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How to Buy Life Insurance

You’re here, because you like being the captain of your own ship! That’s great! On this page you can navigate your own coverage options and learn how to build your own policy.

An Overview

You can either start from the beginning or click a link to jump into the middle of the process. Here are the steps:

  1. How long you need the coverage to last?
  2. How much coverage you need?
  3. Why do you need the coverage (personal or business)?
  4. What kind of coverage do you qualify for?
  5. Are you looking for some add-ons to your policy?
  6. Select your company.

How long do you need coverage?

This is one of the most fundamental questions. The longer a policy lasts, the more expensive the policy is. The shortest coverage is term (short for terminating) coverage. Term is most often available in increments of 10, 15, 20, 25 and 30 years. Learn more about term coverage by clicking here.

Guaranteed Universal Life coverage is technically permanent coverage, but it has been designed to not build cash value like you’re probably used to seeing in traditional permanent coverage. These policies mimic longer term – term coverage. These policies are not based on the length of the term, but the age you wan to have coverage until. Different companies offer different end ages. I’ve seen them vary from age 85 to 121. If you out live the policy, the policy does not pay out and the policy ends. They can be attractive if you’re trying to provide coverage beyond a typical term, but are looking to save some money from traditional permanent policies. You can learn more about guaranteed universal life here.

Permanent policies are policies that most often last until age 121. The standard option is whole life. More recently universal life has been created as an alternative. Universal life is more flexible than whole life. You can learn more about this option on the permanent coverage blog post.

How Much Coverage Do You Need?

The amount of coverage is often hard for people to navigate. Our need for income changes over time. So should our life insurance. The easiest way is not to buy coverage as you go along, but to make a plan for life insurance and edit that plan as things adapt and change.

There are a lot of fancy ways to think about this. If you were to pass, how long would your family need your income to be replaced? If you have children, the youngest being 13 and you want her and everyone else covered until she’s 23 … then you need 10 years. If your income is $40,000 per year then your post tax money is about $33,000 (depending on your state). For income, you need to replace $330,000.

What else do you want to cover? college for 3 children? At a state school that’s $120,000. Mortgage balance of $100,000? That totals income, mortgage, school at $550,000.

What do you do if you can’t afford the full amount you need? Get the most reasonable amount you can afford. Make sure you’re dealing with an independent agent who understands your concerns and can help you shop the best price. And take a second look at this example. Does your spouse NEED to sell the house? people often look for insurance to cover the cost of a mortgage. They probably need enough money to continue paying the mortgage. If you’ve replaced 10 years of income, you’ve replaced 10 years of mortgage payment.

Stacking

Really take a second to consider what will happen when you pass. It’s tough to think about, but that plan is what you’re funding. Once the kids move out, you might not need as much. You can stack life insurance policies to obtain the low rates now and provide for the future. Stacked policies are multiple policies with different time frames taken out at the same time to provide tiered coverage overtime.

Why Do You Need the Coverage?

Personal Income Replacement

The most common need for coverage is personal income replacement. We will all die. That is certain. When you pass, what expenses will your family have? These expenses are the most expensive when you’re starting out in life and building wealth. This is what makes term so attractive to those who are actively working.

Earlier I told you to think through the expenses your family will have when you pass away. Usually over time, mortgages get paid off, savings accounts start to fill, and the anticipated need dwindles. My personal opinion is this: Don’t spend more for your coverage than you need. If you’re simply replacing income, get a term policy, but think through how long and how much you need.

Personal protection against running out of retirement money

One of the biggest money fears for the current younger generations is running out of money in retirement. Whole life policies can be a safe hedge against lost retirement money from poor investments or strain on the economy. This strategy is best for people with time and money to grow their cash values in whole life policies.

Money can be borrowed from properly structured whole life policies without the traditional concerns of 401k / IRA accounts. They can be tax free, there are no minimum or maximum distributions, there are no requirements on what the money can or cannot be used for.

Loans from whole life policies often have no repayment qualifications (as long as it is properly funded). The death benefit (payment to your loved ones when you pass) is lowered by any outstanding debts against the policy when you pass. The investments in the policy are often structured to protect against wild swings in the market. Dividend earning whole life policies and IULs are designed for this purpose.

Final Expenses

Often people simply want to make sure their family is not burdened by the final expenses they’ll have when they pass. If this is your goal there are companies that offer simplified issue whole life policies. These policies are permanent and never expire. The rate does not go up and coverage doesn’t go down.

You must always be careful to watch out. Some companies offer group style term policies that range to around age 80 or 90 with prices that rise every 5 years. Anytime you’re anticipating buying a policy for life you should always confirm the price will not change for life.

Business Coverage

Businesses can take out coverage for a number of reasons. We’ll review a few of them. Anytime you look for business coverage, you’ll want to have loan terms, business valuation, and income information available for your advisor.

Buy/ Sell Agreement: This is one of the more popular policies. The basics are this: Partners in a business often take out policies on each other to cover the cost of buying out the family of the other partner when they pass away. Most commonly this is a term or a GUL (guaranteed universal life) policy based around the time line of ownership. GULs add a lot of extra flexibility. Check our our post on GULs for business. For more about buy/sell agreements check out this post.

Business Purchased Coverage: There are a few reasons the company would want to buy it’s own coverage.

1) Multiple owners. If there are more than 2 owners in the company it can be unnecessarily expensive for all owners to start taking out multiple policies on each other. When the business buys the policy, it can facilitate any needed buy-outs.

2) Lost income, owner / key-person replacement costs. When an owner or key-person passes the business will have inherent expenses. These policies can help the business survive these expenses.

Living benefits. Policies with living benefits can help a company in the event of critical, chronic, or terminal illness of an owner or employee. Most policies include a rider for terminal illness, but getting the other two riders (offered at no cost by certain carriers) can make sure key-people and businesses have multiple options when tragedy strikes.

What kind of coverage do I qualify for?

Life Insurance is something you must qualify for. Age, health, financial history, driving record, and lifestyle choices all have direct impact on your ability to qualify for your policy.

Age before beauty, and health.

Children

Children can generally get policies for up to 50% of the amount of coverage their primary guardian has (and the same amount of coverage as their siblings – keep the favs to yourself).

Term for kids: Many term and permanent policies include the option for purchasing term riders for children. These are small policies that “ride” along the parent’s main policy.

They’re often inexpensive, and are usually one flat fee for all of the parents children. You can expect $10,000-$25,000 in coverage to cost an extra $50-$100/ year as a general ballpark. Amount, the company, and length of term can affect price. A great benefit is the ability to convert these policies into whole life policies in the future if needed.

Whole life for kids: I often recommend parents start a whole life policy for their children and pay it off early. You can get a whole life policy for a child that is scheduled to be paid off by age 100, but these policies can be expensive. My experience is young adults don’t like inheriting a monthly payment and usually don’t value the coverage enough to keep them.

As an alternative, get a policy that is scheduled to be paid off in 20 years. the premium is more, but rarely significant. The interest on the cash value from the insurance company picks up after year 20 and pays off the rest of the policy. Because the cost of coverage is low for a child, the policy can grow faster. In my personal experience, this cut the overall cost of my daughter’s coverage to 1/4 the cost of the policy paid until age 121.

Seniors

I often get requests from seniors looking for hundreds of thousands of dollars. This is too much money if you’re no longer earning income. The amount of coverage for seniors is generally going to be enough coverage for final expenses. If you haven’t already, this is the time to start considering whole life coverage. Read more about this on our final expense post.

Health

Smoking

Smoker or non-smoker. It’s one of the first questions. Regular cigarette will be a direct and significant cost to your policy. The amount of time you need to stop smoking to qualify as a non-smoker can vary, but is never less than a year. It can take up to 5 years of tobacco-free status to qualify for the best rates.

Non-cigarette tobacco: not every company considers non-cigarette tobacco products at tobacco rates. Now, most of them do. You really have to look hard to find one that can cut you a break, but it’s worth the search. Cigar and chew users can often qualify for non-tobacco rates.

Vapers are treated as smokers by all major companies.

Marijuana is becoming an increasingly bigger concern for companies. The way companies are addressing marijuana varies drastically. Prescription and recreational use can be covered. Standards vary wildly. Most companies will at minimum consider marijuana use at tobacco rates, although there are an incredibly short list of companies that will consider non-tobacco rates for minimal usage.

Height and Weight

Heights and weight (build) can be the most impactful on price. Build is the most common reason for insurance rates being higher than anticipated. It is important that you share your detailed build with your agent to get the most accurate predicted rate.

Health Conditions

Your health has a great affect on your rates. What kind of health problems? Not the average cold or flu, but everything from restless leg to cancer. We’ll bring up some of the most common and most impactful health conditions that affect rates and what to expect in your conversation. There are two main things to do when you have health concerns with your coverage:

  1. Always be transparent about your health with your agent.
  2. Find an agent that actually has some history with your health concern.

Agents that specialize in life insurance tend to have more experience in the initial underwriting. This makes sure you have the most realistic expectations on availability of coverage and that the application goes to the right company. The local agent where you purchased your auto insurance is not usually equipped to handle specialty coverage issues.

When you get to know a new agent, anyone worth your time will dig into your health history. Their questions should focus around the following areas:

  • High blood pressure and cholesterol
  • Cancer or tumors
  • Heart Disease, irregular heart beat, or other heart issues
  • Diabetes or elevated blood sugar
  • Asthma, other respiratory ailments, sleep apnea
  • Anxiety, Depression, PTSD, ADD, ADHD, mental or mood disorders
  • Drug or alcohol abuse
  • Liver or Kidney Problems

These are not the only health issues agents will be concerned about, but they are the most common conditions agents will often ask about. If you have something other than these diagnoses, let your agent know and they’ll help you understand the kind of affect the condition will have.

Health issues are not all treated equal. The way a company considers your health depends on several factors. Rates can depend on the mixture and severity of conditions. Some companies will give you a break on rates if you buy a permanent policy instead of a term policy. Different companies have specialties and different standards for each type of medical condition.

With this said, shouldn’t I just be able to make a chart of ‘best companies for you? Unfortunately it’s not that simple. These standards can change over time. Standards can even change depending on the human underwriter reviewing the file. Two things are required to navigate the available products: 1) expertise and 2) access to the right companies.

In this agency, an application with one company is an application with all of them. If a company for any reason offers you an unfair offer, we can transfer your application to another company.

Family health issues: heart disease, stroke, and cancer in parents and siblings can be a sign of possible family health issue that will be concerning to most companies. Companies will want to know if a family member has had these kinds of problems before age 65.

Financial Concerns

People are often surprised that agents ask financial questions. There are a few main reasons for this.

  1. Your income and financial status can affect the amount of coverage you can qualify for. Your coverage must make financial sense to the company.
  2. Financial stress – like bankruptcy – can be a sign of non-medical risk to the insurance company.
  3. Companies are concerned that the cost of the coverage can be a financial burden on you and want to verify that the coverage remains affordable.

Driving Record

The insurance company is going to check your driving record. Specifically the past 5 years. They’re looking for the following:

  1. License suspensions
  2. DUIs or DWIs
  3. Reckless driving tickets
  4. Moving violations

These kinds of infractions are signs of reckless behavior that is a concern for the insurance company. One speeding ticket won’t necessarily keep you from getting coverage, but each company has standards for dicey your record can be before they start charging you extra for your coverage. They can even decline your application if it’s too much.

Lifestyle Choices

Certain hobbies and jobs can be dangerous. Dangerous lifestyles can lead to more expensive coverage. Companies can be concerned about things like flying aircraft, motor racing, sky diving, SCUBA diving, and all kinds of other activities like that.

Jobs that regularly put you in dangerous situations and around dangerous items can raise your rates.

Extra Features (Sweet Add-ons)

Has life insurance gotten sexier or is it just me? Okay, maybe that’s not the best way to describe it, but companies have started adding more options.

Living Benefits are a nickname for accelerated death riders. These riders allow you to access some of your death benefit before you pass away if you become critically, chronically, or terminally ill.

Flexible renewal options: Usually when you take out a term policy, at the end of the term the company offers you the chance to renew your coverage. The coverage amount says the same, yet the price becomes wildly affordable. Companies have started to provide 2 new options.

  1. At the end of the level term the company offers the option of renewing the policy with a reduced death benefit instead of a higher coverage amount. The continue reducing the coverage amount every year. This provides a longer term solution without increasing your budget inline.
  2. At the end of the level term the company reduces the death benefit one time to match the same price you had been paying before. Every year there after, the coverage amount stays the same but the price goes up. This is a great option if you just need a few more years as a buffer after your term is over. Companies don’t offer this option forever, each company has an age where they stop offering renewals.

Select Your Company

The most common question I get as an agent is, “what is the best insurance company.” This is often the wrong question. The better question is, “what is the best insurance company for me?” I have cultivated 25 of the top companies to refer clients to. If it was as simple as writing policies with 1 company, it would make my life much easier and lower my accounting cost. Clients can feel secure with any of the companies that I would recommend. My job is to match the right client with the right company based on the client’s needs.

The company you select is the culmination of all of the things we have talked about on this page. The company you choose should offer the type of coverage you need, at a far price considering your background, and help achieve the extra goals you have set forth. This is a lot to process.

The best thing you can do, is use a guide like this to understand what you expect out of your coverage so you can create the best possible policy to met your needs. Once you know your goals, your agent can help you create the custom plan with the perfect company for your needs.

Conclusion

Life Insurance is incredibly versatile. It can feel overwhelming because it’s a lot to try to understand all at once. The goal here is not to make you an expert on coverage, but to provide you with the basic concepts used to build policies. You should be able to use the language provided here to make sure you’re obtaining the right kind of coverage.