How to Shop for Life Insurance
We’ve been looking at life insurance from many angles for years: We’ve compiled industry research with provider data, polled experts ranging from estate planning attorneys to financial gurus to insurance brokers, and sat on the line with customer service, all to find what you need from your life insurance provider and who can best give it to you.
Here, we summarize the big points. It starts with you considering what impact you want your life insurance to have on your life now and after you’re gone.
Is your life insurance a safety net or a treasure chest?
Insurance is one piece of a bigger financial puzzle, but it can come in different shapes. The essential question to ask yourself is what you expect your life insurance to do, and how much you can afford to pump into a policy in order to get that desired outcome.
“Life insurance is advertised as a product that is needed by all, and so people jam their financial plan in to fit that product. But you need to look at the greater economic picture. You have to consider need.”
Life insurance is a safety net if...
- You are the primary breadwinner.
- You don’t have many other assets and would leave your family vulnerable without your income.
- You have a young family.
- You have dependents now, but won’t down the road when they fly the nest.
Life insurance is a treasure chest if...
- You want to leave a lot more than enough for final expenses.
- You’ve already diversified your holdings in retirement accounts and investments.
- You are interested in building out an estate plan that involves trusts.
- You view death benefits as a nest egg and a method of moving tax-free wealth into the future.
Choose a policy: term, universal, or whole-life
How you perceive life insurance — safety net vs. treasure chest — translates pretty directly into opting for a term life vs. whole life policy. But there’s another product thrown into the mix — universal.
All three of these major life insurance products have benefits and drawbacks, but depending on your situation one of them will you help you the most, and hinder you the least.
Term is best for most people
It boils down to cash: “The appeal of term life insurance will always be 100% the premiums,” explains J.C. Matthews, a ten-year broker with e-agency Simply Insurance, “There's no other life insurance product in existence that will give you lower rates.” Term insurance is affordable, easy to understand, and good for short-term protection. By the time the term’s up — say, 30 years from now — the idea is that your children will be financially independent, and you’ve accumulated savings in other departments, supplanting the financial need for the death benefit.
"While a term policy designed to offer some protections, there is no escaping the fact that, if the purchaser’s needs change down the road so that they require permanent coverage, they would have been better served by purchasing permanent coverage from the start."
By the time the term’s up — say, 30 years from now — the idea is that your children will be financially independent, and you’ve accumulated savings in other departments, supplanting the financial need for the death benefit.
John Holloway, a licensed insurance broker and a co-founder of NoExam.com, sees term life insurance as the best fit for most middle-income earners. “Because term life insurance is designed to only last for a specified period of time, actuaries are able to calculate mortality and pricing more accurately.”
The downside: If your term expires, but you feel you still have need of a life insurance policy, it can be expensive to renew for another term. And whole-life will be significantly more expensive at an advanced age.
You can protect yourself against unexpected, continued need for life insurance (whether due to a discovered illness or a surprise baby) by purchasing a convertibility rider from the outset. This will ensure that you can re-up or transition into permanent insurance without an exam.
Universal is best suited for those looking into buying life insurance later in life
Both term and whole-life come dear when you are over a certain age, while universal (particularly guaranteed universal) maintains a lower rate while all but promising to still be in force when you need it. That’s because you get to set the age you want to be when it expires, typically five-year intervals up to the mightily advanced age of 120.
Lingke Wang of Ethos Life Insurance and Ovid Life Settlements pointed out a few more features for universal life insurance: “If you can afford it, you can bulk up your premium payments when you’re still working, allow it to be stored up as cash value, then use that cash value to pay premiums later on.” You can even reduce your death benefit amount to owe less.
Whole life is best if you are looking to build life insurance into your long-term financial plan
Whole life, also called permanent life insurance, is a tax-efficient means of holding, growing, and ultimately distributing wealth. As financial consultant and author Chris Jarvis described it, “Whole life is a great tool for forced savings.” You pay in excess of your premium, and this growing pot of cash value grows tax-free.
You can take out tax-free policy loans and, like the proceeds from a trust, the death benefits don’t go through probate (the judicial process by which a will is proved) and come out tax-free. Just know that any funds accessed early will reduce that final payout.
“Not only is whole life insurance more expensive than term, it is also difficult for the average consumer to understand fully.”
The presence of this cash account is bantered about in marketing, but its use-value is fairly limited unless you are maxing it out for tax reasons. Either fully exploiting that account or not giving it a thought, Jarvis argues, are the only two approaches. Putting in a mid-low amount is a waste of money and other opportunities.
“Think of cash value life insurance like a Roth IRA that has a term insurance kicker,” Jarvis said.
The combined presence of investment and insurance in whole-life policies make it difficult for most to parse out what they’re paying for and why. That’s why permanent insurance makes the most sense for those who work with a financial advisor.
Remember: The premium depends on the product
Cost consideration should be a big deciding factor in choosing the right product for you: Whole-life is the most expensive; term is the cheapest if you’re buying early; universal is the cheapest if you’re buying late.
If a large monthly premium would be a financial strain, then a long-term, big-benefit policy type is not for you. If you can’t pay your premiums, you’ll have to give up your policy and the money you’ve sunk into it. You might also be on the hook for a surrender fee, to boot.
Every insurance company is willing to take on different risks
Policies don’t vary enormously between providers, and, on the month-to-month scale, neither do premiums. But you’ll find that factors that raise your rates a couple bucks with one provider won’t ratchet the number up quite so much with another. Taking on risk is what an insurance company does, but they don’t weigh all risks equally.
That’s why you should compare quotes between providers
Ensure that you’re selecting your cheapest rate by seeing how the personal factors you plug in — smoking status, age, gender, general health — impact your quote from various companies. A couple dollars in either direction adds up to thousands
over the lifetime of a policy.
Prove your health, lower your premium
Your premium — high or low — reflects how risky the insurance company believes it is to insure you. You can prove yourself a lesser risk (and get rewarded with a lower monthly bill) by taking a medical exam.
An at-home exam, paid for by the insurance provider, verifies what you were probably already asked to state in the initial quote process: your blood pressure, your heart health, the presence or risk of diabetes, and whether or not you smoke.
If you know that you are in poor health, or believe that a medical exam would turn up results that would harm your insurability, it’s possible to find policies that don’t require them. These are typically universal policies and, in consideration of the fact that your health is unknown, the max death benefit may be kept low. Still, even a small insurance policy is enough to cover the end-of-life expenses of most.
If your main qualm with taking an exam is the fuss, know that a little inconvenience could lead to a much more attractive monthly rate. According to Tony Steuer, taking the exam tends to make costs lower, not raise them. Every step up from average health that you demonstrate lowers your premium, and the bar for average health is low.
Our life insurance reviews
We’ve been reviewing life insurance companies for a while now. Check out our in-depth reviews below for more detailed information about individual insurers: