Tips for How to Compare Life Insurance

A life insurance policy is an investment that protects your loved ones from financial disaster when you pass away. Unfortunately, there are many misconceptions about life insurance that could result in you purchasing the wrong policy or not getting one at all.

Finding the best life insurance as well as the most affordable life insurance for your needs is easy when you know what to look for. Learning about the different types of life insurance, determining how much coverage you need, understanding factors that affect costs and investigating different ways you can buy insurance can help you find the right coverage for you and your family.

• Comparing Life Insurance: The Basics
• Determining How Much Coverage You Need
• Factors That Affect Your Life Insurance Costs
• Ways to Get Life Insurance
• The Best Life Insurance Policy for You
• Tips for Buying Life Insurance

Before comparing life insurance policies, understanding the basics can help give you a solid foundation of what to look at and why. From defining what life insurance is to figuring out how much coverage you need, familiarizing yourself can help you better plan for your family’s long-term financial needs.

Life insurance policies grant death benefits to your loved ones when you pass away. In other words, a beneficiary is given a non-taxable lump sum after your death that can be used for various purposes — to pay for your funeral, address any debts or help with their living expenses. In some cases, they may also include a cash value that builds over time and can be accessed while the policyholder is alive.

Life insurance premiums must be paid on a monthly, quarterly, annual or semi-annual basis. Premiums are calculated based on factors like your age, coverage level, health status, type of coverage and more.

However, not all deaths are covered by insurance policies. For instance, if you work in a high-risk industry or have dangerous hobbies — such as sky diving — insurers may add a clause prohibiting a payout if your death results from your high-risk hobby or job. Your beneficiary may also not receive a payout if you're murdered and they're tied to your death.

A life insurance policy can pay for various expenses after your death — be it your funeral, federal or state estate taxes, your beneficiary’s living expenses, or even contributions to a desired charity. Because of these benefits, most people believe that life insurance is only useful if you have dependents — but this isn’t always the case.

Not only is life insurance more affordable than people think, but it can be helpful for just about anyone. Some policies accumulate cash value over time that you can use to supplement your retirement or help with large purchases, such as a home. There are even specific endorsements, called “riders,” for chronic and terminal illnesses that can let you access some of your death benefit while you’re alive, under certain circumstances. For instance, if you are terminally ill and are given a certain period to live, you may use your death benefit to help pay for care and expenses.

When purchasing life insurance, you may come across two different types: permanent and term life insurance policies. Understanding the difference can help you figure out which one is best for your needs.

Permanent life insurance is active for the entire duration of your life. The three most common types of permanent life insurance are whole, universal and burial:

• Whole Life: This is the most common type of permanent life insurance. It includes both a death benefit and an investment component. You typically pay a fixed premium for a specified death benefit, and the investment grows over time.
• Universal Life: This policy also includes a death benefit and investment component. It’s more flexible than whole life because you can increase or decrease your premium payment. When you reduce the amount you pay in premiums, that amount is taken out of your policy’s accumulated cash value.
• Final Expense: A final expense policy is an affordable form of permanent life insurance that provides a small death benefit to handle funeral and burial costs. It does not have a cash value.

In general, most permanent life insurance comes with a fixed premium, a death benefit and cash value. The cash value is the savings component of your policy that grows tax-free each year, which you can withdraw or loan after a certain period. While the premiums for permanent life are typically higher than term life, the guaranteed lifetime coverage and cash value often make up for it.

Term life insurance is a more affordable option than whole life insurance as it only provides coverage for a specified period. Coverage can last anywhere between one to 30 years, after which it expires and has to be renewed. Unlike whole life insurance, however, it does not come with cash value.

Life insurance payouts come in different amounts — while you can set it to $100,000 or anywhere upwards of $1 million, the coverage you qualify for depends on your needs, income and overall net worth. However, it's crucial that you have enough coverage to secure your family's financial future or meet any other important needs; unfortunately, many U.S. adults are inadequately covered.

To get an idea of how much coverage you need, multiply your annual salary by 10 and then add your current and planned financial obligations — be it the mortgage for your house, outstanding student loans or the cost of your children’s education.

For instance, if you make $70,000 a year, your base payout would be $700,000. If you have around $30,000 left in student loans, a mortgage of $250,000 and an expected education expense of $100,000, we’d recommend considering upwards of $1 million for your death benefit.

You may also want to consider the expenses of your beneficiaries — do they need special care? Do they plan on going to medical school? Consider as well your plans for the future, such as if you plan to move in the next five years to a better, more expensive home or are considering going back to school. The additional debt should be included in your payout to alleviate the load on your family and loved ones.

Various factors help determine your life insurance premiums, and every provider weighs those factors a little differently. From age and gender to your coverage and term length, knowing what affects your premiums can give you an idea of how much you can expect to pay before applying.

If you're just about to get life insurance, there are a few ways you can do it: online or in person, and through an insurer, agent or broker.

Purchasing a policy directly from an insurer is easy — you can do so through their online quote generator or by visiting one of their branches to speak to an agent. However, if you’re still in the planning or researching stage, it can be time-consuming to gather multiple quotes through this method.

You can also purchase life insurance from an agent or broker. Like insurers, they can be reached online or through in-person visits, but the only difference is that they can give you quotes from different insurers and help you evaluate your options better.

The best life insurance policy depends on your current needs and financial situation. While a whole life policy may be your ideal choice, a term policy might be better given your current budget. Carefully assessing your options is the best way to find the right coverage for you.

Life insurance can be a bit confusing for anyone looking to get their first policy. Find answers to the most frequently asked questions about life insurance below.