Life Insurance for Beginners: How to Pick the Best Policy
You know that you need life insurance to offer this form of financial protection to your family. What you don’t know is how much life insurance to buy or what type. You don’t know how much this insurance will cost you, or for how long you should even purchase it.
Buying life insurance for the first time can be a daunting task. The good news? Buying life insurance isn’t as complicated as you might think. You just need to understand some basic facts before purchasing a policy.
What do you need life insurance to cover?
The first thing consumers should do when considering life insurance? They need to determine exactly what sort of protection they want their life insurance to provide.
Some consumers want life insurance for a very specific purpose, to provide a financial safety net for their loved ones should they die. Others want to do that, but also want to build an additional source of income, something some life policies can do.
You can’t buy the right insurance policy until you determine — either on your own or after discussing your family and financial situation with an insurance agent — what you want that policy to accomplish.
“Buying life insurance isn’t as clear-cut as saying you want to protect your loved ones,” says Jason Silverberg, vice president of financial planning with Financial Advantage Associates in Rockville, Maryland.
“Finding the right policy boils down to what you want life insurance for,” he adds. “Do you want to make sure that your spouse can stay in your home? Do you want to make sure that your spouse can pay off your other debts? Maye you’re worried about whether your kids can afford college when you’re gone. These are the big questions.”
Once you do this, you can better determine how much insurance you need and what type will help you meet your goals.
Two types of life insurance
Two main types of life insurance are available: term and permanent. The names of these insurance products give you a hint about their differences.
Term insurance lasts for a specific amount of time, or term. Most people who take out term policies do so for five, 10, 20 or 25 years. Permanent life insurance — as its name suggests — lasts your whole life. Because of this, it tends to be more expensive than does term life. Permanent life insurance also comes in different types, such as universal, whole life and adjustable varieties.
Anthony D. Criscuolo, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Fort Lauderdale, Florida, says that term insurance makes the most financial sense for most consumers. That's because of its lower cost.
"If you solely need protection from the loss of income for a specific time period, a term policy is usually the best option," Criscuolo says. "The average person usually just needs to protect their family from their premature death and loss of income to help pay living expenses that otherwise would have been covered by their future earnings."
Criscuolo said that it's usually smarter for consumers to pay the lower premiums of term life insurance and then save the extra dollars they would have spent on a permanent policy. They can then invest those in a separate savings or retirement account on their own.
But there are times when permanent life insurance, despite its higher cost, makes sense. These policies are more expensive, but they also provide more stability. You won’t have to worry about renewing your policy or taking out a new one after an initial term ends. The risk with a term policy is that if you do need to renew after the term ends, the rates will be higher because of your advanced age and, maybe, reduced health.
Jason Matthews of Matthews Financial Insurance Solutions in Antioch, California, said that often consumers find that once their initial term ends, they can’t afford the new payments that would come with renewing.
“That is a shock to some people,” Matthews says. “When they initially took out their term policy, they never thought they’d need insurance past that term. But life does change.”
Do you need a permanent policy?
Permanent life insurance might be the right choice if you need to provide financial protection for a loved one who will depend on you for your entire life. A child with special needs, for instance, might inspire you to take out a permanent life insurance policy.
Criscuolo said that some consumers use permanent life insurance as a way to preserve liquidity in their estates or as a way to pass wealth to future generations.
Some permanent life policies even come with a savings option. In such policies, a portion of every payment you make is saved on a tax-deferred basis. You can then borrow against these savings as they grow. If you cancel your policy, the money you saved is yours.
If you do take out a permanent life insurance policy, expect to pay significantly more for the protection. Matthews said that a 35-year-old male in good health can expect to pay a little less than $50 a month for $1 million of term life insurance.
But that same male can expect to pay about $350 a month for $1 million in permanent life insurance protection, Matthews said.
This price difference is why more people choose term life insurance.
What is the process to apply for life insurance?
You've chosen a policy. Now what happens? Your insurer will put you through the underwriting process to determine how much of a risk you are and how much you should pay for your insurance.
Fortunately, this isn't as frightening as it sounds.
Silverberg said that more insurers today are simply requiring their customers to answer a series of health questions before approving them for a policy. These questions will focus on how much you weigh, whether you smoke, if you have any serious health issues and if your immediate relatives have a history of health issues.
If your answers show that you are healthy, the odds are good that you'll be able to qualify for a high health level and a lower premium, Silverberg said.
Your insurer, though, might still require a brief health screening before approving you. In such cases, a nurse will travel to your home to collect a blood and urine sample and run some short medical tests. Depending on the results, you might qualify for lower premiums, Silverberg said.