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Six Things to Look for in a Life Insurance Policy
If you’re an adult with a house, a spouse, kids, or any financial liabilities, and you should consider buying a life insurance policy. With life insurance in place, you won’t have to lose sleep worrying about the financial burden your loved ones would inherit if you were to die unexpectedly.
Here at The Simple Dollar, we’re a big fan of term life insurance since it’s affordable to purchase and fairly easy to qualify for if you’re in good health. In terms of how much life insurance coverage you should buy, many life insurance agents suggest you purchase five to 10 times your income in coverage ($250,000 to $500,000 for every $50,000 you earn). However, you may need even more coverage if you have a lot of liabilities, or kids, or expenses coming up in the next 10 to 30 years.
The length of your ideal policy also depends on your personal circumstances. If you’re fairly young and want income replacement for your entire career, then a 30-year term policy could be ideal. If you’re older, or you have few debts and tons of savings, on the other hand, a shorter-term life insurance policy might be better.
At the end of the day, it’s smart to think through how much coverage you need and how long it should last. However, you should also keep in mind that any coverage is better than nothing.
What to Consider When Buying Life Insurance
But, what should you look for in a policy? And how can you know whether the life insurance you’re considering is actually ideal for your needs? Because of the wide selection of life insurance companies and policy details available, it’s smart to conduct some due diligence before you dive in.
To help with the process, we interviewed Chris Huntley, president of Huntley Wealth & Insurance Services and author of “25 Best Ways to Save 50% (or More) on Life Insurance.” Here are the main factors Huntley says you should look for – and try to steer clear of:
When I wrote about why I would never buy whole life insurance last year, I shared some basic quotes I received for both whole life and term life insurance as a 37-year-old woman. Long story short, a 20-year term life insurance policy for $750,000 would set me back $717.50 annually, while a whole life policy with the same amount of coverage would have cost $9,875 per year.
This is obviously a huge disparity, and one consumers should know about when weighing the pros and cons of buying whole life or term life. While whole life insurance provides a death benefit your whole life (until you die), it’s a stretch to say the benefit of perpetual life insurance is always worth the added expense.
As Huntley notes, however, scoring an affordable life insurance policy is not only important now – it is important for the future, too. That’s because, when life happens and times get tough, life insurance is often one of the first items people stop paying for.
If you buy a policy that’s affordable, you’ll be much more likely to be able to hold onto it if you have to make any serious cuts to your budget.
“The problem is, if you let your policy lapse, you might find it incredibly expensive to reinstate, or even impossible if your health has changed,” says Huntley.
The bottom line: Plan on a premium you can afford to pay long-term, he says.
#2: Immediate Payout
Huntley notes that, if you see a commercial on TV offering you quick and easy coverage with no medical exam, it’s probably from a company that offers what’s called “simplified issue” life insurance. Because there are few questions on the application and no exam, it’s true that you can easily qualify for these type of policies.
However, there’s often a two- or three-year waiting period after purchase before they’ll pay out 100% of the proceeds upon death. If you want life insurance coverage that starts right away, this is obviously imperfect.
Huntley says that to make sure your policy pays 100% of the “face value” from day one if possible. “Stay away from simplified issues policies unless it’s a last resort,” he says.
#3: Underwriting Leniency
You could be making a huge financial mistake if you buy a policy from a company that does not treat your particular health or personal activities fairly, says Huntley. Companies range widely on how they price out risks like diabetes, smoking, travel outside the U.S., or your family’s medical history.
“Be sure to speak to a knowledgeable independent agent who can ‘shop’ various companies to find the best rates for your particular situation,” says Huntley. If you don’t, you risk overpaying for a life insurance policy – or not being accepted altogether.
#4: Automatic Payments
While there are certain bills you may want to pay manually, life insurance is one of those recurring expenses that is usually best set up as an automatic bank draft or credit card charge – especially in the case of term life insurance where your premium stays the same.
The reason for this is simple: If you forget about your life insurance bill and don’t make your payment on time (or within your grace period, which is usually 30 days), your policy may be cancelled altogether. At that point, your issuer may not allow you to pay back your missed premiums, and they’re not required to reinstate your policy, either.
Look for a life insurance company that will let you pay your monthly premium automatically, and you’ll never have to worry about letting your policy lapse or missing a bill.
#5: Conversion Feature
If you’re looking into term life insurance, beware of policies that don’t allow you to “convert” your term policy into a permanent one, says Huntley. This feature typically allows you to exchange your term policy for a permanent plan (such as universal life or whole life) without proving you’re still healthy.
“If you buy a 20-year term life insurance policy, for example, and decide after 19 years that you still need coverage but have developed some medical conditions since your initial term purchase, the conversion feature would allow you to keep your coverage, whereas you may not be able to qualify if you were to go back out to the market for a new policy,” says Huntley. “Most term policies include a conversion feature, but not all, so be sure to find out.”
#6: Living Benefits
Huntley says that, thanks to a new wave of life insurance companies striving to meet consumer needs, there are more ways than ever to use life insurance while you’re living.
For example, many newer policies give you the option to receive payments if you get a chronic illness or need to be placed in a care facility, Huntley says. “Several companies also give you 20- or 25-year windows at which you can get back some or all of your premium paid into the policy if you no longer want or need the coverage,” he adds.
If you want the option to get cash out of your life insurance policy if you get cancer or need end-of-life care, then looking for a company that offers this option is a smart move.
#7: What type of insurance is best suited for you
The most common life insurance policies fit into one of two categories, term and permanent. While all life insurance policies pay a death benefit to beneficiaries, some also serve as an investment vehicle.
Term life insurance covers the insured for a defined period, like 20 or 30 years. When the term ends, the coverage terminates, unless you decide to renew the policy. Most term life policies provide level term coverage, which means the face value remains the same from the beginning to the end of the term.
Decreasing term policies feature a decreasing death benefit during the policy term. Term life policies don’t build a cash value. When the term ends, you’re no longer covered, with no return of the funds you paid. Typically, you must pass a medical examination to qualify for this type of coverage.
Whole life insurance provides a fixed death benefit and covers you from the time you purchase a policy, until you die. Whole life policies require you to pay a set premium on a scheduled basis. Unlike term life, whole life builds a cash value, based on a value set by the insurer. Once the policy matures, you can take out a loan from the policy or cash out a portion of its value if you decide to drop the coverage.
Universal life insurance is a modern variation of whole life insurance. While you can’t change the face value of a whole life policy, you can increase the death benefit of a universal life policy down the line, provided you pass a medical exam (which most insurers require).
Universal life also gives you the flexibility to change your premium payments, after the policy matures. Universal life policies also provide an investment feature, which typically earns money on your investment based on a money market rate.
Term life is the most affordable type of life insurance. It requires you to make monthly payments throughout the term, which you can usually set up as an automatic payment. Term life is a great option for young adults starting a family. For instance, you may purchase a 20-year term policy to cover you until your kids leave the nest.
Oftentimes, whole life and universal life policies don’t require an initial medical exam for people under 50. While whole life policies are more expensive, they provide coverage throughout your life and build a cash value.
People buy whole and universal life policies for various reasons and at different times in life. Some parents purchase these types of policies for their children as minors, to provide coverage in case something unexpected happens, and to get the kids started on the road to investing.
Other people purchase whole life policies after their kids have left home to provide a death benefit for a surviving spouse. In addition, some adult children buy whole or universal life policies for their aging parents to provide them with protection in their golden years or to protect against the loss of assets associated with long-term care expenses.
Long-term care riders are another option commonly offered by life insurance companies. The rider pays a percentage of the face value of your policy — typically 1% to 4% — if the insured becomes terminally ill or needs long term care. Usually, these riders cap the level of benefit.
#8: Are looking for life insurance as a means for investment?
If you’re looking for an investment vehicle in a life insurance policy, term life won’t get you there. Term life only provides a death benefit for a defined period and doesn’t build a cash value.
Whole life insurance builds a cash value over time, but universal life provides potentially higher dividends, because they accumulate value based on a money market rate of interest. However, two other types of life insurance can provide even better investment vehicles, but only if you have some investment experience.
Variable life policies feature a death benefit, along with a savings account. These flexible policies enable you to choose how you want to invest your savings, in bonds, money market mutual funds or stocks. But, a variable life policy carries more risk than whole life and universal life policies. If your investment doesn’t perform well, you could end up with a reduced death benefit and investment.
Variable-universal life policies combine the flexibility of a universal life policy and the investment options of variable life coverage. This type of policy enables you to adjust your death benefit and premiums, while also allowing you to choose the type of investment you prefer for the savings account. But, like variable life, variable-universal life policies carry the risk of losing part of the death benefit and savings when investments tank.
#9: If I am on a budget or have bad credit how does that impact my life insurance application process?
For most people, term life coverage is the most affordable life insurance policy. A 25-year-old, non-smoking mother in good health can often purchase a 20-year, $500,000 term life policy for as little as $16 per month.
If you’re on a super tight budget and can’t afford the rate for the term and amount of coverage you need, consider purchasing a policy based on the amount of coverage you need, but for a shorter term. Most term life policies enable you to renew at the end of the term, but at a higher rate. If you buy a 10-year policy, but need 20 years of coverage and expect your income will increase over the course of a decade, you’ll be able to afford the renewal rate.
Most states allow insurance companies to consider your credit rating when determining your premium, because statistically, people with poor credit file more insurance claims. If you have poor credit and need car insurance, you can expect to pay a higher rate than someone with good credit. However, when it comes to buying life insurance, your credit score is usually less important.
Underwriting guidelines vary among companies, but most insurers place more emphasis on a life insurance applicant’s life expectancy, than their credit rating.
For example, when reviewing applications for term life policies, Haven Life, whose policies are underwritten by MassMutual, does not consider an applicant’s credit score when determining eligibility or rate. If you ever filed for Chapter 7 or 13 bankruptcy, a provider may deny your application, but only if you’ve recently filed or you’ve fallen behind on payments in the last couple of years.
How to Save Money on Life Insurance
Now that you know what to look for in a life insurance policy, you need to know the best ways to score a policy at the perfect price. As you shop for life insurance, consider these money-saving tips:
- Compare the costs of term and whole life before you buy. If you decide whole life insurance is best for your needs, that’s perfectly fine. But you still might want to shop around for term life insurance so you can compare costs. In the example I shared above, whole life insurance could have cost me $9,000 more per year for the same $750,000 in coverage as a term policy. In the case of such a big disparity, you might discover you’re better off buying term life insurance coverage and saving the difference yourself.
- Get several quotes online. Applying for life insurance coverage online or with a broker that sells multiple policies is a much smarter move than visiting a life insurance agent that works with a single company. Ideally, you’ll want to get life insurance quotes from several companies so you can compare costs as well as policy details.
- Don’t buy way more coverage than you need. Buying the right amount of life insurance (and not too much) is one way to cut down on costs. A good life insurance calculator can help you figure out how much coverage you need.
- Buy now, not later. Last but not least, don’t put off your life insurance policy for another year – or even another week. The rates you’ll pay for coverage will go up every year, no matter what. The sooner you buy, the better chance you have at affording the level of coverage you need.
Life Insurance Policy Simplified:
- Term life is the most affordable life insurance.
- Avoid simplified issue policies, because they don’t offer an immediate payout.
- Avoid overpaying by requesting quotes from several insurers or a broker.
- Set up automatic payments to prevent a coverage lapse.
- Shop for term life policies that allow you to convert to permanent coverage.
- Search for term policies that offer a long-term care rider.
- The most common life insurance policies include whole and universal life, which build cash value over time, and term life, which only provides a death benefit.
- Variable life and variable-universal life policies offer the best investment options, but can pose higher risks if your investments don’t perform well.
- Many insurers don’t charge higher life insurance rates to people with poor credit.