When shopping for life insurance, the best strategy is first to understand your objective in buying life insurance and then focus on the products best suited to meet that goal.
This statement might sound a bit underwhelming or generic, but it has considerable nuanced implications that I want to spend time building out a bit. I think you'll find that effort both insightful and helpful in your pursuits when in the market for life insurance, be it the first time or the umpteenth time.
Life insurance is an extremely versatile product. It's actually a collection of products all uniquely designed to help you meet a goal. If you understand what exactly you seek to accomplish by purchasing life insurance, that will allow you to cut through the confusion of what type of life insurance you want to buy. Instead, you can more quickly match your objective to the kind of life insurance aligned with it and move forward soon.
The majority of people looking to buy life insurance seek death benefit protection. This means they want to cover the lost income loved ones face should they pass away while still working or while still having significant financial obligations–the two are often inextricably tied, but not always.
I'm not going to spend a great deal of time discussing how one arrives at a targeted death benefit amount today. You can find helpful tips on that elsewhere, and honestly, that's a task often best tackled with the personal assistance of a financial or insurance professional.
I do want to stress one crucial consideration loosely tied to the amount of death benefit you seek. That's the amount of time you need that death benefit to exist.
Lots of financial gurus stress the importance of understanding how much life insurance you might need, but few spend much time guiding you on just how long you might need life insurance coverage. Some make vague references to financial independence and how that is kind-a sort-a a point when you might be able to drop your life insurance coverage. No real argument here on that idea. However, misunderstanding precisely what that means from the outset leaves a lot of people susceptible to financial pain later in life.
I want to suggest that knowing both how much life insurance you need and how long you'll need it to hold equal weight in terms of importance. In other words, you need to figure out not just how much you need, but how long…realistically…you'll need it.
The length of the death benefit need question is often trickier to calculate than the exact amount. But let's use a for-instance or two to help build out an understanding.
Perhaps you're in a situation where you have minimal financial obligations beyond a mortgage. A 15-year mortgage for a new home you just bought with a $350,000 total balance. This one is easy. You should buy $350,000 of 15-year term life insurance. Assuming you never refinance the mortgage and reset the term of it, your life insurance policy will last exactly the same amount of time that you plan to have a mortgage outstanding.
Now let's move to a more complicated situation. Let's say your currently 35 with a wife, kids, mortgage, and all that middle American lifestyle stuff we all know and love. You compute your death benefit need to be $2,500,000. Your current plan is to retire by age 65.
Traditionally, we might tell you to buy $2.5 million of 30-year term life insurance. This should cover you for your entire working years. Assuming you retire at 65 as planned, you should have all the money you need to cover your expenses and have no need for life insurance.
But what happens if your plan doesn't work out as planned? I'm not saying it won't, but I can speak from experience when I say it doesn't for a lot of people. Life is messy, and a lot of people end up in situations where the linear path to financial independence looks more like a doodle done by a drunkard. Those blessed to have never dealt with a significant financial set back will have a hard time relating to this statement, but the majority of Americans out there will know what I'm talking about.
Term insurance might be the weapon of choice in the above example, but you have to understand that it has a lot of failure points that could lead to stress and significant sacrifice. Term insurance isn't necessarily the wrong answer. If your capable of savings substantial sums of money, keeping liabilities low, work in a low risk/turnover occupation, and have reasonable expectations for good health term insurance becomes a much more viable option.
The one thing you should never do is simply choose term life insurance because it appears cheap and it allows you to move one with all the other things you want to buy instead.
So if you can easily define your need for life insurance over a few decades or less with reasonable certainty that it completely goes away after that, term life insurance is your answer. With that being said, let's dive into best practices for buying it.
Term life insurance quoting is straight forward 99% of the time. You can easily acquire several quotes from an agent and review the cost of a given amount of death benefit and length of death benefit quickly. Most of the time, you'll simply go with the insurer that offers the coverage for the lowest premium. There are a few times, this might not work out best, and you might opt for the insurer with slightly more expensive premiums. These situations are:
Armed with this information, let's also cover four tips on things you'll want to avoid when purchasing term life insurance:
What happens if you discover that your life insurance need goes beyond the years that term life insurance offers? You'll need permanent life insurance. Permanent life insurance is a broad term that encompasses life insurance products like whole life insurance and universal life insurance. The key feature is that these life insurance products can provide a death benefit for your entire lifetime. You can also think of permanent life insurance as a backup plan for when things don't go as planned.
Some people discover that they end up not needing the death benefit offered by permanent life insurance for their entire lifetime. At this point, they might choose to cancel the policy to stop paying the premium. The good news for them is that most permanent life insurance policies build cash value that the policyholder gets to keep if he/she decides to cancel the policy. So while the life insurance policy will not end up paying a death benefit, the policy owner still gets value from the policy in the form of cash upon cancelation.
Some people also focus in on that cash building aspect of life insurance to build a nest egg with life insurance as a complement to other savings strategies. That subject is a tad more complex than the topic I wish to discuss today, but you'll find a plethora of information on that idea elsewhere on this blog.
Evaluating permanent life insurance is a tad more complicated than term life insurance. Because of its cash value component and ability to create more death benefit than the original amount purchased, you have to take more care than merely comparing premiums for a given amount of death benefit. This is an area where an agent well versed in the subject can come in extremely handy.
You'll also want to spend more time looking at insurance company specific financial data since you'll likely be choosing a relationship for a company over several decades. You want to ensure that they have the finances to remain in business for a long time (pro tip: most of them do).
There are a few pitfalls I want to call to your attention so you can avoid them:
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.