Life insurance is a contract between a life insurance company and a person (called the policyholder). The contract states that if the policyholder dies within the term limit of the contract, the policyholder’s chosen friends and/or family will receive a tax-free, lump sum of money from the insurer. The insurer, for their part, receives monthly premium payments from the policyholder for the life of the policy.
If you have children, are married, or look after elderly parents or grandparents, a life insurance policy can help you provide for your loved ones in the event of your unexpected death.
Life insurance may be easy enough to understand and purchase, but soon-to-be policyholders could be leaving huge savings on the table (or risk voiding their contract) if they sign without understanding the basics of the application process. To help you save money and keep your contract solid throughout the years, we’ll cover the essentials such as how to choose term or whole life insurance, how to customize your policy details, and how to apply as accurately as possible.
Do You Need Life Insurance?
Anyone with financial dependents should consider purchasing a life insurance policy. And by “financial dependent, ” we mean more people than any young children you may have; anyone in your family who depends upon your income to maintain their present quality of life can be considered a dependent.
With a life insurance policy, your dependents (called “beneficiaries” in your life insurance contract) would receive a sum of money in the event of your death. Your beneficiaries can use this money—which often is as much as 10 times your annual salary—to pay off any remaining debts and funeral expenses, or even get a leg up in their own financial futures.
Some common reasons people consider buying life insurance include:
- Being the primary earner for your family.
- Having young children who will require future care.
- Being the primary caretaker of older adults or grandparents.
- Owning or sharing a mortgage or lease where your loved ones live.
- Having unpaid debts or student loans that are co-signed by a family member.
- Having older children who depend on your income to fund higher education.
How Much Life Insurance Do You Need?
The next question to answer when considering life insurance is how much you would need to provide for your dependents, while not paying so much that you hurt your immediate financial interests. Life insurance policies are flexible, making it easy for policyholders to find the right balance between satisfactory coverage and a manageable premium.
Before signing a life insurance contract, policyholders customize two primary policy details: 1) the coverage amount and, 2) the term length. While some insurers allow you to alter these policy details at any time, even during the active contract, some won’t. Get these details customized just right and you’ll only pay for the coverage your family actually needs, saving you money by cutting the fluff.
Let’s break down the best ways to customize your policy:
How to Choose a Coverage Amount
One of the most common ways to customize your life insurance is to decide how much money you would want to be paid out. Greater coverage (a bigger payout) means your dependents will be supported longer but also means higher premiums.
Finding the right coverage amount for your situation can be difficult as in part, it’s a personal decision that weighs your present finances against the financial needs of a potential future. That said, there are two common paths:
The 10X Rule
The 10X Rule states that your life insurance coverage should be ten times your annual salary. That’s usually enough to pay off your debts, any expenses your funeral may incur, and support your spouse or loved ones in the years after your death. With this approach, a contractor making $80,000 a year would seek a coverage amount of around $800,000.
By Loan/Debt Amount
If you’re primarily taking out a life insurance policy to protect your loved ones against a loan or debt (such as a mortgage), you can calculate your coverage amount by adding up your loan expenses and other fees. For example, the same contractor might still owe $150,000 in his mortgage, $60,000 in student loans, and about $10,000 for funeral and burial costs, meaning they would seek about $225,000 in coverage.
How to Choose a Term Length
Most people purchase term life insurance; that is, life insurance that only lasts a set number of years, usually between 5 years and 30 years. Your life insurance contract lasts exactly as many years as you agree to, and then ends. The longer the term, the more expensive the premium. (Whole or permanent life insurance doesn’t have a term length and, as a result, costs more.)
Figuring out how many years you’d want financial protection is also difficult. Start by understanding who currently relies on your income for support and how much longer will they need that support.
For many people, they’d like their life insurance to last until their young children become financially independent, making their terms last about 20 years or so. Others may want to pay off a large debt like a mortgage; in this case, you’d simply make your coverage last as long as your outstanding debt. Some prefer that their life insurance last until they retire, a 30+ year term.
If you have questions about your coverage amount and term length, your insurer is likely to have helpful tools such as representatives, online calculators, and resource guides for finding the right policy details for your situation.
What Type of Life Insurance Policy is Right for You?
Life insurance comes in two primary categories: term life insurance and permanent (whole) life insurance. Depending on factors such as your age, number of family members, or finances, one category of life insurance may work better for you than the other.
Term Life Insurance
Term life insurance pays a lump sum (called the death benefit) to a policyholder’s beneficiaries, but only if the policyholder dies within the contract’s term. If the policyholder dies a day after the contract expires, beneficiaries would not receive a death benefit.
Because of its limited contract, term life insurance is often much cheaper than permanent life insurance, often by thousands of dollars per year.
Term life insurance is a good fit for people who:
- Want to financially protect a long-term goal, such as paying off a mortgage or supporting young children as they grow.
- Are looking to save as much money as possible while staying financially protected.
Permanent (Whole) Life Insurance
Permanent life insurance pays a lump sum of money to a policyholder’s beneficiaries, with no term- or age-based restrictions. Excluding annulments, the beneficiaries of permanent life insurance are guaranteed to receive a death benefit as long as the policyholder pays their premiums.
Whole life insurance is a specific type of permanent life insurance that has a cash value component. A portion of a policyholder’s premium payments goes into a savings account with cash value, allowing policyholders to use this money in any way they see fit over the life of their contract.
Permanent life insurance is a good fit for people who:
- Want to pass on a guaranteed, tax-free inheritance to loved ones.
- Would like to use their life insurance policy as a part of their investment portfolio.
Either type of life insurance can be a smart financial safety net for your loved ones. Be sure to speak to life insurance representatives about your finances and goals; they’ll help you craft the right policy for you and your family.
Do You Need Life Insurance Riders?
As you start comparing life insurance policies, make sure to take a look at what riders are included or are available. Riders are life insurance add-ons. Typically, they’re designed to kick in if the policyholder does not die following an incident but is instead significantly injured or disabled, thereby unable to earn income in the same way they did before the incident.
Riders may include:
- Critical Injury or Chronic Illness: Coverage for policyholders who are critically injured or develop a life-altering illness.
- Accidental Death and Dismemberment: Coverage for policyholders who die accidentally or who survive but are maimed.
- Accelerated Death: Coverage for policyholders who are diagnosed with a terminal illness.
Riders may be a strong addition to your life insurance policy if your job puts you in high-risk conditions, such as working along rooftops/heights, among heavy machinery, or in dangerous environments. Alternatively, a rider may provide peace of mind for you and your family, regardless of your professional and personal life.
Be sure to speak to your insurer about riders during the quoting process, as riders typically raise your premium pricing.
Step 1: Request Multiple Life Insurance Quotes
Now that we’ve covered the need-to-know life insurance lessons, let’s chat about the best way to buy (and save on) life insurance for you and your family.
To start, you’ll want to get quotes from every life insurance company that meets your basic criteria (like term vs permanent plans, term length, and coverage amount). Quotes are usually free, and you’ll only need to submit a portion of your personal information for a formal application (some insurers will even allow you to get a quote and apply simultaneously).
We recommend you field quotes from several insurers, compare the pricing and coverage details, and apply for your top choice.
Need a place to start? Check out our list of top-rated life insurers:
Step 2: Fill Out the Application
Once you find your insurer, it’s time to apply for coverage.
Many of the life insurance companies on our list do not require in-person medical assessments, making the application process 100% online, averaging about 10 minutes from start to finish. Response times are equally quick; insurers might approve your application in as little as five minutes after submission.
To verify your identity and access your medical records, the bulk of the application will require you to submit personal information and give consent/release for additional areas of information, such as your medical records. You shouldn’t need any special paperwork handy, other than your physical ID (such as a driver’s license) and the memory of your social security number (a copy is not typically required).
Be prepared to provide information such as:
- Your Name, Address, Date of Birth, and Social Security Number
- Your Height, Weight, and Gender
- The ID Number of Your License/Identification Card
- Your Occupation and Estimated Salary
- Your Net Worth (Savings, Investments, Property)
- Lifestyle Details: Hobbies, Smoking Status, Drug Use/Alcohol Use Status, etc.
Be Upfront on the Application
In life insurance, honesty is the best policy. When applying for a policy, be as honest and detail-oriented as possible: the legitimacy of your contract might depend upon it.
When you apply, life insurance companies need to see an accurate snapshot of your professional and personal life to know how to fairly offer you protection. Insurers especially need to know if you participate in any high-risk hobbies: skydiving, rock climbing, heli-skiing, or some other activity that incurs some risk. If you’re an adrenaline junky, that’s okay: you can still get accepted for life insurance, but your premiums might be more expensive than someone who doesn’t participate in those activities.
Although no one wants to pay more for their life insurance, omitting information from your application could nullify the entire contract. A failure to be completely accurate in your life insurance application—even if you make an honest mistake—could result in a benefit penalty or outright annulment of your policy.
To avoid any mistakes or omissions, we recommend you take some time before you apply for a life insurance policy to answer the following questions:
- Do I participate in any high-risk or extreme hobbies?
- How much do I exercise?
- What is my diet like?
- Do I smoke, drink alcohol, or use any drugs? If so, how often?
Be Prepared for a Phone Interview or a Medical Exam
The majority of the life insurance companies listed on our site are exam-free, but your insurer of choice may still require a medical exam or phone interview.
If you’re required to take a medical exam, it should only take about 30 minutes. Your insurer will ask you to go to a medical practitioner for what is essentially a checkup, at the insurer’s expense. The practitioner will take a variety of biometric data, such as your height, weight, blood sample, and urine sample.
If you’re asked to take a phone interview, expect this call to last around 20 minutes. An insurance representative will ask you questions about your personal medical history, family medical history, and lifestyle information such as hobbies. For the interview, we recommend you have on hand a basic review of your medical history, hobbies, and lifestyle habits, as well as a basic overview of the general medical history of your close relatives (e.g. chronic diseases, serious illnesses, and operations).
Step 3: Purchase a Policy
If approved, your soon-to-be insurer will send you a contract. Read over this contract carefully: it will include all of your key policy details, such as premium pricing, term length, and coverage amount. Once signed, your coverage kicks in after a contract-designated waiting period (usually about 30 days).
Get Started Today
For a head start on getting quotes from top-rated insurers, just check out the list on our website:
