For better or worse, shopping for life insurance has never been easier. Most major insurance providers offer online quotes and online applications, many without a medical exam. But before you buy, you should understand the different types of coverage available, know how much coverage you need, and be prepared to compare quotes from different insurers.
Life Insurance Shopping To-Do List
- Know your options.
- Decide how much coverage you need.
- Choose which type of coverage to get: term (temporary), permanent (lifelong), or both.
- Get and compare quotes.
- Apply for the policy that best suits your needs (or policies, if you’re buying more than one).
Permanent vs. Term Coverage
There are two general types of life insurance coverage: term and permanent.
Term Life Insurance
Term life insurance is the simplest form of life insurance: It provides a death benefit for the person insured for a certain period, typically between one and 30 years, although some companies offer terms up to 40 years. For instance, if you had a 10-year, $250,000 policy and died during the 10-year term, your beneficiary would receive the $250,000 death benefit.
Typically, term life policies do not return any of your premiums when the term ends (and the insured person hasn’t passed). Some term policies include a “return of premium” feature, which repays part or all of your premiums, but these policies cost more.
Also, term life insurance companies typically only offer new policies up to a certain age, usually around 70 or 80. But depending on the length of the policy and your health, it could be much younger, like 55 if you’re looking for a 35- or 40-year term.
Permanent Life Insurance
Permanent life insurance policies are designed to cover you from the time you purchase the policy until you die. Unlike term life insurance, permanent life insurance policies build a cash value, which you may be able to borrow against or withdraw from. Because of their permanent nature, permanent life policies cost more than term life policies—you pay a larger premium in order to build up that cash value which offsets the cost of insurance as you age.
The market offers several types of permanent life policies:
- Traditional whole life policies state cash values in the policy documents—they build based on a fixed interest rate set by the insurer. These policies also fix the premium which will not change but needs to be paid according to the schedule set in the policy or the policy could lapse.
- Universal life insurance credits interest to the cash account based on current market rates (so cash values aren’t predetermined at policy issue). Premiums on these policies can be flexible (in amount and frequency) if there is sufficient cash value to cover them.
- Variable life insurance policies build cash value through stock market investments in subaccounts, which often look like mutual funds, that the policyowner chooses. If investments lose value, you may need to increase premiums paid into the policy to keep it in force.
In many cases, you can’t change the death benefit on a whole life policy, but you may be able to with a universal or variable universal life policy.
Know What Coverage You Need
Before you start looking for a specific life insurance policy, make sure you know:
- How much coverage you want.
- How long you need coverage for.
- What type of policy you want to purchase.
There are a number of ways to determine your coverage need, from the simple and possibly less accurate to the very complex, and possibly (though not necessarily) more accurate.
If you have children, you might consider one popular rule of thumb—multiply your income by 10 and add on college costs for each of them. Then look for a term policy that lasts at least until they graduate college. Or, if you want to provide final expenses to pay for burial and other costs, you may only need a $10,000 to $15,000 permanent policy. (Also consider any other final expenses your loved ones may face, such as estate taxes, legal expenses, and medical bills.)
In 2019, the median cost of a funeral and burial ran around $7,640, according to the National Funeral Directors Association.
Once you’ve established how much life insurance you need, you should figure out how long you need coverage for. Do you need temporary or permanent coverage? Since permanent insurance is more expensive than term, you may choose to purchase more than one policy to cover both a temporary need and a permanent one, such as replacing lost income while children are at home with a 30-year term policy, and buying a small permanent policy to pay for final expenses.
But often cost is the limiting factor when it comes to providing coverage. If you’re unable to afford the amount of coverage you think you need, just get as close as you comfortably can for the term you need. Also, many "convertible" term policies allow you to convert some or all of the death benefit to permanent coverage without having to go through the underwriting process. This feature is included as a rider at no extra cost on many policies—look for it when comparing quotes.
The Department of Veterans Affairs has a life insurance needs calculator that can help determine how much coverage you need.
Choosing the type of policy and level of coverage is subjective and there are a number of ways to go about it. Consider your situation, income, debts, who depends on you, and how long you expect them to depend on your income.
Evaluate Coverage and Rates
The next step is to compare quotes—you may want to use an online brokerage to generate quotes from multiple insurers or visit multiple insurers’ websites (you’ll probably need to do this to get quotes for permanent coverage).
Examine each quote carefully. Look beyond premiums to ensure the policies offered have the features you want. For example, you might want a term life policy that you can convert into a permanent policy without having to provide evidence of insurability, or you might want one that is renewable once the term expires, also without having to prove insurability.
A provider’s financial strength is also a crucial consideration, because it indicates the carrier’s ability to pay claims. Sign up for a free account on the AM Best website to research carriers’ financial ratings on your own.
Buying permanent life insurance often requires more scrutiny than purchasing term coverage. Permanent insurance policies may include so-called “living benefits,” such as coverage for long-term care or early access to the death benefit due to disability or a terminal or chronic illness—these features can differ significantly between policies. And since permanent coverage, like universal and whole life insurance, require larger premium payments, you may have more to lose if you buy a permanent policy and then later decide you don’t want it.
There’s an interesting caveat to that however, if the policy builds a cash value, you may be able to receive a portion of that cash value back if you surrender the policy. However, permanent policies almost always have a “surrender period” (which can last up to 20 years) during which you’ll be assessed a surrender charge on withdrawals from the cash value, including a full surrender of the policy. Charges may be especially steep during the policy’s early years.
New life insurance policies have a free look period during which time you can “return” the policy for a refund of your premium. It may be between 10 and 30 days—ask the insurance company how long it is for the policy you’re considering.
If you’re unsure about a policy’s specific features, ask questions and read the fine print before applying.
Choose Your Policy
Through comparing quotes, you should be able to determine which policy is right for you (or policies, if you’re purchasing both term and permanent coverage or term policies with different lengths). And while you could apply for more policies than you actually need to determine who has the best rate, it’s probably not a good idea.
In most cases, each application you submit for life insurance gets logged with the Medical Information Bureau (MIB), so all insurers you apply for coverage with can see your applications. That could be a problem because there is a limit on your insurability, or how much death benefit you’re eligible for in aggregate, across all the policies you own (or might own). That limit depends on how much income you make and other financial information.
If you apply for coverage in excess of your insurability limit, it’s possible that all of your applications could be denied.
When applying for life insurance online or with an agent, you’ll typically need to enter certain information during the application process, including:
- Your health history and the medical history of your parents and siblings.
- Your primary care physician’s contact information.
- Your income and level of debt.
- The names, addresses, and Social Security numbers of your beneficiaries.
After submitting a life insurance application, the insurer may require you to take a paramedical examination to determine your eligibility. The examination usually involves giving blood and urine samples and may include electrocardiogram and treadmill stress tests in certain cases, like if you’re 50 or older or applying for a large coverage amount. A laboratory will screen your blood and urine for health problems such as high blood sugar levels or abnormal liver function, as well as substances such as cocaine or nicotine. The laboratory will submit its findings to the insurance company’s underwriting department, which will determine if you qualify for life insurance and at what rate.
The cost of life insurance increases with health issues and age.
Buying Life Insurance Online
Not everyone wants to take a medical exam. But if you apply for a policy online with an insurer that uses accelerated underwriting, you may qualify for a policy without taking a medical examination and still be able to get a good rate. This type of underwriting relies on third-party medical data and detailed information you submit about your health history and prescription drug use.
Several major insurers offer term life insurance that doesn’t require qualified applicants to submit to a medical examination. But keep in mind that some no-exam policies may limit the amount of coverage you can purchase and have higher premiums.
In general, the more information you’re asked to provide when applying for life insurance, the lower your rate can be. This is because the best risk classes are often only available to applicants who submit to more thorough underwriting.
- Term insurance is less expensive than permanent insurance, but permanent insurance builds a cash value and provides lifelong coverage.
- Know how much and what type of coverage (policy) you need before getting quotes.
- Insurance policies have a free look period, often 10-30 days, during which you can cancel coverage and have your premium payment refunded.
- In many cases, the more information you supply when applying for life insurance, the better your rate can be.
- The price of life insurance is important, but it’s at least equally important that it fits your needs.
- Utilize the free financial strength tools on the AM Best website.