How to buy life insurance

What type of life insurance should you buy?

Term life insurance is often the most practical option for individuals who need affordable coverage for a specific period, while permanent life insurance is designed for lifelong protection. The right choice depends on your budget, financial obligations, and how long others will depend on your income.

The two primary categories are term life insurance and permanent life insurance.

Term life insurance

Term life insurance provides coverage for a fixed period, such as 10, 20, or 30 years. If you die during the term, your beneficiaries receive the death benefit. If you outlive the term, coverage ends unless the policy includes a renewal or conversion option.

Age and health play large roles in the cost of life insurance. This is true regardless of the type of policy you choose. However, term life tends to be cheaper for almost everyone because it has a set end point, and the shorter the term, the less likely the insured person is to die during that period.

Thus, a 10-year-term policy will be cheaper than a 30-year-term policy. For the same term length, though, younger, healthier people will pay lower premiums.

As you age and increase the amount of coverage, the premium will go up. Smokers and people with serious health conditions will also pay more. Still, term life insurance is the most affordable option.

Permanent life

Permanent life insurance is designed to remain in force for your entire lifetime, as long as required premiums are paid and policy conditions are met. It is more expensive than term insurance but includes a cash value component that can grow over time.

Permanent life is far more expensive than term life for two reasons:

It pays a death benefit no matter when you die.
Permanent life policies have cash value.

The cash account grows tax-free over time. You can get money from the account or cash in the policy if you decide you no longer want the insurance coverage. (Be aware you may pay hefty fees if you surrender the policy in the early years.)

A variety of permanent life insurance policies are available:

Whole life insurance is the simplest form of permanent coverage. The premium and death benefit stay the same, and the return on the cash value is guaranteed.
Universal life insurance provides flexibility. As long as you meet the initial minimum payment, you can pay more or less, skip premiums, and increase or decrease the death benefit.
Variable life insurance offers the potential for greater growth in cash value than traditional permanent policies, but it comes with risk. You choose how the money is invested, and the policy's death benefit and cash value depend on the investment's performance.
Variable universal life insurance is a hybrid of variable and universal life insurance. It allows you to vary your payments, invest your policy premiums, and adjust your coverage amount.

Because permanent life insurance is more complex than term coverage, it is important to review both guaranteed and non-guaranteed elements in the policy illustration before purchasing.

How much life insurance to buy

You should purchase enough life insurance to cover the financial obligations your family would face without your income. Start with income replacement, debts, and major future expenses, then subtract existing savings and any current life insurance coverage. The appropriate amount depends on the household’s needs rather than a fixed formula.

When deciding on life insurance, you need to consider:

How long your family would need income replacement. Estimate the number of years your dependents would rely on your earnings.
Mortgage and other debts. Decide which liabilities you want the policy to eliminate.
Future education costs. Include anticipated college or education expenses if applicable.
Final expenses. Account for funeral and end-of-life costs.
Child care or household services. Replacing unpaid household work or child care can represent a significant financial need.
Existing savings and insurance. Subtract assets and any current life insurance benefits available to your family.

With these things in mind, you can select the term length (or permanent coverage) as well as the death benefit amount.

EXPERT TIP: When determining how much life insurance to buy, it's important to consider future plans, such as whether you plan to have children, that could change your coverage needs. It's usually cheaper to buy more life insurance now than to buy additional coverage when you're older and your health may have changed.

How to purchase life insurance

To purchase life insurance, begin by selecting the policy type and coverage amount, then compare quotes from multiple insurers using identical specifications. After narrowing your options, review each insurer’s financial strength, complaint history, and policy details. You will then complete an application and any required underwriting before coverage is issued.

Follow these steps:

Choose the type of policy you need. Before you shop, choose whether you need term life insurance or a permanent life insurance policy.
Decide on a death benefit. Once you know what kind of life insurance policy you need, use the steps above to decide how much you need the death benefit to be.
Request quotes from multiple life insurance companies. Compare life insurance quotes for the same policy type and coverage level.
Research life insurance companies. Before you buy, look at financial stability ratings and customer complaints for each life insurance company you're considering. Remember that life insurance premiums are just one factor; you need a life insurance company you can trust.

How are life insurance premiums determined?

Life insurance premiums are based on the level of risk the insurer assumes and the coverage you select. Age and health are primary factors, but insurers also evaluate lifestyle and background information during underwriting.

Factors can include:

Your age and gender
Your health status
Lifestyle factors like smoking
Any high-risk activities, like skydiving
The coverage you choose

Not all insurance companies weigh these factors equally, so you can expect some variation in the rates, even with all of the coverage levels being equal.

Should you add life insurance riders?

You should consider adding life insurance riders to address a specific financial need that your base policy does not cover. Riders can enhance your coverage or provide additional benefits, but they may increase your premium and often include eligibility requirements.

Common riders include:

Waiver of premium -- Waives the premium if you become seriously ill or disabled.
Return of premium -- Returns the premiums you paid at the end of the term if you haven't used the policy (term only).
Accelerated death benefit -- Allows you to collect a portion of your death benefit if you become terminally ill.
Critical illness -- Provides money if you’re diagnosed with a critical illness.
Guaranteed insurability -- Provides a policy without a medical exam.
Long-term care -- Gives money from your health benefit for care.

Riders usually add to the cost of plans. For instance, if you added a return of premium rider, you might pay more than double.

What type of life insurance is right for you?

The right life insurance policy depends on how long you need financial protection and what you can afford to maintain over time. Term life insurance is typically best for temporary needs such as income replacement or mortgage protection. Permanent life insurance is more appropriate for lifelong financial obligations or estate planning goals.

Here's when each type of life insurance would be a good option for you:

You should buy term life insurance if:

You need coverage for a limited period, such as until the kids graduate from college and the mortgage is paid off.
Your estate is small enough that it would not be subject to estate taxes.
You're not interested in life insurance with an investment component.

You should buy permanent life insurance if:

You have a lifelong dependent, such as a child with a disability, to provide for after your death.
You have a large estate to protect or a family business to continue. The beneficiary could use the death benefit to pay the estate taxes, so your heirs would not have to sell off parts of the estate or business to pay taxes.
You want a policy with an investment component.
You want to leave a legacy.

You also have the option of choosing a combination of term life and permanent life insurance. You might want a large term life policy to cover you while your children are growing up and a smaller permanent policy to cover final expenses if you die after the term life insurance expires.

Most term life policies can be converted to permanent life insurance. You can buy an inexpensive term life policy when you're young and starting a career, and then convert portions of the coverage to permanent life insurance as your earning power grows.

No matter what life insurance you buy, make sure it fits your situation.

FAQ: Buying life insurance

What is the best age to buy life insurance?

Buy life insurance at the youngest age possible, as soon as you have someone who depends on you financially. Buying at a younger age means a lower premium because age and health affect life insurance rates. Waiting can make coverage more expensive, especially if your health changes.

How long does it take to get a life insurance policy?

Getting life insurance can take anywhere from a few hours to several weeks, depending on the insurer and underwriting process. Policies using accelerated underwriting may be approved quickly, while traditional underwriting takes longer due to the need for a medical exam, medical records or additional information.

Can you have more than one life insurance policy?

Yes, you can own more than one life insurance policy as long as you qualify for the combined coverage. For example, you might have a personal term policy along with employer-provided life insurance or combine term and permanent policies to cover different financial needs.

Should you buy life insurance through work or on your own?

You should have both. Employer life insurance is useful, but it may not provide enough coverage on its own. Workplace coverage is often tied to your job and may end or become more expensive when you leave. A separate individual policy gives you coverage that isn't dependent on your employer.