Protect Your Loved Ones with Life Insurance: A Comprehensive Guide
If you have a spouse or dependent children who rely on your income, protecting them with life insurance can offer peace of mind by ensuring they’ll be cared for if something happens to you. However, buying life insurance is different from purchasing other types of insurance. It involves a multistep process that can take several days or weeks to complete. Here’s what you need to know.
Calculate How Much Life Insurance You Need
Before buying a policy, you must decide how much coverage you need. While you might have heard about formulas for calculating death benefits, such as buying 10, 20, or 30 times your annual income, these don’t take into account your unique financial situation. To estimate your needs more accurately, consider the following expenses:
- Current debt: Life insurance can help your loved ones pay down all types of debt, including your mortgage, auto loans, credit card balances, student loans, and personal loans.
- Income replacement: Determine how many years your family would need financial support and multiply your annual salary by that number.
- Future expenses: Include costs such as college education, weddings, long-term care for a spouse, and funeral costs.
Add everything up, and that’s how much life insurance you may need. If you have savings and investments your family can use to help offset their expenses, you may choose to factor that into your calculation. However, if the money is earmarked for retirement, it may be best to exclude it from your calculation so it’s still available for your spouse when they retire.
Decide What Type of Life Insurance Fits Your Needs
There are two main types of life insurance: term life and permanent life. Additionally, there are two kinds of permanent life insurance—whole and universal. Here’s how they work:
Term Life
Term life insurance lasts for a set amount of time, known as the term, which may range from as little as one year up to 30 years or more. Term life insurance provides a death benefit to your beneficiaries if the policy is active when you die. However, if you’re alive when the term ends, the policy expires, leaving you without coverage. Term life tends to be less expensive than permanent life insurance.
Whole Life
Whole life insurance provides you with lifetime protection. Unlike term life, it has two components—a death benefit and a cash value account. The cash account grows tax-deferred, at a guaranteed rate, and you can withdraw or borrow money from it while you’re alive. However, doing so can lower the amount your beneficiaries receive in the event of your death. The premium for whole life remains fixed for the life of the policy.
Universal Life
Like whole life, universal life insurance provides lifetime coverage, a death benefit, and a cash value account, but it offers more flexibility than whole life. You may be able to change the death benefit or raise or lower your premium after purchasing the policy. The interest rate on the cash account is variable, but some universal life insurance policies have guaranteed minimum rates to help protect against market fluctuations.
Life Insurance Riders
Life insurance riders are optional add-ons you can include with your policy for extra protection—usually for a fee. They allow you to personalize your policy to meet your specific needs. For example, an accelerated death benefit rider gives the policyholder access to part of the policy’s death benefit while they’re alive if they’re diagnosed with a terminal illness. Other common life insurance riders include accidental death, waiver of premium, and guaranteed renewability.
Riders can typically be added to term or permanent life insurance policies, but availability varies by policy type and insurer.
Compare Multiple Quotes
Different insurance companies often have different rates for the same coverage. Shopping around and comparing quotes from multiple providers helps ensure you get the lowest rate possible. You can get quotes in a few ways, including:
- Comparison websites: Life insurance comparison websites allow you to compare quotes from multiple insurers simultaneously.
- Insurance company: Some insurers have an online quote generator to provide instant quotes.
- Agent or broker: Working with an agent or broker can help simplify the process of purchasing life insurance. Agents represent a single insurer while brokers represent multiple insurers. Both can provide quotes, answer questions, and provide guidance based on your individual situation.
Submit an Application
The only way to know for sure how much a policy will cost is to submit an application and go through the underwriting process. You’ll need to answer questions about your lifestyle and health history, including your age, weight, gender, occupation, overall health, family health history, hobbies, tobacco use, and more. The insurance company will use the information to assign you to a rate class based on the risk you present.
Complete a Phone Interview
Depending on the insurer, you may also need to complete a phone interview after submitting your application. The company representative may verify the information you provided and gather additional information about your health history and your family’s medical history. These phone conversations usually take about 20 to 30 minutes. The insurance company may also schedule a time for your medical exam—if required.
Get a Medical Exam (if Needed)
Many insurers require an in-person medical exam, which typically involves a health professional coming to your home to assess your weight, height, BMI, blood pressure, and pulse. They may also collect blood and urine samples to detect the presence of nicotine and drugs in your system and determine your cholesterol and glucose levels. Depending on your medical history and other factors, the insurer may order additional testing.
If you don’t want or think you won’t qualify for coverage with a medical exam, you can purchase guaranteed issue insurance, but it will cost more and coverage limits are typically lower.
Wait for an Approval, Then Finalize Your Policy
When your application, interview, and exam are complete, the insurance company will review your information and make a decision. It typically takes a few weeks to hear back. When you do, you’ll find out if you were approved, how much coverage you were approved for, and how much your policy will cost. In some cases, you may be approved for less coverage than you applied for because of information you provided on your application or the insurance company discovered during your medical exam. Pricing may be more or less than you were initially quoted.
If you decide to purchase the policy, you must accept the terms and pay the premium. Your policy won’t be active until you accept the terms and make your first premium payment.
Frequently Asked Questions
How Much Does Life Insurance Cost?
The cost of life insurance varies based on several factors, including your age, health, lifestyle, and the amount of coverage you need. It’s essential to compare quotes from multiple providers to find the best rate.
Is Life Insurance Worth It?
Life insurance is worth it if you have loved ones who depend on your income. It provides financial security and peace of mind, knowing your family will be taken care of if something happens to you.
Can I Convert My Term Life Insurance Policy to Whole Life?
Some term life insurance policies offer the option to convert to whole life insurance. Check with your insurer to see if this option is available and what the terms are.
The Bottom Line
Purchasing life insurance may take a little more time and effort than buying other types of insurance, but it’s worth it, knowing your loved ones will be protected if something happens to you. Keep in mind, some states allow insurers to factor your credit-based insurance score into their calculation when determining premiums. If you live in one of those states and have good credit, you’ll likely pay less for coverage. You can check your credit score for free from Experian before starting the search for life insurance to get an idea of how your credit may affect the cost of insurance.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate the complexities of life insurance and ensure you get the best coverage for your needs.
