Purchasing life insurance: A step-by-step guide

Having life insurance can safeguard your family financially in the event of your death, particularly if you have dependents such as children, a mortgage, or significant expenses that rely on your income. Additionally, life insurance can serve as an investment or cover funeral, medical, and other end-of-life expenses.

Buying a life insurance policy can be confusing, with various types of plans available, making it difficult to understand the importance of life insurance.

Before purchasing life insurance, it's important to consider certain factors.

1. Decide how much coverage you need

There are several factors to consider when determining the amount of insurance to purchase.

• What would be the financial impact on your family if you passed away during your peak earning years?
• How much is your mortgage, car loan and other major debts?
• Do you have kids and do you anticipate funding their college education?
• How much do you have in savings, investments and other assets?

There's several different ways to crunch the numbers:

The 10 times method

To obtain a rough estimate, you can multiply your yearly income by ten. For instance, if you earn $100,000 annually, you should aim for a death benefit of at least $1 million (In contrast, most corporate life insurance policies only provide one or two times your salary's worth of coverage.)

The DIME method

Another strategy is to add up your:

• After your death, your family will inherit all your debts.
• Your annual income times the number of years you believe your family will require your financial assistance after your passing.
• Mortgage: The balance on your home loan plus insurance and property taxes.
• The cost of college for each of your children: Education expenses.

Collaborating with a financial advisor will provide you with customized advice.

2. Choose the type of policy you want

The two primary categories of life insurance are term and permanent.

Term life insurance

Term life insurance is more affordable and covers a specific number of years, making it a popular choice for families during their high-earning years when they need protection for their children or mortgage payments.

Two of our top recommended term life insurance options, Ladder and Amica, provide affordable rates and a straightforward application process.

Permanent life insurance

Permanent life insurance offers lifelong coverage as long as premiums are paid, and may also include a cash value component that increases over time. Although more expensive, it can be advantageous for long-term financial objectives such as estate planning or supporting a dependent with ongoing care needs. Several types of permanent life insurance are available.

• A whole life insurance policy has a fixed monthly premium and a guaranteed death benefit, but it is more complex and typically requires the assistance of a broker or advisor for purchase.
• Universal life insurance: Your policy's premiums are invested in the market, which can lower your monthly payments. However, you must monitor your policy to avoid underfunding.
• Final expense life insurance: If your primary concern with life insurance is ensuring that your loved ones are not financially burdened by covering your funeral or other end-of-life expenses, a final expense or burial insurance policy is a type of permanent life insurance. These policies typically have a maximum coverage of $25,000, and you may be able to obtain approval without a medical exam.

One of our top choices for whole life insurance is State Farm, which offers a range of payment options and additional riders such as a waiver of premium, accelerated death benefit, and the ability to add a child's term policy.

Ethos provides a notable final expense policy, featuring a payout of up to $25,000 and complimentary will and estate planning resources.

3. Shop for a plan

To obtain the best deal, obtain rate quotes from at least three providers and take into account the following factors:

Available policy options

Look for life insurance companies that offer the type of policy you desire, such as term or no-exam policies.

Coverage limits

To determine the best fit for your insurance needs, consider the coverage you require and choose providers that offer that amount. If an insurer's minimum death benefit is significantly higher than what you need, it may not be the right choice. Conversely, if you are the primary breadwinner for a family with a mortgage and college-bound children, ensure that the maximum coverage limit will be sufficient.

Restrictions

Before investigating an insurance company, ensure that you are eligible for the policy you want, as not all companies are licensed nationwide and some plans have age restrictions.

Rates

A cheaper policy may have a smaller death benefit, fewer options for riders, or more restrictive requirements for approval. To make an informed decision, it's best to get quotes from multiple insurance companies with the same term length, death benefit, and riders.

Riders

Endorsements, or riders, enable you to personalize your insurance policy. Typical endorsements include converting a term policy to whole life, providing coverage for dependent children, ensuring insurability, and receiving benefits if you're diagnosed with a terminal illness or require long-term care.

Customer service

To ensure you have a policy for life, it is crucial to select an insurance company that provides excellent customer service. J.D. Power's individual life insurance surveys can help you determine how current customers feel about their providers and the claims process. Additionally, you can examine a company's Better Business Bureau grade and the number of complaints filed with the National Association of Insurance Commissioners. It is also essential to consider whether the provider has an easy-to-use website and mobile app, as well as customer service available on weekends and nights.

Financial strength

Assess a company's financial stability by examining its A.M. Best financial strength ratings. A rating of "A" or higher suggests the company is financially secure and capable of meeting its obligations.

4. Apply for a policy

If you choose term life insurance, you can usually apply and get approved online. But, if you select whole life, you may need to work with an agent or broker to guide you through the process.

You will need to submit personal details as part of the application procedure.

• Proof of identity
• Your age and gender
• Personal and family medical history
• Lifestyle habits, including drinking and smoking, any risky hobbies

A medical exam, usually conducted at no cost in your home or office, may be required of you. Additionally, your insurance company may request your credit score and driving history.

Your application will be reviewed by an underwriter to determine your eligibility and premiums, with a response time ranging from 24 hours to several weeks.

5. Review the details and buy your policy

To complete the purchase of your life insurance policy, you must set up payment and notify your beneficiaries.

Reviewing your policy annually is beneficial to ensure it aligns with your financial goals.

How much does life insurance cost?

In October 2024, a term life insurance policy cost approximately $30 per month ($360 per year) for a 30-year-old male in good health with a $500,000 death benefit and a 20-year term, according to Policygenius. Meanwhile, a 30-year-old female would pay approximately $23 per month ($276 per year).

A 30-year-old nonsmoker in good health can expect to pay an average of $440 per month for a whole life insurance policy with a $500,000 payout.

The cost of individual health insurance premiums varies significantly depending on factors such as age, gender, medical history, smoking status, coverage type and amount, and any additional riders added.

How to save on life insurance

Some strategies to reduce life insurance premium costs include comparing rates among companies.

Get a term life policy

Term life insurance is only active for a set period and doesn't build cash value, while whole life insurance is, on average, six times more expensive. It's crucial to choose a term length that provides the most coverage when your family needs it the most, such as when your children are still at home or you're still paying off your mortgage.

Buy it when you're young

Obtaining a level-term life insurance policy at a younger age can result in lower premiums, as the policy's terms will remain the same for the entire policy duration.

Maintain a healthy lifestyle

Regular exercise, a healthy diet, limited alcohol use, and good sleep habits can help you get a better rate from insurers, while not smoking can save you up to twice as much on your policy, according to the UCSF Department of Social and Behavioral Sciences.

Don't skip the medical exam

A policy requiring a medical exam offers lower premiums and higher coverage amounts than a no-exam policy, with a free exam that takes only 30 minutes.

Comparison shop

It's important to compare quotes from multiple insurance providers to ensure that your risk factors are taken into account. Be sure to inquire about any discounts, such as those offered for having a homeowners or auto insurance policy with the company.

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Our goal at CNBC Select is to deliver top-notch service journalism and in-depth consumer advice to our readers, enabling them to make well-informed decisions when it comes to their finances. Each insurance article we publish is the result of thorough reporting by our team of expert writers and editors, who possess extensive knowledge of insurance products. At CNBC Select, we are committed to maintaining our journalistic standards and ethics, even when we earn a commission from our affiliate partners on many offers and links.

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