Life insurance is something most people don’t think much about… until they start a family or buy a house, and suddenly realize they’re grown-ups. When you’ve got a spouse or kids, you need to make sure they’ll be financially secure if you’re not around — without diverting too much money from other goals like retirement or college savings.
So finding a cheap life insurance policy that offers the right amount of coverage is a main concern of any first-time buyer, as well as those simply looking for a better rate. For your convenience, I’ve created a life insurance quote tool so you can find the most affordable life insurance in your area.
What You Need to Know about Life Insurance
You generally have two options for life insurance. There are various hybrids and nuances, but a life insurance policy is usually either:
- Term life insurance
- Whole life insurance
What is term life insurance?
Term life insurance acts much like your auto insurance, so it’s much easier to understand. Like your car insurance, you pay a premium each month for the period of time you wish to be covered, and if you don’t use the insurance (i.e., you don’t pass away) in that time period, the insurance company keeps the money and does not have to pay a death benefit. This is just like your auto policy — if you don’t get into an accident, there is no payout from the insurance company.
Term insurance is generally cheaper because the coverage is only provided for a specific period of time. In most cases, the insurance company will never pay out because you will outlive the term and the policy will expire. However, term life premiums can and do rise with age, whereas whole life premiums stay steady. Late in life, they can become cost-prohibitive.
What is whole life insurance?
Whole life insurance is a life insurance policy that remains in force for the insured’s whole life. In this case, you or your survivors are guaranteed to receive a payout from the insurance company as long as your payments are current.
Whole life insurance has an investment growth component to it where dividends are accumulated tax-deferred. Part of your premium pays for the death benefit and part of your premium is invested to produce these dividends and increase your policy’s “cash value.” Your cash value typically can be accessed during your lifetime, which is a nice living benefit.
Your premium payment is generally higher than with term life, but does not increase over time. Your premium stays the same once your policy is in force no matter what your health or age is. Additionally, because of the cash-value buildup, at some point you can usually use the growth in your policy to pay your premium. This way, you can have a policy in force for the rest of your life without making another out-of-pocket premium payment.
What impacts your life insurance rates?
Once you choose the type of insurance you want, your actual insurance cost is based on many factors, with age and health being the biggest factors. For either term or whole life, the following factors can impact how much you pay:
- Overall health
- Family history
- Lifestyle (high-risk activities)
How I Use Life Insurance
Experts argue about which is best, but there is a specific purpose for both term and whole life insurance. If you structure them properly you can create a very affordable life insurance program that is comprehensive enough to meet all of your goals.
Here’s how I approach life insurance:
- I use term life to cover my fixed debts, or expenses that are likely to only exist for a fixed period of time.
- I supplement long-term coverage with a whole life policy that has more growth and tax-advantaged features.
I am 34 years old, married, have two young children, and have a home with two vehicles.
I use cheap term life insurance to cover debts, and to take care of my wife, kids and family expenses.
If I died tomorrow, here is what I would want covered:
- My mortgage debt, so the house will be paid off.
- Vehicle ownership expenses, so my cars will be paid off.
- Approximate child expenses for 18 years.
- Cost of four-year college tuition for two kids.
These expenses end roughly 20 years into the future, so I try to match my coverage term to that time frame.
When I started looking into life insurance, I had recently graduated from college and didn’t have enough money to purchase a whole life policy, so I bought a term life policy.
I made sure my term could be converted to whole life insurance. I value this conversion flexibility because I like the idea of growing my money tax-deferred, and estate tax policy is in constant flux.
I plan to leave money to my children, and this gift may be taxable in the future. I can use whole life to cover any tax implications for my kids at the time of my death.
Granted, I do understand that what I’ve outlined here may not be the cheapest, but I wanted to provide some personal details that may help you.
How much should you buy, and when should you start?
A very general rule of thumb is to purchase at least 10 times your annual salary in life insurance. So, if you make $50,000 per year, you would want to look at a $500,000 life insurance policy. As you can imagine, this broad calculation might not fit your unique situation.
For a more accurate approach, follow these steps:
- Add up any mortgage or student loan debts you want covered.
- Add up your monthly expenses for the period of time you want covered.
- Add in any educational or other extraordinary expenses you want covered.
- Finally, add in any other obligations you do not want to burden your survivors with (e.g., taxes or other debts).
Going through this exercise will give you a more realistic portrayal of how much coverage you need. An additional benefit to this process is that, if your quotes end up coming in much higher than your budget, you can remove items from your list and adjust your number to arrive at a more reasonable premium payment.
How to get started
Generally, when you experience major life changes, like purchasing a home, getting married, or having children, you start to accumulate many financial responsibilities that you want to protect with life insurance.
There really isn’t much of a need to buy term life insurance before these events.
However, many people choose to start whole life insurance programs at a very young age because cheap insurance is so plentiful and the policy owners can milk the cash value growth for a longer period of time.
Here are the two most basic keys to getting cheap life insurance:
- Target a term life insurance policy.
- Get quotes from multiple providers.
If you want to get the most affordable life insurance, there are also several additional things you can do to minimize costs. We have six tips to help you find cheap life insurance, which I’ll be sharing with you in this article.
It’s true there are factors you have less control over when it comes to the cost of life insurance — such as your age — but there’s a lot within your control, too.
Life Insurance Calculator
To help determine how much life insurance you or your family members need, we’ve created this calculator that take into account your life situation.
Tips to Find Cheap Life Insurance
Beyond those two basic principles, there are other ways you can lower your rate as well. Life insurance can be tricky to understand. Many companies analyze your health differently and also calculate risk in slightly varying ways. Following these steps is key to finding the cheapest life insurance for you.
Tip #1: Get several quotes
As with most purchasing decisions, finding many options will give you an edge. Most people don’t bother obtaining multiple quotes because it’s time-consuming. However, using an online life insurance quote tool is the quickest way to get quotes from several reputable insurers at one time.
Tip #2: Avoid riders and additional insurance
If your bottom-line goal is to find the cheapest insurance possible, you’ll want to say no to any add-on insurance or policy riders. Examples of add-ons include the option to purchase child policies or more insurance at a future date without going through the medical exam process again.
You can think of riders as à-la-carte options to supe up your policy. Riders can be purchased to accelerate your death benefit and pay you out for medical expenses if you have a terminal illness but haven’t passed away yet. Term conversion is another rider that gives you the option to convert your term policy to a permanent (whole life) policy.
A caveat: Choose your coverage wisely. If you need coverage for your kids, then it’s OK to pay for the extra coverage. Also, if you’re someone who is on the fence between term and whole life coverage, the term conversion rider will give you that option down the road for a few dollars per month.
There is no one-size-fits-all method to buying life insurance, but having as few riders as possible will keep your rates low.
Tip #3: Say no to one-company local agents
Experts are available to help you through the process of purchasing life insurance, and many of the largest insurance companies have their own networks of agents. If you need the human touch, I would avoid one-company local agents because they usually represent the interests of their own company, which essentially lowers your options. If they happen to represent the cheapest and the best life insurance company, that’s another story!
A good strategy is to seek out a financial advisor, like Edward Jones, that covers several different insurers. This way, your advisor will be more impartial even though he or she has personal preferences.
Tip #4: Don’t wait
Generally speaking, the younger and healthier you are, the cheaper your insurance costs will be. If you’re in your mid-20s and are thinking about lifestyle changes like marriage and kids, it can pay off to buy a policy now rather than waiting. The biggest reason is that you never really know how your health will change at any time.
As a summer intern, I sold my future father-in-law a life insurance policy on his 19-year-old daughter. After that, she was diagnosed with a condition that would prevent her from being insured today. Not waiting made all the difference.
Tip #5: Bundle coverages if you can
One way to receive discounts on your quoted life insurance rate is to bundle coverage with your car, home, or other insurance. Large insurers like State Farm can be fairly cheap life insurance providers because they give you the most options to bundle.
A good strategy to maximize your bundled discounts is to review all of your insurance at the same time and pick the company that can give you the best deal for switching. This is more work in the short term, but can pay huge dividends and offer great savings in the long run.
Tip #6: Check the financial stability of the insurer
Cheap life insurance can be a very bad deal if the insurer isn’t financially healthy enough to pay out when the time comes. After you get a few online life insurance quotes, always check the financial reputation of the insurer so you don’t pay premiums for years only to find out the company can’t pay out any claims.
A.M. Best is an insurance rating agency and provides up-to-date information on the financial health of most life insurance companies. Use them to check on a company, especially if you haven’t heard of them or if they’ve started operations within the last 10 years.
Life insurance for New Parents
Life insurance products have expanded dramatically over the years and you may be wondering what policy will work best for your family’s needs. One of the benefits of purchasing a life insurance policy today is the variety and ability to customize single or multiple policies. Becoming a new parent can be challenging and exciting. Considering a life insurance policy option should be on that to do list during early parenthood.
Why is life insurance important to parents?
A proper life insurance policy can provide a payout to supplement or continue your income in the event that you pass away. It may also include riders to the policy for your own children to cover funeral expenses. You should consider life insurance as a small investment in protecting assets and a standard of living for your children in the event that your death could trigger financial difficulty. The variety of available products means life insurance is more affordable now than ever before.
Term or permanent?
The majority of life insurance policies you choose from will either be in the form of term or permanent life insurance. Permanent life insurance policies are sometimes called whole life. This is because the product is locked in for the life of the holder. Permanent life insurance products can develop a savings over time and have a higher premium. Term insurance policies are relatively inexpensive.
Young parents with a clean bill of health can obtain term life insurance at very reasonable rates. You may want to consider creating a priority list to determine if you need a single product or both types of policies. Some new parents will purchase a whole life policy for a child. The child can then continue making premium payments after they turn 18 or cash it out to receive a savings refund.
Finding a quality insurance product requires prioritizing how this product will be used throughout the course of your life. New parents will incur expenses such as child care and education costs. Some of these costs can be substantial. Consider updating your will to include a trust. A will and insurance trust can ensure that a trustee can make sure funds are used appropriately for minor children in the event that a policy has to be used. It may also break policy amounts into specific financial goals such as paying off a house or providing a set amount for a child’s education.
Whatever decision you make, it can’t hurt to get started by getting a quote from several providers. You can find the most affordable life insurance (whether it’s term or whole) and then decide if it fits within your current budget.
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About this resource:
Created on: October 06, 2015
Updated on: February 17, 2016
Edited by: Sarah Ban, Mike Jelinek
Research by: Michael Gardon