How Do I Choose a Life Insurance Policy?

Depending on where you’re at in your financial journey, you might need life insurance. Personally, I have a life insurance policy to cover my funeral and last-minute expenses if I were to pass away prematurely.

Understanding how to choose and purchase a life insurance policy helps protect your loved ones’ financial future. The following seven steps can help.

1. Consider Whether You Need Life Insurance

Life insurance is for the living. A policy helps provide financial security for your loved ones if you pass away unexpectedly and cannot provide for them.

The death benefit is the money the life insurance company pays your beneficiary upon your death. The money might be used for the following purposes:

• Replacing lost income to support your spouse, children, or other dependents.

• Covering final expenses, such as funeral and burial costs and medical bills.

• Continuing to pay the mortgage.

• Paying outstanding debt, such as credit cards, car loans, and personal loans.

• Covering living expenses, such as groceries, gas, home maintenance, auto repairs, and childcare.

• Funding your children’s future education.

2. Determine How Much Life Insurance You Need

Deciding on an appropriate death benefit for your life insurance policy involves many considerations. You want to avoid being underinsured, where the death benefit is too low and would provide insufficient financial support for your loved ones, or over-insured, where you pay too much for coverage.

Consider the following factors when determining the face value of your life insurance policy:

• Family size: A larger family might require a higher death benefit.

• Employment status: Consider how much money would be needed to replace your income if you are employed and pass away prematurely.

• Age: A young, single person likely would require less coverage than an older, married person with children.

• Income: The higher your salary, the more income you would need to replace.

• Estimated final expenses: Consider how much money would be needed to cover funeral costs, medical bills, and legal fees to process your will through probate.

• Outstanding debt: Carrying a higher debt load, such as a mortgage, student loans, car loans, and credit card debt, requires more life insurance coverage.

• Current life insurance and assets: You might need a lower death benefit if you have liquid assets and existing life insurance, such as a group policy through work. Remember, you cannot take a group life insurance policy with you if you change jobs.

• Future goals: Your life insurance needs might increase later if you plan to start a family. Securing a policy now, when you are young and healthy, could qualify you for a better rate.

3. Choose the Best Type of Life Insurance for You

There are different types of life insurance to fill individual needs. However, term life insurance is appropriate for most situations:

• Term life insurance costs less than other types of life insurance.

• You receive coverage for a specific duration, such as 10, 15, 20, or 30 years.

• By the time your term life insurance policy ends, your debt should be paid off, your kids should be out of the house, and you should have enough assets to cover final expenses.

Beware whole life insurance, universal life insurance, and other types of policies that include a cash value:

• You pay significantly more for a life insurance policy with an attached savings component than for a term life insurance policy.

• If you borrow from a life insurance policy with an attached savings component, you pay interest on the loan, which could be 6-8% or higher.

• If you pass away while the insurance policy is in force, your beneficiary receives the death benefit minus the amount in the savings account; they do not receive the death benefit plus the savings.

• For instance, if the death benefit is $100,000 and there is $25,000 in the savings component, your beneficiary will receive $100,000, NOT $125,000.

• The company keeps the rest of the death benefit, leaving less money for your beneficiary.

4. Decide If You Need Life Insurance Riders

Life insurance riders are optional benefits you can add to your policy to customize your coverage. Some riders might be standard features; others could be available for an additional cost.  

Common term life insurance policy riders include:

• Waiver of premium disability rider: Waives your policy's premium if you develop a qualifying disability and can't work.

• Critical illness rider: Lets you claim part of the death benefit while you're still alive if you become critically ill.

• Long-term care rider: You can receive monthly payments if you have to stay at a nursing home or receive home care.

Most life insurance companies offer free quotes through their websites. However, talking with a licensed financial representative is typically required to purchase a policy. They can thoroughly explain the policy’s details, features, and benefits, and answer questions.

The premiums for a life insurance policy depend on the following factors:

• Policy type

• Death benefit amount

• Any additional riders

• Your age

• Gender

• Health

• Tobacco use

• Family medical history

• Personal risks, such as your occupation and lifestyle activities like car racing

5. Purchase Your Life Insurance Policy

Securing a life insurance policy takes time. You might be required to provide evidence of insurability, and underwriting can encounter delays.

The five steps to purchase life insurance include:

A. Completing the life insurance application 

Consider working with a licensed life insurance agent to complete the life insurance application online or in person. The following information is typically needed:

• Policy type

• Contact information

• Social security number

• Driver's license number  

• Date of birth

• Gender

• Marital status

• Occupation

• Personal financial information, including your salary and net worth

• Health

• Medical history

• Any nicotine or tobacco use

• Beneficiary designations with their personal information

If you complete your application online, expect a follow-up phone interview with a life insurance agent to confirm your answers and request additional information about your background. 

B. Scheduling a medical exam

Any required medical exam should be performed at your home by a qualified medical professional and should take less than an hour. The life insurance company pays the costs for the following:

• Taking bloodwork

• General health testing, including blood pressure, pulse, height, and weight

• Performing a heart test

• Asking more in-depth questions about your medical history and your family’s medical history

C. Going through the underwriting process

The underwriting process involves reviewing your life insurance application and evaluating any pre-existing conditions to determine your coverage eligibility and policy cost:

• The company selects and classifies applicants by their degree of risk.

• Your age, requested coverage amount, and medical history impact your ability to receive coverage.

• The underwriting process can take 5-6 weeks or longer.

• The company might request additional documentation, such as your doctor submitting a written report describing your medical history.

If approved, your life insurance application will fall into one of three categories:

• Approved as applied: Your rate will be the same as your original quote.

• Approved better than applied: Your rate will be less expensive than your quote.

• Approved other than applied: Your rate will be more expensive than your quote, based on the underwriter's review of your medical records.

D. Choosing a beneficiary

Your beneficiary is the person or entity you select to receive your life insurance policy’s death benefit after you pass away:

• You can select multiple beneficiaries, clarify the percentage of the death benefit for each, and make changes at any time, if desired.

• You might designate a charity, church, educational institution, business, corporation, your estate, or a trustee as your beneficiary.

• Consider naming a primary and contingent beneficiary, in case the primary cannot be located.

• If you do not choose a beneficiary or they cannot be located, the death benefit amount will go to your estate.

E. Accepting the policy and paying the first premium

If you are satisfied with your life insurance policy offer and agree to the terms, pay your first premium to put the policy into force. Be aware that you have a grace period, or free look period, to evaluate your policy without the obligation to accept it.

Keep a hard copy and a digital copy of your life insurance policy in a secure and accessible location. If you lose your policy, contact the company to request a replacement copy.

6. Tell Your Beneficiaries About Your Life Insurance Policy

Let your beneficiaries know about your life insurance policy so they can claim the death benefit. Include the company name, instructions regarding the death benefit, and where to locate a hard copy of the policy.   

*This information is for educational purposes only.