Permanent vs. Term
There are two main types of life insurance coverage: term and permanent.
Term Life Insurance
Term life insurance is the simplest form of life insurance. It provides a death benefit, or cash payout upon death, for the person insured for a certain time frame, often between one and 30 years. Some companies offer terms up to 40 years. For instance, if you had a 10-year, $250,000 policy and died during the 10-year term, the person you name as your beneficiary would receive the $250,000 death benefit. Most term life policies do not return any of your premiums when the term ends (and the insured person hasn’t passed). Some term policies include a “return of premium” feature, which repays part or all of your premiums, but they cost more. Most term life insurance companies will only offer new policies up to a certain age, around 70 or 80, but this will depend on the length of the policy and your health. The limit may be much younger, like 55 if you’re looking for a 35- or 40-year term.
Permanent Life Insurance
Permanent life insurance policies are designed to cover you from the time you purchase the policy until you die. Unlike term life insurance, permanent life insurance policies build a cash value, which you may be able to borrow against or withdraw from. Because of their permanent nature, they cost more than term life policies—you pay a larger premium in order to build up that cash value, which offsets the cost of insurance as you age. The market offers many types of permanent life policies:
Traditional whole life: These policies state cash values in the contract. They build based on a fixed interest rate set by the insurer. Whole life policies also set a fixed premium per a schedule set up in advance. Your monthly payment may go up or down over time, but all is set forth in the contract. It also means that if you don’t pay the amount as established in the schedule each month, your policy could lapse.Universal life: This form of insurance credits interest to the cash account based on current market rates. In other words, cash values aren’t predetermined at the time the contract is signed. Premiums on these policies can be flexible (in both amount and frequency), if there is enough cash value to cover them.Variable life: These policies build cash value through stock market investments in accounts that the holder chooses. They often look like mutual funds. If investments lose value, you may need to increase premiums paid to keep the policy in force.
Know What Coverage You Need
Before you start looking for a specific life insurance policy, make sure you know:
How much coverage you want How long you need coverage for What type of policy you want to purchase
There are a number of ways to determine your coverage needs, and the result will be unique to you. You may want to start by counting each person you plan to cover, and what their future might look like. If you have children, you might go with a common rule of thumb: Multiply your income by 10, and add on college costs for each of them. Then look for a term policy that lasts at least until they graduate from college. Or, if you want to provide final expenses to pay for burial and other costs, you may only need a $10,000 to $15,000 permanent policy. (Also think about any other final expenses your loved ones may face, such as estate taxes, legal expenses, and medical bills.) Once you’ve figured out how much life insurance you need, you should assess the time frame: How long you need coverage for? Do you need temporary or permanent coverage? Since permanent insurance costs more than term, you may choose to purchase more than one policy to cover both types of needs. One example would be if you wish to replace lost income, while children are at home, with a 30-year term policy, and also buy a small permanent policy to pay for final expenses. Cost is often the limiting factor when it comes to providing coverage. If you can’t afford the amount of coverage you think you need, just get as close as you can for the term you need. Many “convertible” term policies allow you to convert some or all of the death benefit to permanent coverage without having to go through the underwriting process. This feature is included as a rider at no extra cost on many policies, so be sure to look for it when you compare quotes. You can also ask an agent. Choosing the type of policy and level of coverage is subjective, and there are a number of ways to go about it. Consider your situation, income, and debts; how many people depend on you; and how long you expect them to rely on your income.
Evaluate Coverage and Rates
The next step is to compare quotes. You may want to use an online brokerage to come up with quotes from many insurers at once. Or you can visit multiple insurers’ websites (which you’ll probably need to do in order to get quotes for permanent coverage). Assess each quote carefully. Look beyond premiums to ensure that the policies offered have the features you want. For example, you might want a term life policy that you can convert into a permanent policy without having to provide evidence of insurability. (“Insurability” is simply a way to express how much risk a company takes on if it accepts you as a client; the less risk you pose, the more “insurable” you are.) Or you might want one that you can renew once the term expires, also without having to prove insurability. Buying permanent life insurance often requires more scrutiny than purchasing term coverage. Permanent insurance policies may include so-called “living benefits,” such as coverage for long-term care or early access to the death benefit due to disability or a terminal or chronic illness. These features can vary greatly among policies. And since permanent coverage comes with higher premium payments, you may have more to lose if you buy a permanent policy and then later decide you don’t want it. There’s a caveat though: If the policy you choose builds a cash value, you may be able to receive a portion of that cash value back if you surrender the policy. Permanent policies almost always have a “surrender period” (which can last up to 20 years) during which you’ll be assessed a surrender charge on withdrawals from the cash value, including a full surrender of the policy. Charges may be quite steep during the policy’s early years. If you’re unsure about any given policy’s exact features, ask questions and read the fine print before you apply.
Choose Your Policy
When you compare quotes, you should be able to decide which policy is right for you (or policies, if you’re buying more than one with varied lengths). And while you could apply for more policies than you truly need, to figure out who has the best rate, it’s probably not a good idea. In most cases, each application you submit for life insurance gets logged with the Medical Information Bureau (MIB). All insurers you apply with can see all of your other applications. That could be a problem, because there is a limit on your insurability, which is how much death benefit you’re eligible for in the aggregate, across all the policies you own (or might own). That limit depends on your income and other financial information.
Be Prepared
When you apply for life insurance online or with an agent, you’ll need to enter certain information during the process, including:
Your health history and the medical history of your parents and siblingsYour primary care physician’s contact informationYour income and level of debtThe names, addresses, and Social Security numbers of your beneficiaries
After you submit a life insurance application, the insurer may require you to take a paramedical exam to determine your eligibility. The exam often involves giving blood and urine samples. It may even include electrocardiogram and treadmill stress tests in certain cases (for example, if you’re age 50 or older or if you apply for a large coverage amount). A lab will screen your blood and urine for health issues such as high blood sugar levels or abnormal liver function, as well as substances such as cocaine or nicotine. The lab will submit its findings to the insurance company’s underwriting department, which will determine whether you qualify for life insurance and, if so, at what rate.
Buying Life Insurance Online
Not everyone wants to take a medical exam. But if you apply for a policy online with an insurer that uses accelerated underwriting, you may qualify for a policy without taking a medical exam and might still be able to get a good rate. This type of underwriting relies on third-party medical data and detailed information you submit about your health history and prescription drug use. Several major insurers offer term life insurance that doesn’t require qualified applicants to submit to a medical exam. Keep in mind that some no-exam policies may limit the amount of coverage you can purchase, and they may have higher premiums as well. For the most part, the more information you’re asked to provide when applying for life insurance, the lower your rate can be, because the best risk classes are often only available to applicants who submit to more thorough underwriting.
