In the market to buy life insurance? Here are tips to help first timers decide how much insurance coverage they'll need.
There’s nothing like a global pandemic to make people contemplate the need for life insurance. In fact, some insurance companies reported that the number of people buying policies in 2020 jumped, as COVID-19 fears caused consumers to make preparations for their loved ones, just in case. Still, just 54% of Americans have life insurance.
When shopping for life insurance, the best strategy is don't make a rash decision. Instead, take a step back and really think about your situation in order to decide what type you need and how much.
For first-time buyers purchasing life insurance, here are some tips to keep in mind.
Understand what life insurance is
Life insurance is meant to help ease the financial burden on your loved ones in the event that you pass away unexpectedly. In addition to helping with funeral costs and immediate expenses in the aftermath, you also want to think about how your family will get by financially without you going forward. Therefore, your age, your marital status, whether or not you have children and their ages, and your current financial situation should be carefully taken into account when you’re buying life insurance.
Think about how much insurance you need (and how long you need it)
If you determine that purchasing life insurance is a good idea, the next step is to figure out how much you need. Ultimately, you want to be able to answer the question: If I die, will my family be able to afford to continue living their current lifestyle? Some things to think about:
- What is your current income, and how much does it contribute to the household budget? (Note that even a stay-at-home parent might opt for a life insurance policy since the surviving spouse may then have to pay for childcare.)
- How much savings do you have?
- Do you have any outstanding debt?
- What are your current expenses (monthly bills), as well as future ones (i.e. children’s college)?
- Do you already have life insurance through your employer?
Some insurance companies say a simple method for figuring out how much life insurance you need is to multiply your annual salary by eight—more aggressive experts may say to go with a higher multiple like 10 or even 15. For a more customized result, try using an online calculator to plug in your actual numbers, or work with a professional who can help you determine the right amount for your needs.
Learn the difference between term and permanent life insurance
Before you shop around, you should understand the two main types of life insurance. Term life insurance is similar to other insurances (like car and home) in that during the years that you pay for it, you are covered. If you pass away while you have coverage, your dependents will receive the set death benefit amount of your policy. Usually, term life insurance is flexible in that you can set the amount of years of coverage, say, until your children reach 21 years old or until your mortgage is paid. Even older people can benefit from a smaller term life policy, such as if they want to protect their adult children from having to cover funeral expenses and debts they may have. Term life is a simple, and affordable option for most people.
Permanent life insurance premiums are much higher, but they build up cash value over time and cover you until your death. Because this type of insurance is more complex and expensive, it's not for everyone, and you should speak with a financial professional you trust to get some guidance if you're considering it.
Shop insurance rates
Once you have a clear idea of your needs, you don’t want to go with the first company you contact. It’s wise to work with an independent broker who can help run some numbers for you from various insurers. Or, do the legwork on your own and get quotes from a few companies so you can compare. Make sure that when you look at the numbers, you're using the same number of years and the same amount of coverage so you have a fair comparison. Keep in mind that rates will also depend on your age, general health, whether or not you smoke, and other factors. Finally, make sure that for whatever plans you're considering that the premium payments fit your budget.
Think about add-ons
Some insurance policies allow you to add on riders such as “living benefits,” which may allow you to cash in early should you become chronically or terminally ill, and cannot earn income. This is something to consider doing as it can ease the financial stress on your family should you become debilitated.
Choose a reputable company
If you’re considering a policy with an insurance company that doesn’t have name recognition, be sure to do some research first. See how it’s rated by customers and check for complaints with the Better Business Bureau. Even for well-known companies, poke around their website, visit their social media pages, and read reviews to get a sense of their customer service reputation so you can be sure you feel comfortable working with them.
Get signed up
Once you decide which life insurance policy is best for you, follow through to get signed up. You may be able to choose a “no exam” policy, meaning you just have to answer a questionnaire and then you can get started. Or, you might decide to go with a policy that requires a health screening—that approval may take a bit longer. Either way, once you've been approved, don't stop there. Oftentimes, people become preoccupied with other priorities, and they don't finish signing up.
It's never too early to invest in the peace of mind of knowing that your family will be taken care of should something happen to you. Don't wait for the next pandemic or a tragedy to scare you into exploring life insurance options. Follow the steps above to make your first life insurance purchase.