Buying guide for Best life insurance
Purchasing any type of insurance can be an intimidating experience, but perhaps the most daunting purchase of them all is life insurance.
The good news is, life insurance is arguably the easiest insurance to understand. For instance, did you know that there are only two basic types of life insurance? In the broadest scope, the two types are term life insurance and permanent life insurance. Once you learn the difference between the two, it’s much easier to purchase a policy with confidence.
In this article, we walk you through the essentials that you need to know when purchasing life insurance. We explain the concepts behind both term and permanent life insurance, provide tips on how to research your options, point out common mistakes to avoid, and even help you calculate how much coverage you need. In order to learn all of that and more, just keep reading.
Types of life insurance
Term
When you purchase term life insurance, it is for a specific period of time. That term can be as little as one year to as long as 30 years (although some companies may offer a longer term). If the owner of the policy passes away during the designated time period, the beneficiaries will receive payment. Once the term comes to an end, the benefits cease. The policy has no cash value. When purchased early on, this is the more affordable option.
Permanent
Permanent or whole life insurance provides coverage for your entire life, as long as you continue to pay your premiums. If your premiums stay the same over the years (as most do), this type of coverage is more expensive in the beginning because the cost is balanced out over the years. In effect, you are overpaying your premium in your early years so you can more easily afford the cost in your later years.
Because you are overpaying, after you have reached a certain limit, by law, the policy has a cash value. It is important to note that this cash value is an alternative benefit, not an additional benefit. If you borrow from it and do not pay it back, you decrease the payout when you pass away.
Did You Know?
For most individuals, the older you get, the more health issues start to appear. Since life insurance rates are partially determined by your current health, it can be prudent to seek insurance while you are in your prime.
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Researching life insurance
While there are a number of details you may want to eventually consider when researching life insurance, you don't have to delve into the minutiae right away to find a reputable company. If you look at the bigger picture, you can quickly determine the merits of the company you’re considering. When you've found a few good choices, then you can take a closer look.
Check the company's financial strength. If you'd like an evaluation of a particular life insurance company before doing business with them, you don't have to do it yourself. There are a number of independent companies, such as A.M. Best, Standard and Poor’s, Moody’s, and Fitch Ratings, that have already done the legwork. Access to the ratings is free, but you do have to create a membership profile.
Do your own legwork. If you don't want to create another profile and have another password to remember, you can do some of your own research. These days, it’s not hard to discover what type of experience other customers have had with a company. Read the comments from people with firsthand experience, and use that information to determine if this is the right insurer for you.
Take a closer look to see if it's the best fit. Once you've narrowed down your selection to a handful of top choices, take a closer look to make sure the company matches your needs. For example, if you are in the process of losing weight or you just kicked that last bad habit, how tolerant is the insurer? Will it drastically affect your rates? Does the company accept online payments? Can you get the riders you want? Now is the time to consider those other important aspects.
To be sure the people you love are fully protected in any eventuality, it may be wise to name more than one beneficiary in your policy.
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Common mistakes to avoid
Mistake #1: Waiting to purchase
The biggest mistake most individuals make is holding off on purchasing life insurance until they have some extra money. If your dependents could not survive without your income, it doesn't matter what age you are: it is time to seriously consider life insurance. The best part about purchasing when you are younger is that rates are more affordable, so not only will you be protecting your loved ones, you'll be doing it at a lower rate than if you were to wait even just five or ten years.
Mistake #2: Not shopping around
If you purchased a car for $60,000 and later realized the dealer down the street had the exact same make, model, and year available for $30,000, you'd probably be pretty upset. Life insurance is the same. You could easily pay twice as much for the same coverage if you fail to shop around. Note: it is important to be sure the information that you are providing and the plans you are comparing are the same.
Mistake #3: Not getting the coverage you need
The amount of insurance needed varies from individual to individual. While you don't want to purchase too much coverage, it is worse to purchase too little. Determining how much coverage you need shouldn't be an afterthought or something that comes down to premium costs. It should be a solid figure that is not an estimate but a calculation. If you need help determining what that figure should be for you, keep reading.
Did You Know?
Depending on the area where you live, the average cost of a funeral can range from $10,000 to $20,000.
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Tips for purchasing the right amount of coverage
- Purchase 10 times your pre-tax income. The quick and easy way to choose how much coverage you require is to simply multiply your annual income (pre-tax) by 10. Note, however, that while many use this formula, it does not provide an entirely accurate picture of your needs. Even if it is only temporary, your spouse may have to stop working. Also, it is important to remember that as your children grow, their expenses will grow. And then there's always the unforeseen: what happens if you need a major repair, such as a new roof?
- Purchase 10 times your pre-tax income plus $100,000 for each child for college expenses. Again, this can be suitable for providing a quick snapshot of what you can expect, but it doesn't take everything into consideration. Also, if you have substantial investments and/or assets, you might be purchasing too much life insurance based on this simple formula.
- Calculate your needs based on the DIME formula. While you cannot be 100% sure of your future needs, this formula covers the bases far better than the other quick estimates. Add up all of your debt (the D in DIME). This includes everything from mortgage to credit cards. Factor in income replacement (I). Think about everyone who depends on your income and determine how many years they will remain dependent. The M stands for mortality, which is adding enough to cover all funeral expenses. Last is education (E). This can range from daycare to college. Once you've added all of these together, you will have a much better picture of exactly how much life insurance coverage you require.
FAQ
Q. What is the purpose of life insurance?
A. The purpose of life insurance is to provide funds to the people who depended on your income. This could be your children, your spouse, or even your business. It is also used to cover funeral expenses. Some use it to benefit charities. If you are in a position where no one is fully dependent on your income other than yourself, it may be wiser to invest the money elsewhere, so you have a higher return.
Q. Do I need a medical exam to get life insurance?
A. In order to get traditional life insurance coverage, some type of medical exam is usually required. The reason for this is, grimly enough, the premiums you pay are calculated on your likelihood of dying. The exams are not that extensive; usually, it's the same information and general testing required for a routine well-visit with your healthcare provider.
While it is possible to get coverage without an exam, these plans typically have a higher premium.
Q. Is life insurance considered an investment?
A. You will find individuals who passionately argue both sides of this topic. However, since the purpose of an investment is to profit, it may be argued that insurance of any type cannot be considered an investment. Insurance is paying for protection against possible risk. It is a product, not an investment. If you remember this when shopping for life insurance, it will be easier to remain objective.
