Posted on Nov 14, 2012
If you don’t have life insurance yet, or your coverage through work is inadequate, you’ve come to the right place. We’ve explained how important life insurance is; now you just need to go through the process of getting yourself the best and most affordable coverage for you. Use this checklist to get started:
Decide if you actually need it.
If you have anyone depending on you for income, like a spouse, child or other family member, or you have high debt and not a lot of assets, life insurance is a good idea. But if you are young and single and no one is depending on you, you probably don’t need coverage yet. Read more here .
You can also take out a life insurance policy on someone else. For example: a parent who has high debts that you think you might have to cover when they pass away. You’ll need the person’s consent and they will have to agree to submit to the typical medical exam required to get approved for a policy.
Learn about the types of coverage.
There are two main types of life insurance. You can choose one type, or get both to take care of different needs:
Term insurance is a policy with fixed premiums for a certain amount of time, or a term. Once the term is up, you have to choose whether to give up the coverage or maintain your coverage at a different (usually much higher) premium and with different conditions. For example, when your children are born, you could choose a 20-year policy that would insure you almost through the end of their college years. Or you could choose a one-year policy that would cover you while you’re taking a sabbatical and not covered by a work policy. With term insurance, the only time you get a payout is upon death. This type of life insurance offers the greatest coverage for the lowest premium, which makes it ideal for families and people on a tighter budget.
Permanent insurance offers you life-long coverage. Some differences from term insurance include:
- You can cash out some of the benefits before the policy holder dies, like if you are terminally ill and want to buy a home for your children, your retirement income isn’t quite enough, you want to pay tuition for your child’s college or you just want to make a large investment. (We’re not saying you should, just that it’s possible.)
- You can take out a loan against the value of the benefit, which is simpler and easier than a loan from the bank. If you repay the loan, your cash benefit stays the same. If not, the benefit will be reduced. For example, if you want to take out a $30,000 loan to buy property, you could do so from your life insurance, then pay back the value of the loan over time. But if you don’t pay it back, the value of the benefit would be reduced by $30,000.
- You can stop paying premiums for a period of time and keep the benefit, as long as you have enough “cash value” to cover the premiums for a while. You don’t have to make up the missed premiums; you’ll just end up reducing the cash value and therefore the total death benefit.
- Because this type of policy is an investment, the value of it could increase over time, just like a retirement account could. And the increasing value is tax-deferred, meaning you aren’t paying taxes on the gains you are making. This means that if you aren’t very good at regularly saving for big investment goals such as college or retirement, you could use this as a sort of forced savings plan for those types of goals since you have to make a monthly payment. Each premium you pay partially covers the cost of the insurance and partially builds up the “cash value” of the policy.
In this way, permanent insurance is kind of like having an asset to your name that you can tap into at almost any time. But while permanent insurance is more flexible, it’s also more expensive than term coverage. The premiums are especially expensive when you first take out the coverage.
Permanent insurance comes in four flavors:
- Whole Life: The simplest and most common type of permanent insurance, your premiums stay the same your whole life, and the value of the benefit upon death is guaranteed; you also build up cash value above and beyond the actual cost of insurance, which then earns dividends or interest.
- Variable Life: You invest your premiums in sub-accounts comprised of stocks or bonds, hoping to get a higher return or payout.
- Universal Life: You can vary the amount of your premium payments, like dropping them if you are OK with the value of the benefit growing more slowly, or increasing them if you can afford to invest more. Alhough, if you drop your payments too low, the value of the cash benefit could be reduced.
- Variable-Universal Life: A mix of the above two types, premium payments are variable, and you invest them in stock and bond accounts.
Choose term insurance or permanent.
Which one you go with depends on your situation. But because permanent insurance is generally much more expensive and requires you to pay the same amount in premiums for your entire life, it’s usually the less practical option. That’s because once you reach age, say, 55, you might not need life insurance anymore. Your kids may be grown and financially independent, you may have a sizable retirement account that would pass to your spouse and you might have even paid off your mortgage. As you can see, it may make more sense in this situation to have a term policy with a term that ends when you pass into this stage of life.
Calculate how much coverage you need.
Life insurance works by giving you or your family cash when the covered
person passes away. There’s no one-size-fits-all life insurance policy. You’ll have to decide what amount of money would be appropriate for you and your family. For example, if you would want your family to have the same standard of living if the main breadwinner passed away, you’ll need more coverage; likewise if you have a lot of debt. If you would only want to cover immediate costs, such as funeral expenses and lawyers’ fees, you would need minimal coverage.
LearnVest recommends, as a simple rule of thumb, replacing anywhere from 7 to 10 times your annual income. If you work personally with an independent agent (step 6, below), they will also help you determine how much coverage you may need.
Determine how long your policy should be.
If you’ve chosen term life insurance (which is our recommendation for most people), then you need to choose how long you wish to be covered. If you are about to have a child, you may want the policy to extend until you believe they will be financially independent, possibly for 20 years or more. If you’re taking it out to benefit your spouse, you might want to take out a longer policy to cover you until retirement.
Decide how much you can afford to pay.
Your monthly premium will depend on many factors, including, but not limited to, what state you live in, how much you want the value of the life insurance policy to be, your health and age, your family’s medical history, and your tobacco use. But generally, if you’re young and healthy, you can expect to pay a few hundred a year for a 20-year, $1,000,000 term life policy, or less than $75 a month. If you want the pricier permanent or universal insurance, your premiums may be much higher, stretching to several hundred a month or more. If you get insurance later in life, your premiums will be higher.
Take a look at your budget and decide how much you can afford to pay a month in premiums. This should be a premium that you can afford to pay both now and over the next 20 years. It’s best to get coverage that doesn’t stretch you too thin, in case you go through financial hard times.
Choose how you will get coverage.
You can get coverage one of three places:
Through work: Getting coverage through work is often easier and more affordable than finding it independently. You can get access to lower group rates and have the monthly premium taken right out of your paycheck. However, if you leave your job you will likely have a gap in coverage while a policy at your new job kicks in, or you secure a new policy. Inquire with your company to see if they offer coverage, and if so, whether you can buy additional coverage beyond just the basic to suit your needs.
Through a local agent: Ask for referrals from friends, family members or colleagues, try this agent locator or get a list of agents through your state’s insurance agency. Meet with at least a couple different agents to compare their credentials and experience. Any agent you choose should have at least one of the following certifications: Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC), Certified Financial Planner (CFP), Financial Services Specialist (FSS) or Life Underwriter Training Council Fellow (LUTCF). You’ll also want an agent with experience dealing with someone in your financial situation and needs. Another great idea is to look for an independent agent with an insurance brokerage firm who can recommend policies from a wide range of companies to find the best value for your particular situation.
Compare quotes you get from an agent to other sources, like another agent or online. Make sure the rates are competitive. Don’t let your agent present you with only one insurance company as a choice–he or she should have several different companies and quotes to choose form, and be able to clearly explain the differences.
Online: You can get quotes on life insurance through online brokers like Accuquote , InsWeb , Insure.com or LLIS.com. You may get less hand-holding through the process than if you were working through a local agent, but you will still have the opportunity to speak with a broker before committing to a plan.
Research the insurance company.
Zeroed in on one or two quotes that are appealing? Make sure the insurance company is financially sound. Look up their rating through S&P. Moody’s. Fitch or A.M. Best .
Next, look at the level of service they provide. Examine the fine print to see what restrictions apply, how long it would take to file a claim and receive money, and whether there are any negative customer service reviews online.
If all things are equal at this point between your choices, then you can choose the most affordable option.
Fill out the application accurately.
If you’re a smoker, overweight or have a family history of disease, among other things, you might be tempted to lie to get a lower premium. However, if the company finds out you lied on your application, they could refuse to pay out the claim. That means you could have paid thousands for coverage, only to have it be useless to your family. Don’t risk it!
If you get rejected …
First, ask the insurance company why you were rejected. It could be for a mistake, or for a small health indicator–like high blood pressure–that could be explained to the company by your doctor.
If that doesn’t work, you can apply to another company. But again, be honest. You’ll have to disclose on this application that you were rejected by another insurance company, or else you risk being denied a claim.
Pay your premiums on time.
Once you’ve gotten coverage, don’t let it lapse by paying late or not at all–even if your budget is tight. A lapse in coverage means you’ve just thrown away money you’ve been paying–you or your family will no longer be covered and that could leave you or them in a financial crisis.