Life insurance is an essential part of a long-term financial plan. A life insurance plan protects your dependents from falling into debt or financial hardship upon your death by paying out a death benefit.
Purchasing life insurance is a very important decision, and can be more complex than some types of insurance. So, here is a breakdown of the process of purchasing life insurance, which you’ll walk through with your insurance agent.
Is It the Right Time for Life Insurance?
Life insurance is a good fit for practically everyone. The purpose of life insurance in many cases is to benefit your dependents in the event of your death. Life insurance can also be used to provide the necessary cash flow to a business when an important employee dies.
The most common reasons for buying life insurance include:
- Replace income for dependents.
- Pay final expenses at death.
- Create an inheritance for heirs.
- Pay federal and state death taxes.
- Make significant charitable contributions.
- Create a source of savings.
Understanding the Terms
Life insurance companies use specific terms to describe what they offer. It’s important to know some of the main terms to be informed about what is being discussed. Some of the most used terms include:
- Death Benefit: Assuming all premiums are paid and there is not a breach of the insurance contract, the death benefit is the amount of cash paid to the beneficiaries in the event of the insured’s death.
- Beneficiary: The beneficiary is an individual or entity that will receive the death benefit from your policy.
- Policy: A life insurance policy is a legal document stating the terms of the life insurance contract.
- Coverage: This is the amount of the death benefit to be paid out, plus any additional benefits of the plan, such as the cash value of the policy.
- Premium: This is the amount of money paid, often monthly or annually, for a life insurance policy.
- Term: This is the period of time the insured person is covered by a life insurance policy.
Decide on the Life Insurance Specifics
Life insurance policies vary. Each person interested in buying life insurance must look for a policy that meets their individual needs.
Types of Life Insurance
Decide between the three main types of life insurance:
- Whole Life: A whole life insurance policy has two components: a permanent life insurance component and an investment component. Premiums may be higher than with a term life insurance policy, but there is some accumulated cash value over the life of the policy that the policyholder may withdraw or borrow against.
- Term Life: Term life insurance policies last for a specified period of time. These policies tend to have lower premiums than many other types of life insurance. However, there is no cash value with a term life insurance policy.
- Universal Life: Universal life insurance combines some elements of a term life insurance policy with an investment element. The cash value of the account may grow over time.
How Much Life Insurance Do You Need?
When calculating the amount of life insurance you need, take into account the expenses you expect in the future, and how much money your family needs to cover the expenses in the event of your death.
Life insurance is meant to assist family members with the loss of income they experience if you were to die. When considering the future expenses your family may incur, consider monthly living expenses, childcare, higher education costs for children, weddings, your spouse’s retirement, and any inheritance you would like to leave your heirs.
Life Insurance “Riders”
Some life insurance policies come with “riders,” which are provisions that add benefits to, or amends the terms of, the insurance policy. Look for two specific riders:
- Waiver of Premium: A waiver of premium ensures that all premium payments are waived if the policyholder becomes seriously injured, disabled, or critically ill. Some conditions may apply.
- Guaranteed Insurability: This guarantees that you can buy additional life insurance with no underwriting.
Get a Life Insurance Quote
With an idea of the specific life insurance characteristics that meet your needs, request a quote for life insurance that matches your needs. Quotes are given on an individual basis, taking into account the age, medical history, and other basic information about the person being insured.
Getting a quote is free. It should contain details such as the expected premium payments and coverage amounts.
Submit an Application
When you apply for life insurance, you are asked questions about your medical history in most cases and sign an authorization for your medical records to be released.
Your agent will also tell you which documents you need to supply when applying for life insurance, based on your specific circumstances. The documents can include:
- Proof of identity, age, and citizenship: Driver’s license, social security number, birth certificate, valid passport, or green card.
- Proof of income: Pay stubs, a letter of employment, a tax return, an earnings statement from your bank, unemployment letter, statements describing your unemployment benefits.
- Proof of residency: Signed lease, property tax statement, or utility bill.
Depending on the type and amount of life insurance you are applying for, a certified medical examiner will perform a basic medical exam. Medical exams for life insurance applications may include:
- Review of your medical history.
- Measurement of your blood pressure and pulse, including an EKG.
- Blood sample.
- Urine sample.
This is a free service that can be provided at a location that’s convenient for you, such as at home or your office.
Once the application is submitted and you have completed the medical exam, the final underwriting takes place. An underwriter from the insurance company takes all the information provided and makes the final determination on the life insurance that can be offered to you. Underwriting may take just a couple of weeks, but it could take up to 6-8 weeks.
Purchase the Policy
If you decide to accept the life insurance policy offered by the company, you will sign the insurance contract and pay the premium. Always confirm the details of the policy. In most cases, you will also authorize a payment method and choose the frequency of payments at this time.
Notify Your Beneficiaries
Once your policy is in force, you should tell your beneficiary about the policy, including the place where you keep the policy, such as a safe deposit box.
Life Insurance Resources
Why should I buy life insurance? (Insurance Information Institute)
Universal Life Insurance (Investopedia)
Whole Life vs. Universal Life Insurance (Investopedia)
Term Life Insurance (Investopedia)
How Much Life Insurance Should You Carry? (Investopedia)