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Eric McWhinnie
Life is unpredictable, and uncertainties can happen to anyone at any time. While no one wishes to think about their death, planning for it is a wise decision. Purchasing life insurance is an excellent way to protect your loved ones from financial distress when you pass away. However, with several policies available in the market, it can be confusing to determine the right one. If you're thinking about buying life insurance, this step-by-step guide on how to buy life insurance will help you understand the process.
Who needs life insurance?
Before asking how to get life insurance, it's first important to consider who needs to buy life insurance and assess your needs. Determine why you need the insurance, who you want to protect, and for how long. After all, getting life insurance wouldn't make sense if it wasn't necessary.
The reality, however, is that the vast majority of people need life insurance. Life insurance is necessary for anyone who has people depending on them. This could be loved ones, such as aging parents or a spouse or children. Or it could be a business partner.
Figuring out how to buy life insurance is important not just for people with loved ones counting on their income. It's also essential for a consumer to buy it if anyone relies on their services. For example, a stay-at-home parent offers valuable family support. If the parent passed, someone may need to be paid to provide care. Life insurance should be purchased to cover those costs.
RELATED: See The Ascent's guide to life insurance for spouses.
At what age should you get life insurance?
Deciding when to buy life insurance coverage is tricky. It can depend on each person's individual situation. However, it is absolutely crucial for a person to buy life insurance as soon as anyone is depending on that individual. Often, people buy life insurance when they get married, buy a shared home with someone, or have a child.
In some cases, it makes sense to buy life insurance even before having dependents. This could be a good idea for someone who knows they will have someone who relies on them at some time in the future. For example, a person who is planning to get married and have children may want to buy life insurance when they are young -- even before they are married.
This could make sense when comparing life insurance rates by age. Premiums can be much cheaper if a policy is purchased at a young age. Figuring out how to buy life insurance ASAP could also enable people to get covered before developing pre-existing conditions. Pre-existing medical issues could otherwise disqualify them from buying a policy later or could make life insurance more expensive later.
How do you qualify for life insurance?
When figuring out how to get life insurance, it's important to know how to qualify for coverage. For most term and whole life policies, this involves:
- Submitting an application for coverage
- Answering medical questions
- Undergoing a medical exam
Some insurers allow people to buy coverage without an exam, regardless of medical status. These types of policies are called guaranteed issue. They usually don't provide much coverage. And there may be rules limiting when the death benefit is paid out. For example, some guaranteed issue policies have a long waiting period before beneficiaries can receive the full amount.
When deciding how to get life insurance, it's important to research all coverage options to find the policy that's the best fit.
Decide how much life insurance you need
Figuring out how much life insurance to purchase is one of the more complicated parts of determining how to buy life insurance.
Some experts recommend simply buying coverage equaling 10 to 12 times annual earnings. However, consumers can also use the DIME formula to get a more accurate estimate of how much coverage is needed. Here are the factors considered in the DIME formula that can be helpful when determining how to get life insurance.
Debt
Individuals determining how to get life insurance may want to buy sufficient coverage to repay their debt in full. This would mean loved ones aren't left struggling to repay debt that was taken out jointly.
Income
Life insurance serves as a replacement of the income the deceased person was earning. It helps ensure those dependent on that income don't face financial shortfalls. Consumers determining how to buy life insurance should determine how many years of income replacement they'll need. They can then buy coverage that provides it.
Mortgage
Many people looking into how to get life insurance will have a mortgage on their homes. They may want to ensure their policy offers enough money to pay off their home loan in full so surviving loved ones can inherit the house free and clear of debt.
Education
If a person has children when determining how to get life insurance, it is a good idea to ensure the death benefit is large enough to cover their educational costs.
Select the type of life insurance policy that's best for you
There are different kinds of life insurance. The two most common and comprehensive types are term and whole life coverage. But what is the difference between term vs. whole life insurance?
Term life insurance remains in effect for a limited term, or a set time period. For example, a policy may provide 15 to 30 years of coverage. If the policyholder purchased a 30-year term policy, the death benefit would be paid to surviving loved ones if they died during the 30-year term. But if they died 31 years or more after their coverage went into effect, no death benefit would be paid.
Whole life coverage doesn't have a set term of coverage. It can remain in effect indefinitely as long as the policyholder pays the premiums. It also has an investment component. The policyholder pays extra money in their premiums above the cost of providing insurance. The money is invested. The policy acquires a cash value and policyholders can surrender it or borrow against it to obtain money.
For most people, term insurance policies are the best option when determining how to get life insurance. They are cheaper, and most people don't need coverage forever because eventually no one depends on their income. Most people can also get a better return on investment with other investments besides whole life policies.
Compare life insurance
Figuring out how to choose life insurance companies is a crucial part of determining how to buy life insurance. That's because there are many different insurers out there and the best life insurance companies vary from person to person. They may not always be the biggest life insurance companies either.
Choosing the right insurance company is crucial as it affects your policy's financial strength and reliability. Look for companies with good financial ratings and check their claim settlement records. You can also seek recommendations from family and friends or read reviews online.
Consumers who want to get the best and most comprehensive coverage at the most affordable price should aim to get quotes from multiple different insurers. This allows them to compare costs and coverage options to ensure their families are fully protected and they aren't paying more than needed. Every life insurance company is at least a little bit different.
The good news is, it is now easy to buy life insurance online, so comparing quotes is simpler than ever.
Apply for life insurance
There are multiple different steps involved when determining how to buy life insurance. These steps go beyond simply making the choice to apply for life insurance. Here are some of the things that consumers will need to do.
Collect the documents you'll need
When a person decides to buy life insurance policy protections, it's important to gather any necessary documents.
This can include identifying documentation such as a driver's license. Having medical records ready to refer to can also be helpful in answering application questions accurately.
Choose coverage options
When determining how to buy life insurance, it's helpful to consider what type of coverage is desired.
This means deciding between term and whole life coverage. Consumers may also want to research riders they are interested in. These provide add-on coverage, offering additional protection. Some common riders include:
- Return of premium rider: Allows policyholders to get their premiums back on a term life policy if they do not die during their coverage period.
- Accelerated death benefit rider: Allows policyholders to access some of the money from the death benefit while they are still alive to cover medical costs associated with a terminal illness.
- Waiver of premium for disability rider: Allows policyholders to keep their coverage in effect but to stop paying premiums if they become disabled.
Compare quotes
One of the best ways to make life insurance more affordable is to compare quotes before committing to purchase life insurance. By comparing quotes from multiple insurers, it's possible to get the best term life insurance rates.
It's a good idea to determine what coverage is desired first before comparing quotes. When determining how to get life insurance, it's also important to research options for where to buy life insurance. Consumers can shop online. They can also work with insurance agents that are employed by insurance companies. Or they can work with independent agents that will help them shop for coverage with multiple insurers.
Take this step when deciding how to buy life insurance as this will ensure the most affordable coverage is identified.
Submit an application
Once you decide on the policy and coverage amount, fill out the application form and send it to the insurer. Consumers can also submit an application through a financial advisor, broker, or online. Applying for coverage will involve answering more detailed questions about medical history and health status, as well as providing identifying information.
Take the medical exam
In most cases, it's necessary to take a medical exam when figuring out how to get life insurance. An insurance company arranges this exam with a medical professional the company employs. The medical professional will come to the applicant and perform a basic physical, including taking a blood and urine test.
The results of the exam, along with answers to medical history questions, will determine if the insurer offers coverage and what the premium costs are.
Review the policy and sign up for coverage
After completing the form and medical exam, review the policy documents thoroughly. Make sure you understand the policy terms, premiums, beneficiary details, and any exclusions or limitations. Seek clarifications from the insurance agent or company, if required. You can then decide to purchase the policy.
Pay the premiums
After your application is approved, pay the premium regularly to ensure your policy remains active. Missing premium payments may result in the policy being canceled, and you won't receive the benefits. Consider setting up automatic payments to ensure you don't miss any deadlines.
FAQs
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The average costs of life insurance varies based on age, health status, and type of insurance. For a 20-year-old, healthy person, average costs could be around $15 per month for a $250,000 term life insurance policy. But for an older smoker, average life insurance premiums could be $100 per month or more.
Whole life insurance is much more expensive. Premiums are typically between five and 15 times more expensive than for term life insurance for a policy offering a comparable death benefit.
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There are several different types of life insurance including:
- Term life insurance, which provides coverage for a limited period of time and has no investment component.
- Whole life insurance, which has an investment component and remains in effect indefinitely as long as the policyholder doesn't allow the policy to lapse by not paying premiums.
- Universal life insurance, which is a type of whole life insurance offering more flexibility than standard whole life coverage. Policies accrue a cash value, but there's no guaranteed rate of return.
- Variable life insurance, which is a type of whole life insurance that offers a variable cash value with no guaranteed rate of return.
- Guaranteed issue life insurance, which offers insurance to anyone regardless of medical history but which has lower coverage limits and restrictions on when the death benefit pays out.
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A sick person may be able to get life insurance, but figuring out how to buy life insurance will be more complicated.
Some standard term and whole life insurers will offer coverage even to someone with a medical issue. However, eligibility depends on how serious the medical problem is and the specific insurer's rules. For example, some companies provide coverage to people with HIV or controlled diabetes, but others don't.
Guaranteed issue policies are always available, even to very sick people. But, there is usually a multi-year waiting period before the full death benefit is paid. And there are typically low policy limits.
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If a life insurance medical exam shows serious problems, the insurer may deny coverage. A consumer can appeal if they believe an error was made.
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A person who is denied life insurance could appeal if they believe there was a mistake. They could also consider finding another insurer with more permissible coverage requirements. This can make figuring out how to buy life insurance more challenging.
Guaranteed issue or final expense insurance policies are another option. They are always available regardless of medical status. But there are limits and restrictions on coverage.
Our Insurance Experts
Christy Bieber is a full-time personal finance and legal writer with more than a decade of experience. She has a JD from UCLA as well as a degree in English, Media and Communications with a Certificate in Business Management from the University of Rochester. In addition to writing for The Ascent and The Motley Fool, her work has also been featured regularly on MSN Money, CNBC, and USA Today. She also ghost writes textbooks, serves as a subject matter expert for online course design, and is a former college instructor.
David S. Chang, ChFC®, CLU® is an award-winning entrepreneur, keynote speaker, author, and consultant. He has over two decades of experience in the wealth management space and has been featured in dozens of news, radio, and podcast programs nationwide. He currently works as Head of IoT for the West Region of a Fortune 200 company. He is a graduate of the United States Military Academy at West Point and currently a Lieutenant Colonel in the California Army National Guard. He is an East-West Graduate Degree Fellow and has an MBA from the UCLA Anderson School of Management.
Fact Checked
Eric McWhinnie
Eric McWhinnie has been writing and editing digital content since 2010. He specializes in personal finance and investing. He also holds a bachelor’s degree in Finance.
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