Today I’ll show you exactly how to buy life insurance.
Step by step.
In this life insurance buyer’s guide, you’ll learn:
- Step #1: How to decide what type of life insurance is best for you.
- Step #2: How to decide how much insurance you need.
- Step #3: Whether your group life insurance plan is worth buying.
- Step #4: Where to buy life insurance for the lowest possible price.
Prior to The Ways To Wealth, I spent 10 years as a licensed life insurance agent. And wow… did I see some major mistakes when it came to buying life insurance.
The most common were:
- Buying the wrong type of insurance for a lot more money (as in 10X more money).
- Not understanding exactly what was being purchased.
- Not understanding the fees and commissions.
On the positive side, applying for life insurance has never been easier. Once you know the right type of policy to look for and the mistakes to avoid, there are companies that use modern technology to make the process (almost) effortless.
Step #1 — Determine What Type of Life Insurance You Should Buy
Your first step in purchasing life insurance is deciding what type of insurance you need.
There are two primary types of life insurance:
- Term life insurance
- Whole life insurance
Then, there are choices within those types.
Let’s start with term life insurance.
Option #1: Term Life Insurance
Term life policies offer you guaranteed protection for the length of the contract, which typically range from one to 30 years.
The most common type of term life insurance is called “level guaranteed term life insurance.” With a level guaranteed term life insurance policy, premium payments stay the same for the duration of the contract.
At the end of the term, you have the ability to extend the contract, but at an increased premium. If you don’t want to pay the new premium (which goes up in price considerably), the contract ends and you no longer have any life insurance (nor is any premium you paid returned).
While some see this as a negative, remember: term life insurance is much less expensive than whole life insurance. You can get an adequate-coverage policy for around $20 to $30 a month.
Option #2: Whole Life Insurance
Whole life insurance is a combination of term life insurance and an investment. Every time you pay your premium, part of it goes to the life insurance company and part of it to the investment.
What makes whole life insurance different than a term life policy?
Whole life insurance is permanent.
While term life insurance lasts for a certain period of time (e.g., a “term”), whole life insurance lasts for as long as you keep paying.
Most whole life insurance policies “endow” when you reach the age of 100. That means that on your 100th birthday, you receive the death benefit (even though you’re still alive), which is the full “cash value” of the policy. If you die before then, it goes to your named beneficiary.
With whole life insurance, there’s no guaranteed length of the contract. As long as you pay, your contract remains in force.
The disadvantage is the cost. Whole life insurance is much more expensive than term life insurance.
Which Is Better: Term or Whole Life Insurance?
For the vast majority of people, term life insurance is a much better choice. There are a very few, very specific situations in which whole life does provide noteworthy advantages. However, those situations are (by far) the exception to the rule.
When I was helping clients purchase life insurance, I would always look at a client’s entire financial situation. When I first sat down with clients to discuss life insurance, one of the things I would go over was their “balance sheet.” I wanted to identify what assets were in what type of account.
I would often see parents not contributing to tax-advantaged investments like IRAs, 401(k)s, HSAs and college 529 plans, or who had large amounts of high-interest student loan debt with no strategy for paying it off.
Yet those same people were considering buying permanent life insurance because it’s what an insurance broker recommended.
That makes no sense. The numbers just don’t add up.
IRAs and 401(k)s give you access to tax benefits during retirement. Yes, so does whole life insurance. But IRAs and 401(k)s come without the fees and hassle.
What are the very few these exceptions? Well, it gets complex. But here are a couple of situations in which some type of permanent insurance might make sense:
- You can use permanent life insurance to reduce the size of your estate with the hopes of avoiding paying estate taxes.
- Whole life insurance might be required for those whose heirs will need access to a large amount of cash, typically to pay estate taxes or to be able to hold onto a valuable asset like a business or piece of real estate.
If you’re on the fence between going with a term or whole life insurance policy, and you think you may be the exception to the rule, here’s what I would do. Go hire a fee-only CERTIFIED FINANCIAL PLANNER™ for one to two hours to evaluate whether whole life insurance policies are a good fit.
CERTIFIED FINANCIAL PLANNERs™ are fiduciaries, meaning they’re legally obligated to act in your best interest. Most life insurance agents are not fiduciaries, which means they’re under no obligation to act in your best interest. Does that make a difference when it comes to the investments and products they recommend? You better believe it!
Step #2 — Determine How Much Life Insurance You Should Buy
Perhaps the most common method for determining how much life insurance you need is to use a “rule of thumb.” For example, Dave Ramsey recommends 10 to 12 times your income. Therefore, if you make $50,000 a year, you should buy between $500,000 to $600,000 worth of term life insurance.
However, when you take a step back, there’s a lot more that needs to go into the equation than just your salary.
For this all-important question of how much life insurance you should buy, the best way to start is by reminding yourself of the purpose of life insurance, which is income replacement.
With that in mind, we can determine that the right amount of life insurance is the amount that allows you to replace your income to cover future financial obligations, while also accounting for your current assets.
In equation form we get:
Life Insurance Coverage Needed = Future Financial Obligations – Current Assets
There’s a lot that goes into each variable, which is why I’ve found it’s best to use a calculator to help you determine the right amount of coverage.
Finding A Good Online Life Insurance Calculator
A Google search brings up 60,000,000 results for the phrase “life insurance calculators.”
But that’s not the most problematic part. The biggest problem is that if you use five different calculators, you’ll probably get five different results.
Often, much different results.
Still, calculators can help you if you give them sufficient inputs. But the best place to start is not with a Google search; you need to know what makes a good life insurance calculator.
When it comes to life insurance calculators, I’ve found one thing to be true: typically, the more questions it asks, the better.
You want to make sure the calculator is at least asking you about the following:
- Estimated final expenses (funeral costs, etc.)
- Mortgage debts
- Your student loans
- How many children you have
- Your children’s college funding
- Your current savings and investments
- The amount of life insurance you currently own
- Your current income
Last, read the fine print for the estimated inflation and after-tax investment yield.
What should you be looking for?
- An inflation rate should be between 2% and 4%.
- After-tax investment yield should be between 4% and 7%
If the calculator doesn’t tell you what these numbers are, I wouldn’t use it.
And of course, make sure it’s from a trusted source.
My Favorite Online Life Insurance Calculator
There’s one life insurance needs calculator I recommend. It’s from the non-profit LifeHappens.org.
It’s easy to use and asks the right questions.
While no calculator is perfect, a good one like the one linked to above will get you close to your ideal number.
Step #3 — Start With Your Group Insurance Plan
Say you’re a parent (i.e., you have precious little spare time). You need life insurance. Your employer has a group life insurance plan. You’re thinking, “Hey… maybe I can wrap this life insurance thing up with one email to HR. I’ll just tell them I need some coverage and I’ll be all set.”
Sorry to tell you this, but it’s not that simple.
Yes, when you’re shopping for life insurance, your group insurance plan should be the first place you look. But, as you’ll discover, it’s a bit more complex than that. There are advantages to group life insurance, but there are also disadvantages.
Let’s start with the advantages.
The Advantages of Group Life Insurance
It’s guaranteed issue. Most group life insurance plans come “guaranteed issue,” meaning there’s no medical underwriting necessary to bind coverage. There’s no physical, no saliva sample or blood drawn, and no waiting for coverage. For someone with a poor health history, this is a huge advantage.
It’s free (sometimes). Many employers pay 100% of the contribution for group life insurance. Then, if you want extra coverage, you have the option to buy it. For example, your employer may provide you with $50,000 of coverage at no cost. Then, you have the option to buy up to $200,000 more in coverage.
It’s convenient. If you’re the kind of person who puts things off, it’s hard to beat the convenience offered by group life insurance. Unlike buying coverage on your own, it’s a much shorter and simpler process.
The Disadvantages of Group Life Insurance
It has low limits. Group life insurance plans limit the amount of coverage you can buy. This limit is usually well below the amount that’s needed.
It lacks portability. If you leave your job, what happens to your insurance? Here’s a scarier thought: if you leave your job due to health issues, what happens to your insurance? Many group life insurance plans are not portable, meaning that you can’t transfer your coverage to an individual policy if you’re no longer employed.
Cost. For healthy individuals, cost is the biggest disadvantage that comes with group life insurance. There’s a good chance you’ll pay a higher premium.
Why is group life insurance more expensive?
The reason is adverse selection.
Remember, most group health insurance plans come without underwriting, both traditional and accelerated (which you’ll learn about soon). Thus, those who have trouble finding coverage as an individual buy as much group insurance as they can.
As a result, the pool of people who buy group insurance isn’t as healthy as the pool of people who buy individual coverage, and the healthier people in the pool end up effectively subsidizing the unhealthier people.
Final Thoughts on Group Life Insurance
If your employer offers to pay for life insurance, take it. If it costs you nothing, there’s no reason not to.
If your employer doesn’t contribute, buying insurance through your employer is likely more expensive than buying it on your own. If that’s the case, you’re better off shopping the individual market (if you’re healthy).
The important thing to keep in mind is that your employer’s plan is only the beginning. You not only need to buy life insurance, you need to buy the right amount.
Step #4 — Buy Life Insurance For the Lowest Possible Price
You now know what type of life insurance you want to buy. You know how much life insurance to buy. And you’ve reviewed your group life insurance plan.
Step #4 is buying individual life insurance at the lowest possible price.
As I discussed in the opening section, the majority of people should buy term life insurance. So, I’ll be taking you step-by-step through buying a term policy.
Know the Company Inside and Out
The most important decision you’ll make when comparing life insurance is deciding which company to buy it from.
Keep in mind that when buying life insurance, you’re entering into a long-term contract. Unlike auto insurance or home insurance, this isn’t a one year policy; for many people, it’s a commitment that will last as long as 30 years.
Why does that matter?
Well, imagine that you uphold your end of the contract by paying your premiums for 17 years. But then, in Year 17, the insurance company files for bankruptcy.
You’re 17 years older now. You have a few health issues. And you still have a need for life insurance.
Pretty big deal, right?
Buying Life Insurance
If you’re shopping for life insurance, know that it’s never been easier to purchase a policy. For some, you can have this entire life insurance process wrapped up in the next 10 minutes.
But before diving in, it’s important to understand a major trend that’s allowing people like you the ability to purchase life insurance so quickly.
It’s called accelerated underwriting.
Before accelerated underwriting, the traditional way to purchase life insurance was:
- Step #1: Compare quotes from different life insurance companies.
- Step #2: Pick the company with the lowest quote.
- Step #3: Fill out lengthy physical forms with that company.
- Step #4: Get a medical exam, which includes a blood draw and urine sample to verify the information on your application.
- Step #5: At around four to six weeks later, hear back from the company on your final rate.
It should come as little surprise that often, the rate you saw upfront was quite different from the rate you actually had to pay.
The traditional underwriting method is far from perfect from the consumer’s perspective, and it’s expensive to administrator for the insurance company.
To make life insurance buying easier (as well as to lower administrative costs), insurance companies created accelerated underwriting.
In most cases, instead of a physical exam, life insurers who use accelerated underwriting rely on big data to determine eligibility. Many times, this is third-party data that you agree to share with the life insurance company.
So, instead of having to fill out pages of forms that are manually reviewed, schedule and sit for a physical, and then wait for your actual quote, you can get a decision in minutes online.
If it sounds like a much easier process, that’s because it is. However, it does come with some downsides.
The biggest downside is that you may end up paying more for a policy that uses accelerated underwriting. Looking at it from the perspective of the insurance company, this makes sense, as they’re making a decision about whether to approve you (and how much to charge) without blood and urine samples.
Another downside to using accelerated underwriting is that, many times, these policies are limited — either in the amount of coverage available (maximum coverage tends to be around $1 million), term length (which some companies limit to 20 years), or both.
So, should you avoid companies that use accelerated underwriting?
As this trend matures, the data they have is getting better and better. In some cases, you may be able to find a cheaper rate using accelerated underwriting than you could with traditional underwriting. Plus, you’ll save yourself a lot of time and hassle going this route.
If I were purchasing life insurance today, I’d make sure to compare the prices of a company that uses accelerated underwriting with a company that uses traditional underwriting. If I could save myself a lot of money (even though it requires more of my time), then I’d opt for the latter.
But there are so many variables at play in the market today that you can’t really know which route will offer the better deal until you start getting some quotes.
Where to Get Life Insurance Quotes
With the advancement of accelerated underwriting and big data, a number of startups have launched in the past few years to take advantage of this opportunity.
And with each new company, it gets harder and harder to know which one is right for you. After taking a look at the current life insurance offerings available, there were six companies that really stood out for me.
Policygenius is one of the largest quote comparison sites. The site specializes in companies that use traditional underwriting, and with its large network of carriers, it’s a great site to compare quotes on if you’d like to see what you’ll pay going the traditional underwriting route.
Bestow allows you to buy up to $1 million in term life insurance with a maximum policy length of 20 years. The company uses accelerated underwriting that allows you to complete the process in as little as five minutes. It’s worth a look, as long as the policy limitations fit your needs.
Health IQ offers life insurance for health-conscious individuals. To get a quote, you’ll enter basic personal information and take a health quiz. If you qualify for the company’s special rate, it’s among the cheapest policies you’ll have available in the marketplace.
If you don’t qualify for the special rate, they have a large network of companies (similar to Policygenius) where they’ll gather quotes for you.
If health plays an important part in your life, you’ll definitely want to give Health IQ a shot.
Ladder offers accelerated underwriting for term life insurance policies up to $3M in coverage, with a bit of a twist. With Ladder, you can adjust your policy as your life changes. So, if you only need $500,000 of coverage today, but know that in five years you’re likely to need more, Ladder allows you to adjust your policy on the go (this is called “laddering up” or “laddering down”). To ladder up, you’ll need to apply for the added amount, while laddering down can be done in a matter of clicks.
It’s a great place to get a quote for those whose needs are expected to change, as well as for those looking to compare the cost of a direct online company to the rates of a traditional company.
Haven Life was one of the first companies to market an accelerated underwriting life insurance product. What’s unique about Haven Life, compared to any other online life insurance provider, is that policy limits for Haven Life customers under 60 go up to $3 million.
That makes Haven Life a must-stop shop for those who are seeking a quick buying process, yet who also need a bit higher life insurance coverage amount than is offered by other providers.
As I explained earlier, in many cases, the price you get upfront when comparing quotes is a lot different than the price you end up paying after the underwriting process is complete.
Sproutt’s goal is to match you with the right company at the beginning of your journey — the one that’s going to provide you with the best price when it’s time to actually sign the contract.
If you have some family medical history that might factor into play, or even some minor health issues that might raise some red flags on your life insurance application, give Sproutt a chance.
Life Insurance Buyer’s Guide Summary
Life insurance is one of the most complex contracts you’ll enter into. And as you can see, there’s a lot more to consider than just insurance premiums.
But if you’ve read this far, you know enough to make a wise decision when it comes to purchasing the best life insurance policy given your specific needs.
If you haven’t already done so, your next steps are to:
- Determine how much life insurance you’ll need
- Review your group insurance policy
- Pick two to three reputable life insurance companies to gather quotes from
Once you know the right steps to take and which mistakes to avoid, the process of gathering quotes and picking the right company is the easy part.
And as you’ll see, there’s some truth to what the life insurance companies say: you’ll feel a certain peace of mind when you buy a policy.
Just make sure you use this guide to find the right one.