Don't buy a policy without getting quotes from several agents or companies and be sure to compare not only premiums, but cash value (where relevant), death benefits, and fees.
U.S. News & World Reports also suggests consumers should also look at the financial strength of the insurers they are considering and weigh that against the prices being offered. (You can find ratings on MassMutual’s financial strength here)
You are also potentially more likely to keep your premium to a minimum by purchasing coverage when you are still in your 20s or 30s, as premiums are based largely on age and rise every year. And, if you smoke, consider quitting. ValuePenguin.com, a personal finance website, conducted research showing smokers pay 218 percent more for life insurance than their non-smoking peers. A 20-year term life policy for a 35-year old non-smoker, for example, can cost an average of about $460 per year, while a smoker might pay closer to $1,400 per year. By the time they reach age 60, that premium could hit $3,800 per year for non-smokers, and $12,000 for smokers.2
Finally, while it may be easier to purchase a policy that offers guaranteed or “simplified issue” coverage with no medical exam, healthy individuals may be able to lower their premium, get more coverage, or both by opting instead for a traditional “underwritten” policy that requires a full application and medical exam, said Feldman. “Most simplified and guaranteed issue policies are actuarially priced for the higher risk of not providing full medical details,” he said.
Budgeting for life insurance is a key component to getting — and keeping — the policy that’s right for you, especially for those with limited cash flow or fluctuating salaries. To give your family the protection they need, look for opportunities to save, ensure you can afford the coverage you select, and consider using a combination of term and permanent life insurance to meet your goals.
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This article was originally published in January 2017. It has been updated.
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¹Life Happens.org, “2023 Insurance Barometer Study.”
2Value Penguin, “Average Cost of Life Insurance (2019): Rates by Age, Term and Policy Size, “ Feb. 14, 2023.