5 tips for first-time life insurance shoppers

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5 tips for first-time life insurance shoppers

You have big plans in life. You want to have a family. You want to own a home. You want to retire while you’re still young enough to enjoy it. Heck, maybe you’re already doing these things, or are at least well on your way.

But all of those plans don’t mean much without life insurance.

If you were to die, would your significant other be able to afford to raise that family, and send your children off to college? Would they be able to pay the mortgage on that home? Would he or she be able to retire if there’s no second income fueling a 401(k) or IRA?

It can be scary to think about, but it doesn’t have to be. If you have the plans, you need to shop for life insurance. And that can be scary on its own. But for first-time life insurance shoppers, you can be confident in your ability to buy life insurance by asking these five simple questions.

Do you need life insurance coverage?

Here’s a surprising answer: Maybe not.

Are you young and healthy? Are you debt-free? Are you free of any dependents who rely on your income?

If the answer is "Yes," then you may not need life insurance. Life insurance acts to protect your dependents in the event that the worst happens. If you don’t have anyone sharing debt with you, or anyone relying on your income, then you may choose to not purchase life insurance. It can still be helpful to buy it now since, as we’ll talk about later, life insurance only gets more expensive the older you get, but it may not be a necessity at the moment.

On the other hand, if you do have people relying on you, and you can’t self-insure with savings, life insurance is a must-have. Any financial plans you have in place, whether it’s making day-to-day expenses, saving for the future, or paying off past (and current) debts, can all be derailed, leaving your dependents behind to pick up the check in a lot of cases.

So take stock of the debts and plans you currently have, what your plan for the future is, and how each affect other people. If there’s someone who would stand to benefit from a lump sum of tax-free money to complete these financial plans, you need to buy life insurance.

What are the basics of life insurance?

There are a lot of different types of life insurance out there, but if you need straightforward, affordable coverage to complete your financial safety net, the best product for you is likely term life insurance. It’s simple: You purchase a policy for a certain amount of time, pay a fixed monthly amount, and if you die during that certain amount of time, your family gets money. Other life insurance types get complicated – and expensive – with things like interest-accruing cash value components, but term life insurance is simple.

Let’s dive into some important terms that should be a part of your life insurance lexicon:

  • Term – This is how long your life insurance policy lasts (as long as you pay for it each month). The term can be as short as five years and as long as 30 years. First-time life insurance shoppers should determine how long they’ll need protection from the policy in order to protect all of their financial plans.

  • Death benefit – The amount of money that’s paid out in the event of your death (if your death occurs during the policy’s term). This generally ranges from $25,000 to $10,000,000. The death benefit is paid out as a lump sum and is tax-free, allowing your dependents to use it as needed.

  • Beneficiary – The person (or people) who receive the death benefit. For most people it will be their spouse, but it can also be parents, children, or even pets or institutions like charities or museums. The beneficiary is listed on the life insurance policy but can be updated during the policy term to take into account changes in your life.

  • Premium – This is how much you’ll pay for your policy. Typically it is paid monthly, but some life insurers may offer discounts for policyholders who pay annually. The premium charged to you is based on how likely you are to pass over the policy term, as determined during underwriting. Once your life insurance policy is in-force, your premium rate won’t increase (as almost all term life policies are fixed level term policies, meaning the premium is fixed).

  • Underwriting – The process by which a life insurance carrier determines how likely you are to die during the term of your policy. Underwriting occurs after you apply and will determine your premiums for your chosen policy. Current health, health history, driving record, hobbies, and more go into the underwriting process, allowing the life insurance carrier to classify you based on how risky you are to insure. A medical exam and a variety of documents are used during underwriting. You can learn more about everything that goes into the underwriting process in our full guide.

How do you know how much coverage you need?

For first-time life insurance shoppers, it can be difficult to figure just how much coverage is enough. Going through our insurance checkup can help, but here’s a quick way to figure out how much protection you’ll need.

  • Figure out how much debt you have. Some debt can be passed on to your loved ones – shared credit card debt, for instance, or some co-signed student loans. Then there are long-term debts like auto loans and mortgages; even if a beneficiary isn’t obligated to pay them, not paying them has real consequences, as they may be paid off from your estate, lessening what your survivors stand to inherit. If you died, would your loved ones be able to cover these debts?

  • Figure out how you’ll pay for college. Ten years from now, college may be two to three times the cost of today’s higher education. A 529 savings plan is a great way to afford college, but it doesn’t do much good if you’re the primary breadwinner and you’re no longer around to contribute to it. If you’re not yet able to afford four years of college for each of your children, add that to your costs.

  • Figure out how much your dependents need for day-to-day living. When you think of dependents, you’re probably thinking of children. And they can be expensive: in addition to things like clothes and food, will your partner need a nanny or daycare in order to help raise them on his or her own? Also consider aging parents, who may need to be supported in their old age. Every aspect of caring for your dependents – all of your dependents – needs to be taken into account.

  • Figure out how they’ll afford end of life expenses. End of life care can be expensive (we’ll get to a way to mitigate that using life insurance in a bit) and funerals can cost north of $10,000. Don’t want to leave your grieving family with a huge bill? Make sure end of life expenses are factored into your financial needs.

  • Figure out what your financial cushion is. Or, rather, you should figure out what you want your spouse’s financial cushion to be. We’ve talked about the things that absolutely need to be paid for, but what about funding your partner’s retirement? If they work, how much will they be able to contribute to these expenses, and how much will they rely on the death benefit for? This is a conversation you and your spouse should have with each other so you’re both on the same page.

All of these needs are variable. At one point in time you might be paying your mortgage, saving for your kids’ college, and putting away money for retirement. But down the line your house is paid off, your kids have graduated, and you’re looking forward to your golden years, safety net in place. Should you be paying for the same level of life insurance?

Of course not! That’s why we love term life insurance. Unlike permanent life insurance policies, which are more expensive and stay in place for as long as you pay your premiums, term life insurance ends. By the time it does, you’ll hopefully have fewer obligations that need coverage. Using a little-known secret called the ladder strategy, you can step down your coverage as your needs decrease.

Under the ladder strategy, you buy multiple, smaller policies of varying death benefits and terms. For example: You may start with three policies totalling a million dollars of coverage, and as they expire, you’ll find yourself with a single policy worth $250,000. Using this strategy, you can save as much as 50% on your life insurance costs (compared to the cost of a single large policy) and you won’t find yourself with unnecessary coverage – or premiums – when you’re in your 50s or 60s.

The ladder strategy might be a little more than a first-time life insurance shopper is looking for, but a good agent can walk you through the idea and help you determine if it’s right for your situation.

What affects the price of your life insurance policy?

So, life insurance can last decades and pays out hundreds of thousands – maybe even millions – of dollars. Must be pretty pricey, right?

Usually not. We break down life insurance pricing at different ages here, but in short, life insurance is surprisingly affordable considering the peace of mind you get. Here’s what goes into how much you’ll pay for the policy:

  • The term and size of the policy. This one is pretty straightforward: The shorter and smaller your policy, the less you’ll pay. As you increase the term length and the death benefit amount, you can expect your premium to increase.

  • Your age. Life insurance gets more expensive as we get older. That’s just a fact of life. Premiums can increase by as much as 8-10% every year you put off buying life insurance. That’s why, even if you’re young and don’t yet have the obligations that typically necessitate life insurance, you might consider buying it now. You can lock in low rates, meaning 55-year-old you will be paying 25-year-old you prices. Plus, you’ll be well-prepared for the future.

  • Your health. Between the medical exam, which is essentially a physical so the life insurance carrier can get a picture of your current health, potential requests for Attending Physician Statements, which is your health history from the point of view of your doctor, and looking into your family’s health history, it becomes quickly apparent that life insurance companies are very interested in your health. That should be a clue as to how important your health is to your life insurance premium rates. Smoking, obesity, high cholesterol, diabetes, and more play a role, and if you’re in poor health, it can raise your rates substantially. That’s not to say that you’re out of luck: Some conditions, like HIV/AIDS and cancer, are much more manageable now than they were even just a few years ago, and aren’t viewed as strictly by insurers as they once were. Changing habits, like quitting smoking, and taking proper medication are looked upon favorably by carriers. And many carriers work with consumers with health conditions to get them competitive rates. It might take a little extra legwork, but first-time life insurance shoppers with less-than-perfect health shouldn’t be put off.

  • Other factors. This is sort of a miscellaneous grab bag of other things that are considered when determining the cost of your life insurance plan. Remember, your premiums are largely determined by the risk you pose of dying over the term of your policy. While health plays a big role in that, other factors, like your hobbies (do you skydive and scuba dive a lot?) and your driving record (are you likely to get into an auto accident?) also contribute.

What riders are available?

Worried that a standard life insurance policy isn’t for you? Spice it up a little with riders – essentially mini-contracts that modify your policy so that it suits your needs. Some riders come standard with certain carriers, while others will add a little extra to your premium. You won’t need every rider that’s out there, but you should be aware of some popular ones so you know what your options are.

  • Accelerated death benefit – End of life expenses and treatment can get expensive. In the case of terminal illness, you may benefit from an accelerated death benefit rider, which will allow you to access your death benefit and pay medical bills so the task isn’t entirely left to your family when you’ve passed. This rider is typically standard on term life insurance policies.

  • Waiver of premium – Long-term disability insurance is a great way keep money flowing in even if you’re disabled (first-time shoppers can find our guide for it here). But if you become disabled and can’t pay your life insurance premiums, a waiver of premium rider will allow you to delay payment for a period of time. This rider is typically an added cost on term life insurance policies.

  • Term conversion – We like term life insurance because it gives you protection while you need it, and you can stop paying for it once your financial obligations are finished. But if your life insurance term expires before you’re ready for it to, a term conversion rider will let you transition your term policy to a permanent policy that will last for as long as you pay your premiums. This rider is typically standard on term life insurance policies.

Are these five questions the only thing you need to know about life insurance? Of course not! (We have an entire site full of more information!) But it’s important to take the first step toward getting covered, and knowing the basics will give first-time life insurance shoppers a foundation to dig into the details. Talk to one of our independent licensed experts today to ask any questions you have about life insurance, and find out how you can get covered as soon as possible.