Life insurance was invented to make life easier and help lower stress in adults, but the process of getting it can be enough to make you scream. Luckily, we broke the whole stinkin’ process down into 7.5 bite-sized steps so you can shop with confidence, knowing you’re getting what you need, no more and no less.
Once you understand the whole thing a bit better and are ready to make a move, our independent insurance agents are there to do the grunt work for you. Don’t let life insurance mystify you any longer: Read on and be prepared to leave behind the right lasting impression.
How Does Life Insurance Work?
Basically, life insurance is a contract between you and an insurance company. You pay them monthly, quarterly or yearly (these payments are called premiums), and in exchange, they’ll pay out if you die within the term of the policy (the amount they agree to pay is the benefits).
There are two main kinds of life insurance: term and permanent. Term life insurance covers you for a specific amount of time, e.g., twenty years. Permanent life insurance covers you, well, permanently. Term life insurance is cheaper up front, but its value expires. Permanent life insurance costs more but is worth more over time.
Since you can’t spend an insurance payout once you’re gone (bummer), you’ll need to decide who you want to receive the money. This can be pretty much anybody: family, friends, or even your favorite charity. The recipients are called beneficiaries.
Pretty simple so far, right? We’ll break down the finer points later. But now let’s talk shopping.
Step 1: Have a Reason to Buy Life Insurance
Life insurance is most valuable when you know exactly why you want it. Do you have young children that you’d want to provide for if you died suddenly? Do you have an expensive mortgage to pay off that you don’t want your spouse to be stuck with? Do you want to make sure your funeral costs are covered?
These are all excellent reasons to buy life insurance, and maybe you have your own. Each reason will probably result in a different kind of life insurance purchase. So take some time to figure out exactly why you want the insurance before you shop around.
Step 2: Decide What Kind of Life Insurance You Need
The #1 life insurance mistake people make is not having it—but the #2 mistake is not having the right kind. Here’s a breakdown of the kinds of problems each type of life insurance was meant to solve:
- Term: This is perfect for a need with an expiration date, like the young children and mortgage examples above. You can buy life insurance for a certain length of time, whether that’s 5 years or 35. So think ahead to when the kids will be out of college and the house will be paid off. And if you survive the term, great! The policy lapses. If you pass away, not to worry—the need is covered.
- Permanent: “Perm” life insurance is designed as a nest egg to cover permanent needs. Maybe that’s funeral expenses, or maybe it’s the generous donation to charity you’ve always wanted to make. It lasts until you die or cancel it. You’ll pay the same amount in premiums for the duration of the policy, which means that the younger you are when you lock it in (when your premiums are the lowest), the better.
- Cash benefit: BONUS ROUND! If you’ve had a permanent policy for a long time and no longer feel that you need life insurance, you can cash it in for a lump sum or annuity that can even exceed the initial benefit you agreed upon. Sweet!
- Preplanned funeral: Some life insurance companies team up with funeral homes in order to provide preplanned funerals. Your premiums go directly toward the cost. Funeral costs are always rising, so it’s a great way to lock in your funeral costs at today’s prices. Morbid, but forward-thinking!
- Annuities: This isn’t a type of insurance, but rather the way benefits are paid out. An annuity turns a lump sum into regular payments for you (if you’re cashing in a perm policy) or your beneficiaries. It’s especially popular as a way to support your spouse, children, or other dependents over time instead of front-loading.
Life insurance is closely tied to financial and retirement planning, which means that there are dozens and dozens more types to choose from. Start with these, and be sure to talk to a financial planner or insurance agent about options that are perfectly tailored to your needs.
Step 3: Fill Out an Application
Life insurance is based on a giant math problem: Companies make an educated guess about how likely you are to pass in a given year, based on your age, health, hobbies, and even marital status (really!).
To do this math, companies need to know more about you. Fill out an application online or in person (if you’re old-school like that) so they can figure out what insurance to offer you. Not sure what to put down? An insurance agent can help, and they will often offer to fill out the application for you.
Life insurance applications may include a medical exam. Even if they don’t, if a company finds out you lied on your application, it can invalidate the entire benefit. So don’t do that. Scout’s honor only.
Step 4: Vet the Insurance Companies
Once you’ve decided what type of life insurance you want, you’ll still probably have to choose between a few different insurance companies (called “carriers” in the biz). Qualities to compare between carriers include:
- Life insurance discounts: Discounts lower your premiums. Carriers offer all sorts of discounts, from common ones like military and veteran discounts to niche ones through unions or your employer (and many more). Don’t be shy about asking what discounts a company offers and which discounts have already been applied to your quote.
- Company size: Would you prefer a mom ‘n’ pop shop on Main Street or a sleek high-tech corporation? There’s no right answer, just your preference, but be sure to factor it into your decision.
- After-hours support: Check out a carrier’s website to feel out their available hours and claims support options. Some life insurance companies offer 24/7 claims reporting, but many don’t, since life insurance benefits are less sensitive than other insurance benefits. Instead, look for longer business hours, such as 7-6 instead of 9-3.
Step 5: Compare the Prices
Before you make it official, double-check that you’re paying a fair price. Things that push costs higher include an older age, poor health, and dangerous habits like smoking or skydiving. The younger and healthier you are, the cheaper your life insurance will be.
Life insurance costs vary so much that it’s hard to give a range, but there’s an easy way to determine if you’re paying a fair price: comparing your premiums over time to the benefits.
Step 6: Seal the Deal
Once you’ve picked a quote, finalizing your insurance is as simple as signing your name. Congrats! You did it. You are now the proud owner of a life insurance policy. Your loved ones thank you.
Step 7: Change Your Policy to Meet Your Needs over Time
Death is for sure, but life insurance is flexible. You can make all kinds of changes over time, including changing beneficiaries, adding extra benefits and making investment decisions. That’s where financial planning comes in. To maximize your benefits, review them regularly and stay connected with your agent, since your needs may change.
Step 7.5: Don’t Buy Life Insurance That You Don’t Need
Buying life insurance is a smart decision for your future, but there are two scenarios where it doesn’t make sense: when you don’t have a reason and when the premiums cost more than the benefits. Let’s break that down.
If you’re uncertain about life insurance, go with a permanent policy over a term one. That’s because a term policy without a term-length need is just you throwing money at an insurance company. Go in with a game plan instead. At least you can cash out the permanent benefit at the end.
Also, the older you get, the more life insurance becomes a bad choice. That’s because you’ll pay more and more in premiums for less and less in potential benefits. It’s important to calculate exactly how much you’re getting for what you’re giving.
Don’t let fear or panic over your own mortality make decisions for you; go in with a cool head, instead. It’s possible to pay hundreds a month in premiums for only a few thousand in benefits that you might not even get to use if you don’t die. Now that’s a bummer and a half.
The Awesome Benefits of an Independent Insurance Agent
Independent insurance agents are the super-duper not-so-secret life hack to buying life insurance. They work for you, not the insurance companies, so they can find you the right prices with the right company for you. They’ll also help you with the boring parts of the application process.
Their help doesn’t stop there, either. If you pass away and your beneficiaries need to file, your agent can help guide them through the process so they can maximize the benefits you planned for them. Now that’s a win.