Choosing Life Insurance: What You Need To Know

Choosing the right life insurance policy can be a confusing and daunting task. However, it is an important decision that can offer peace of mind and financial security for you and your loved ones. The first step is to assess whether you need life insurance and, if so, how much coverage you require. This will depend on factors such as your income, financial goals, health, age, and family circumstances. The next step is to decide on the type of policy, with the two main options being term life insurance and permanent life insurance. Term life insurance covers you for a specific period, while permanent life insurance offers lifelong coverage and the opportunity to build cash value. When choosing a life insurance company, it is important to consider their financial stability, customer satisfaction record, and the range of products they offer. Comparing costs and shopping around with multiple insurers can help you find the best policy at the most reasonable price.

Assess your need for life insurance

When assessing your need for life insurance, it's important to consider your financial and family situation, especially if you have loved ones who depend on your income. Ask yourself the following:

• How much of the family income do I provide?
• If I were to die, how would my survivors, especially my children, manage financially?
• Does anyone else depend on me financially, such as a parent, grandparent, sibling, or anyone else?
• Do I have children for whom I would like to set aside money to finish their education in the event of my death?
• How will my family pay final expenses and repay debts after my death?
• Do I have family members or organisations to whom I would like to leave money?
• Will there be estate taxes to pay after my death?
• How will inflation affect future needs?

Some insurance experts suggest purchasing five to eight times your current income in coverage. However, it's better to go through the above questions to figure out a more accurate amount.

Another factor to consider is your age. The younger and healthier you are, the less you'll pay for premiums. However, older people can still get life insurance, and it may be wise to carry as much life insurance as you need to pay off your debts, plus any interest.

Your policy's payout should be large enough to replace your income, plus a little more to hedge against the impacts of inflation on purchasing power. Most insurance companies say a reasonable amount of coverage is at least 10 times your annual salary.

If you're the primary provider for your dependents and have a significant amount of debt that outweighs your assets, then insurance can help ensure your loved ones are well provided for if something happens to you. Having a life insurance policy may also be a good idea if you own a business or owe co-signed debts for which someone else could be held responsible if you pass away.

Remember, life insurance by itself doesn't cover every situation. For example, a standard policy won't pay out if you develop a chronic illness, nor will it cover long-term nursing care costs. You can, however, purchase additional riders for an extra premium cost to provide living benefits for these scenarios.

Calculate how much coverage you need

When calculating how much life insurance coverage you need, it's important to consider your financial goals and needs, as well as those of your dependents or beneficiaries. Here are some key factors to help you determine the appropriate level of coverage:

• Income replacement: Consider how many years' worth of income you want to replace for your dependents. A common guideline is to have coverage equivalent to 10 times your annual salary. Another approach is to multiply your annual salary by the number of years left until your retirement.
• Debts and expenses: Evaluate your outstanding debts, such as mortgage, student loans, car loans, credit cards, and personal loans. Ensure your policy coverage is sufficient to pay off these debts in full, including any additional interest or charges. Also, think about day-to-day expenses and end-of-life expenses, such as funeral costs, estate taxes, and medical bills, that you want to cover for your beneficiaries.
• Education costs: If you have children or dependents you wish to provide for, consider the costs of their education, including college tuition and daycare.
• Inflation: Take into account how inflation may affect future needs and adjust your coverage amount accordingly.
• Standard of living: Consider the amount of money your survivors would need to maintain their standard of living if you were to pass away. This calculation is sometimes referred to as the human life value (HLV) approach.
• Other dependents: Besides your immediate family, do you have anyone else who depends on you financially, such as parents, grandparents, siblings, or other relatives?
• Legacy and charitable giving: If you wish to leave money to family members, organisations, or charities, factor this into your coverage amount.

While these factors provide a good starting point, it's recommended to consult a trusted financial advisor who can help you tailor a policy to your specific circumstances and long-term financial strategy. Additionally, consider using a life insurance calculator to get an initial estimate of your coverage needs.

Understand the different types of life insurance

There are two main types of life insurance: term and permanent. Term life insurance covers you for a limited period, while permanent life insurance can cover you for the rest of your life.

Term Life Insurance

Term life insurance offers coverage for a set number of years, often 10, 15, 20, or 30 years. You select a term and coverage amount and pay a monthly premium to keep your coverage active. If you pass away during the term, your beneficiary will receive the plan's death benefit. However, if you outlive the term, your coverage will end unless you opt for a renewal, which will come with a higher premium.

Term life insurance is typically the most affordable option and is best for those who need coverage during a period of large financial responsibility, such as paying off a mortgage or supporting children.

Whole Life Insurance

Whole life insurance, also known as ordinary life insurance, is a type of permanent life insurance that covers you for your entire life as long as you pay the premiums. It comes with a fixed death benefit and a fixed monthly premium that remains the same throughout the policy. Whole life insurance also includes a savings component that accumulates cash value over time, allowing you to borrow against or withdraw from it during your lifetime. However, the amount borrowed will be deducted from the death benefit paid to your beneficiary.

Whole life insurance is a more expensive option upfront but offers more secure benefits in the long run. It is best for those seeking guaranteed support for their loved ones and those interested in long-term financial planning.

Universal Life Insurance

Universal life insurance is another type of permanent life insurance that offers coverage for your entire life. It has a savings component, known as the cash value, which can be adjusted along with the premium and death benefit to suit your budget. The interest on the cash value accrues according to market interest rates, so while you may earn more when the market is up, you may also earn less when the market is down. Universal life insurance provides flexibility and is suitable for those who want permanent coverage but also want more control over their monthly payments.

Variable Life Insurance

Variable life insurance is a type of permanent life insurance that allows you to invest your cash value into assets like mutual funds. The growth of your cash value will depend on the performance of your investments, giving you more control over its growth. Variable life insurance offers flexible premiums and death benefits and is best for those who are investment-savvy and comfortable with risk.

Final Expense Life Insurance

Final expense insurance, also known as burial insurance, is a type of permanent life insurance designed to cover end-of-life expenses such as funeral costs, burial costs, and medical bills. It typically does not require a medical exam for approval and offers lower coverage amounts to keep premiums affordable. Final expense insurance is often chosen by those who are older or have pre-existing health conditions and find other insurance policies inaccessible.

Other Types of Life Insurance

In addition to the main types of life insurance, there are several other variations, including short-term life insurance, variable universal life insurance, supplemental life insurance, and more. When choosing a life insurance policy, it is important to consider your budget, age, health, preferences, and risk tolerance to find the best fit for your needs.

Compare life insurance companies and their quotes

Comparing quotes from different life insurance companies is a crucial step in choosing the right life insurance policy. Here are some detailed tips to help you compare life insurance companies and their quotes:

Assess Your Needs:

Firstly, decide whether you need term life insurance or permanent life insurance. Term life insurance is ideal if you only need coverage for a specific period, such as until your children finish college or while you pay off a mortgage. Permanent life insurance, on the other hand, provides coverage for your entire life and includes a cash value component. Consider your financial obligations, income replacement needs, and future expenses to determine the amount of coverage you require.

Research Multiple Life Insurance Providers:

Explore life insurance companies that offer the type of policy you need. Compare these providers based on customer satisfaction ratings and their financial strength as indicated by independent agencies like J.D. Power and AM Best. This will give you an idea of how stable the company is and how they interact with their clients.

Compare Life Insurance Options:

Gather quotes from multiple insurers and carefully compare the details of each policy, including the type of policy, coverage amount, and death benefit. Since insurers evaluate risk factors differently, shopping around can help you find the best deal. Consider working with a broker who can shop around on your behalf and provide expert guidance.

Apply for a Policy:

Once you've selected an insurer and a policy type, it's time to apply. You can apply through a licensed agent or online, depending on the insurer. The application process may include a medical examination, and remember that you'll have a "free look" period after purchasing the policy, allowing you to review and ensure it meets your expectations.

Key Factors Affecting Quotes:

When comparing quotes, keep in mind that life insurance rates are based on factors such as your age, gender, health, lifestyle choices, and occupation. Age is one of the biggest factors, with rates generally being higher for seniors. Other factors that can impact your quote include smoking, major health conditions, family medical history, high-risk hobbies, certain occupations, and alcohol or drug use.

Tips for Saving on Premiums:

Life insurance can be expensive, but you can take steps to lower your premium. Improving your health and making lifestyle changes, such as quitting smoking, can positively impact your rates. Additionally, consider different policy types, such as term life or permanent life, to find the most cost-effective option for your needs. Buying life insurance at a younger age can also help you lock in lower rates.

In conclusion, by following these steps and comparing quotes from multiple insurers, you can find the best life insurance policy that suits your financial goals and provides the necessary coverage for your loved ones.

Complete the application process

The life insurance application process can be lengthy, but it's important to be as accurate as possible. Here's a detailed, step-by-step guide on how to complete the application process:

Gather the Required Information:

Before starting the application, ensure you have all the necessary information. This includes basic personal details such as your name, address, occupation, and employer. Additionally, be prepared to provide the following:

• Lifestyle habits: Information about smoking, drinking, exercise, and any risky hobbies or professions.
• Health history: Details of any medical conditions, surgeries, and prescription medications.
• Family health history: Information about the health of your immediate family members, especially regarding specific diseases or conditions.
• Financial information: Your annual income, net worth, and any other relevant financial details.
• Criminal record: Any criminal convictions or driving violations.

Choose Your Beneficiaries:

Decide who will receive the benefits of your policy. This can include your spouse, children, or other family members. You may also choose to designate a charity or your estate as the beneficiary. If you select multiple beneficiaries, specify the percentage of the benefit that will go to each individual. It is recommended to choose both a primary and contingent beneficiary to ensure the benefit is received in case your primary beneficiary cannot be located.

Complete the Application Form:

You can usually find life insurance application forms on the insurance company's website or by contacting a licensed agent. The application process typically involves two parts: a short initial application, followed by a more comprehensive form that includes health and lifestyle questions, as well as a discussion about family history. Be honest and accurate when filling out the application, as any misrepresentation can lead to denial of coverage or benefits.

Prepare for the Phone Interview:

After submitting the application, the insurance company may conduct a phone interview to confirm the information provided and ask additional questions. Be ready to discuss your lifestyle, hobbies, financial situation, and any other life insurance policies you have.

Schedule and Undergo the Medical Exam:

Most life insurance policies require a medical exam. This exam is typically conducted by a paramedical examiner at a location of your choice, such as your home or office. The exam includes recording your medical history, taking blood pressure and pulse rate measurements, and collecting blood and urine samples. Be sure to disclose any medications you are taking and provide an accurate health status. The insurance company will use the exam results to assess your health class and determine your premium.

Finalize Your Policy:

Once your application is approved, you will receive the final cost of your premiums. Carefully review the policy, sign the necessary documents, and make the first premium payment to activate your coverage. Share the policy details with your beneficiaries and store it in a safe place accessible to them.

Frequently asked questions