How to Purchase Life Insurance

Life insurance plays a crucial role in securing the financial future of a family.  And, while the decision to buy a policy is an easy one, purchasing one can be vexing due to the overwhelming number of choices available. With hundreds of life insurance companies offering thousands of different products, the task of selecting the right plan for you is a daunting one.  Too many choices often lead to confusion and the fear of making the wrong decision, which is one of the reasons why people procrastinate.

As with any decision that involves a lot of choices, the best course is to winnow them down as best as you can using some parameters that can eliminate the ones that are least suitable for your needs.  The key is to have a firm grasp of what your needs are. 

Determine Your Life Insurance Need

Life insurance is purchased for the protection it provides against the loss of your income. But, what does that amount to?  Your family was counting on your income to pay the mortgage, save for college, and to maintain a certain life style for a certain period of time.  Will that need continue or will it go away?  No one likes to buy too much life insurance, but buying too little can be devastating for your family.

Some people use a simple formula such as a “multiple of income”, to determine how much life insurance to buy.  This can result in an underfunding of your family’s needs. The best way to determine your need is to calculate how much of your income needs to be replaced until some other form of income can be generated by your family.  Also, paying off debts and prefunding future goals, such as college education, will reduce your family’s financial burden.  

Study the Plans

Life insurance comes in several forms and it is important to know how each of them works in order to determine the best plan for you:

 Term life insurance: This is life insurance in its purest form. You are essentially just buying a death benefit for a specific period of time. You pay for the cost of insurance with a low premium until the policy expires in 10, 15, 20 or 30 years.  It’s an inexpensive way to buy insurance if you only have a temporary need.  The problem is that if there is a possibility that your family’s need for life insurance should continue beyond the expiration of the term policy, it could become very expensive to buy continuing coverage, if you are still able to qualify for it.

Cash value life Insurance: If you think that you may have a permanent need for life insurance, a cash value plan can provide guaranteed protection at a fixed premium rate for as long as you pay the premium. These policies include a cash value component that allows you to accumulate equity on a tax favored basis, which can be used for other financial needs or to pay down the cost of the policy.  In many plans, the cash value growth is sufficient to ultimately cover the premium costs.

 There are a few different types of cash value life insurance from which to choose depending on your preferences and specific needs.   

Where to Buy Life Insurance

These days life insurance can be purchased from a number of different sources. As one of your first parameters, it can make your life much easier to keep your search to those life insurers that meet the highest standards for integrity and financial strength.  The life insurance market is very competitive, so you will find little difference in premium rates between the highest rated companies and the lower rated companies, so try to stick with the best. Working with a knowledgeable insurance broker who works with a number of different companies can ensure you get unbiased guidance in selecting the right type of plan and company.

What to Expect

Life insurance is a complicated product involving a lot of moving parts and it is generally priced based on your age, health and medical history. So, the life insurer will need to know a lot about you before issuing you a policy.  In most cases, they will require copies of your medical history which is provided by your physician. For larger policy amounts, you might need to take physical exam.  Additionally, they may require financial information and evidence of your good character.  It could take as long as a month for this application process to result in issuing you a policy.  This is all the more reason to work with an experienced insurance broker who can help you navigate the process.

The life insurance purchase is never a simple one; however, by doing some homework on the types of plans that are available, the best companies from which to buy, and discovering your needs for protection, you will be in a much better position to make the right choice.