The idea behind life insurance — that it’s one way to help protect loved ones — is fairly simple. But navigating the sea of options and figuring out which policy to go with isn’t always so straightforward.
Below are tips for comparing life insurance policies and understanding the insurance buying process.
Choosing the Right Policy
Before you start reviewing different life insurance options, it’s a good idea to first decide which type of policy you need. The following guidelines can come in handy.
Buying Term Life Insurance
Term life insurance offers protection for a specific time period, usually in five, 10, 15, 20, 25, or 30 years. If you die during that time, your beneficiaries receive a cash benefit.
A term policy can be matched to a particular length of time when coverage is needed. For example, if your top priority is to provide enough income for your dependents to pay for college, then a 20-year policy fits your needs. Or if you need a policy that will help your beneficiaries repay outstanding debts, maybe a 25-year policy would make more sense.
If your budget is limited, buying term life insurance may make more sense. These policies tend to be more affordable than permanent life insurance because they are statistically less likely to pay out than permanent life policies.
Typically, there are a couple of reasons a term policy expires: if the insured stops paying the premiums or if they live past the term of the policy. Renewal is possible, but terms and rates may vary based on the applicant’s health and age. (The renewal is typically in one-year increments and the cost will likely be significantly more than the cost during the initial term.)
Insured people who wish to extend their policies may want to contact different providers to determine how continuing coverage after the end of their life insurance terms generally works.
If your financial needs change during the term of the life insurance policy, contact your insurer. Some may offer a convertible policy, which involves converting a term life policy to a permanent policy in exchange for higher premiums.
Buying Permanent Life Insurance
Permanent life insurance works a bit differently. For starters, it provides protection for the insured’s lifetime, as long as the premiums are paid.
Unlike term life, a permanent life insurance policy will pay a death benefit no matter when the insured passes away. It may also come with a savings component, which can grow on a tax-deferred basis and be used to borrow funds for a variety of reasons or pay premiums. Even if the insured has less than ideal credit, the funds can still be borrowed against. In that case, the death benefit is considered collateral for a loan. (Make sure to check with your insurance provider or other advisor before withdrawing money because taking cash out of the policy can cause it to collapse unless the death benefit or premiums are adjusted.)
In practice, this can mean that when the insured passes away before repaying what was borrowed against the policy, the life insurance company deducts what’s still owed from the beneficiary payout.
There are several other options for permanent life insurance, including:
• Whole life insurance. This coverage provides foreseeable lifelong coverage, which includes a fixed premium and death benefit.
• Universal life insurance. Universal life insurance provides flexible lifelong protection and several cash accumulation options.
• Variable universal life insurance. This type of coverage offers flexible death benefits and several investment options for the cash accumulation component.
It’s important to note that permanent life insurance is typically more expensive than term life insurance. So, when weighing out the options, the cost of the policy might be a crucial factor to calculate.
Recommended: Term vs. Whole Life Insurance
Calculating the Right Amount of Coverage
There are several different ways to calculate how much coverage is necessary. Some insurers recommend multiplying the insured’s salary by five or 10. While that can be an effective rule of thumb, be sure to account for all your beneficiaries’ anticipated needs. For instance, you might need a higher coverage amount if you have children and plan on helping them pay for college. On the other hand, if additional resources or assets are available to your beneficiaries at the time of your death, a lower coverage amount might make more sense.
Another option is to use an online life insurance calculator to estimate the cost of different levels of coverage. If you go this route, be sure to include all the debt that beneficiaries or an estate may be responsible for, including shared revolving debt.
Keep in mind that the amount of life insurance coverage you choose will impact the price of your monthly premiums.
Comparing Life Insurance Providers
Once you’ve determined the right type and amount of life insurance coverage you need, it’s time to gather life insurance quotes. Look for insurance companies with established financial histories, strong consumer ratings, and flexible product offerings. Several credit rating agencies look at insurance providers’ overall financial strength and their ability to meet existing insurance obligations (i.e., paying out the benefits).
But ratings aren’t a guarantee, so be sure to review ratings for all the companies you’re considering. For example, A+ and A++ are A.M. Best’s superior ratings. They denote companies that, according to the agency’s analyses, have shown an exceptional ability to meet their insurance obligations and have evidenced financial strength. (All 50 states have a program to ensure that insurance proceeds are paid if an insurer becomes insolvent.)
Recommended: How to Buy Life Insurance in 9 Steps
Gathering Multiple Life Insurance Quotes
Some providers require you to complete a simple online application before you receive a quote. In order to provide an accurate quote, the insurance company may ask you to share some personal details, such as your age, location, gender, health, and desired coverage.
Since permanent life insurance policies tend to be more complex, it can be wise to consult with an agent who can help you compare the pros and cons of different types of policies.
Comparing Life Insurance Quotes
Here are some things to pay close attention to as you’re reviewing life insurance quotes and considering which policy meets your needs.
Cost
The cost of a policy is generally determined by underwriters employed by the life insurance provider. They look at numerous factors, including applicants’ age, health conditions, and medical history to determine the risk for covering them.
While each provider may use similar methodologies, costs can vary depending on the amount of coverage they are willing to provide and the price paid by the insured.
Again, the value of the company and the services offered can also play a role in how much a policy may cost. So while aiming to get the lowest monthly bill may seem like the right solution, it’s wise to evaluate if that lower-priced option can provide the desired coverage over the life of the policy.
Customization
Since no two people have the same financial goals or coverage expectations, some insurers offer policies designed to match a given applicant’s specific needs.
For example, insurers may offer different riders or payment plan options to customize a policy to fit an individual’s goals. Insurers who offer more flexibility might be a better fit for some buyers.
Product Range
Buying life insurance from a company that offers a wide range of products is not only a convenient way to shop for insurance, it may even help you save money. That’s because insurance companies sometimes offer discounts for bundling multiple insurance policies together, like life, automobile, or rental insurance.
People shopping for life insurance can review the other products each insurance company offers to determine if buying a bundled policy can save time, money, and the potential hassle of working with more than one provider.
Long-Term Cash Value Potential
Since permanent life insurance has a cash value component that can grow over time, it’s important to factor this trait when comparing each policy’s potential value. Although low-cost policies may seem like an attractive option, they may not provide as much coverage over the life of the policy.
For buyers who prioritize cash value and dividend distribution, picking a life insurance policy that offers either or both of those features may be a good choice. But keep in mind: Policies with higher dividend payouts are, typically, more costly each month. Many policies have guaranteed rates of return depending on the investment options. However, the market will often outpace the guarantees in insurance policies so consider your investment objectives and risk tolerance before getting a life insurance policy as an investment vehicle.
Using an Agent
While it’s possible to buy life insurance online, sometimes it’s wiser to contact an insurance agent. Because different life insurance products come with varying fine print details, an insurance agent could help buyers grasp the key differences between policies and products. Buyers can also ask them any lingering questions.
An agent who is well versed in the product’s details can also explain important distinctions like cost, coverage limits, and varying terms. It’s worth noting that any insurance agents are paid on commission. In most cases, you will not pay more by going through an insurance agent. The commission is included in the quote and goes to the insurer if the policyholder buys a policy directly from an insurance company.
The Takeaway
Life insurance can be a good way to provide for your loved ones after you’ve died. There are different types of policies to consider. Term life insurance offers coverage for a specific period of time; if you die during that time, your beneficiaries will receive a cash benefit. Permanent life insurance offers protection for the rest of the insured’s life and will pay beneficiaries a death benefit no matter when the insured dies. It often comes with a savings component that can grow on a tax-deferred basis and be used for a variety of purposes.
As you begin to research companies and gather quotes, take note of the cost, ability to customize, long-term cash potential, and range of products the insurer offers. An agent can help you make sense of your options and select the plan that’s right for you.
If you’re shopping for life insurance, SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. You can apply in just minutes and get an instant decision. As your circumstances change, you can easily change or cancel your policy with no fees and no hassles.
Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
Ladder offers coverage to people who are between the ages of 20 and 60 as of their nearest birthday. Your current age plus the term length cannot exceed 70 years.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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