Purchasing life insurance is a significant milestone – one that tends to immediately follow other milestones.
Maybe you just had your first conversation about the subject with a financial advisor or a savvy parent. Perhaps you just got married, had your first child, or started a business, and you’re waking up to the notion that – if you died unexpectedly – people you love would suffer financial hardship. In any case, if that sounds like you: it’s time to start thinking about life insurance.
But how do you figure out the right policy choices? How do you even go about purchasing a plan? It’s such an uncomfortable conversation to have with a sales agent – necessarily involving hard questions, like: “Is there a will?” or “Do you want to be resuscitated?” and “Who gets the money when you die?”
Yikes.
How to Begin:
Unlike homeowners or car insurance, you don’t have to buy life insurance. You may have a moral obligation, or a logical obligation – but you’re under no legal obligation. It’s important to understand that, since the decision to purchase a policy is entirely your own, you bear full responsibility for the ensuing results.
But essentially, life insurance works like any other insurance policy. You pay a fee in the form of monthly premiums in exchange for an insurer’s legally-binding promise to pay out a lump sum if XYZ event(s) occur.
In the case of life insurance, that payout – called the “death benefit.” It goes to a named beneficiary – a person, or people, of your choosing – who may then use the funds however they see fit. It assists, in particular, with the enormous expenses typically incurred by the successors of a single-provider family. Childcare and housing costs are high enough – but funerals can be as expensive as weddings. An extra infusion of cash can prevent the lives of your loved ones from unraveling even further.
What Type of Policy to Choose?
There are dozens and dozens of different types of life insurance. It’s impossible to break it all that down in one article – and who would sit through that, anyway?
For now, only one distinction matters. The two categories you’re most likely to encounter are Term Life Insurance and Whole Life Insurance.
They couldn’t be more different.
With Term Life Insurance, your coverage (like you) will eventually expire. In this case, it’s a question of weighing the odds. Terms are set at 10, 15, 20, 25, or 30 years. If you pass away during the agreed-upon period and the claim is approved, your beneficiaries receive the lump sum. You choose the payout amount, and the premium is calculated according to how high or low that number is.
Unfortunately, you don’t build any equity or additional cash value with term life policies. Chances are, you’ll still be alive at the end of the policy, and you’ll have to re-apply – likely at a higher rate, since by that point: you’re old.
As a result – term life insurance premiums tend to be up to 15 times cheaper than their big brother: permanent life insurance policies. This discrepancy makes life insurance a unique market, where incentives and risk-behavior are highly polarized.
On the other hand, Whole Life Insurance is a particular type of permanent life insurance. It’s much more expensive, because, well – you’re set for life! And since everybody dies, this kind of coverage essentially guarantees a payout.
Another selling point is that, over time, you build equity in whole life insurance policies. Your contributions are invested, growing additional cash value that policyholders can use while they’re still alive. The equity in life insurance plans has the added benefit of helping with the significant medical expenses so often incurred near the end of life.
But in addition to price, the application process poses another major downside of whole life coverage. It’s one of the longest commitments you make in your life, and just getting approved can be prohibitively expensive. Not to mention, it requires a comprehensive, invasive medical examination to determine your exact status of health and any pre-existing conditions. They’ll also go to great lengths to assess any occupational or lifestyle hazards putting you at increased risk of death. They’ll even pull your driving reports. And all of this happens before you even get the quote.
Thankfully, less-invasive options are emerging on the market now, where quotes can be issued using digital exams and telemedicine, rather than expensive trips to the hospital.
So, what’s the best advice for choosing a life insurance plan?
To consider the insurance company as a whole.
If you have other, existing forms of insurance that work – look into those companies’ life insurance policies first. You can often receive “bundling” discounts, and the claims process becomes much, much simpler when you’re mailing everything to the same place.
If you’re going with a new firm, though: first independently confirm that the insurer is financially solvent. Read about their customer service, and consider paying more for better. Seek opinions from regular people who use the insurer about how they’ve been treated. Look for red flags, like pushy agents, fearmongering, and upselling.
And remember: seek counsel before you make any serious financial decisions – especially picking a life insurance policy. It’s always good to chat with a trusted financial advisor, lawyer, accountant, or parent before you sign that paperwork. Your life literally depends on it!
