How to Buy Life Insurance: Tips for First-Time Insurance Buyers

You’ve seen them; tear-jerk commercials of a family moving on after losing a loved one. They are thankful not because the loved one moved on. That would be a jerky commercial. Instead, they are thankful because they had life insurance. How to buy life insurance is simple: understanding how much life insurance to get isn’t.

If you’re looking for life insurance, throw a stick. Everyone is selling some. Of course, there is the local insurance agency but then there are the banks and estate planners. Even tax advisers probably can set you up in a term policy. Then, of course, there are the thousands who jump in getting licensed because selling life insurance is admirable.

Unfortunately, the admiration only really happens after the policy is needed and the feeling of nobility is moot with an agent who sits there with the sinking feeling that, yeah I got them covered, but man this sucks that they are dealing with a death.

I am one of those licensed agents. I’ve owned an insurance agency. I’ve worked as an independent contractor. It all started for me when I was a financial consultant.

As someone who has seen all sides of the sales process and the types of people who sell it, I think it’s time to have an honest conversation about:

• what life insurance you really need,
• what questions to ask when buying life insurance; and
• how much is too much life insurance?

Let’s get pretty basic in understanding what life insurance is and how you can use it to protect different things.

What Is Life Insurance?

The definition of life insurance: a contract that agrees to pay a sum of money after you die to a named person or entity called a beneficiary. The beneficiary can be a living person, a trust, a company or a non-profit. It’s a safety net that covers someone or something from financial loss if you die.

Pretty morbid, right?

It is! What I like to do is have my clients think about the fun ways they could die. Doing things on that bucket list that we all think about doing. After all, if I’m going to kick the bucket, it might as well be doing something on that bucket list.

Just make sure you have the life insurance in place long before you start that bucket list. I mean I’m no one to tell anyone to not live life to the fullest, but do realize that insurance companies often have exclusions for the fun stuff on basic policies.

That means if you are piloting small aircraft – or jumping out of perfectly good aircraft – chances are the insurance company won’t want to insure you on basic policies within the next two years. Those insurance carriers, well most of them, they just don’t have a great sense of humor.

This brings us to life insurance exclusions. Every policy’s death benefit could be nullified based on the contract terms because of exclusions.

What are Life Insurance Exclusions?

Every insurance carrier handles exclusions in its own way. The most common life insurance exclusions are:

1. Failure to disclose known medical issues
2. Suicide
3. Death resulting from activities in aviation
4. Acts of war
5. Dangerous activities such as rock climbing or sky diving
6. Death by intentional or illegal acts
7. Natural causes: common with accidental death life insurance policies that only cover accidents and not illness or disease

Some life insurance carriers have time frames on some exclusions. For example, if you bought the policy and then four years later started canyoneering, your policy could cover an accidental death from the activity. Other insurance policy carriers maintain the exclusion for the duration of the policy.

Don’t try to plead the case that more people die from a car accident than by small aircraft or skydiving accidents. Trust me, I’ve pled the case because I’m a fun insurance agent who lives life outside of an office and I enjoy it. If you regularly participate in a full-throttle lifestyle, don’t worry. There are carriers who will cover you for the variety of risks that we put ourselves in.

Do I Need Life Insurance?

Life insurance isn’t an absolute necessity. If no one is dependent on your income or future income down the road, then you don’t. Most people have some need if even to take care of funeral expenses so loved ones aren’t burdened. If you have more financial obligations than assets, consider getting life insurance.

That being said, think about your kids setting up a GoFundMe or standing on the side of the road with a sign asking for help. It’s hard for them to have to do and heartbreaking for everyone watching.

Is It Compulsory to Take Out Life Insurance With a Mortgage?

Most lenders don’t require a new homeowner to obtain life insurance with a mortgage. There are life insurance policies that are designed to reduce in total death benefits over time to correspond to a mortgage referred to as mortgage life insurance. It is designed to replace your income to cover the mortgage cost if you die with a mortgage balance.

How Long Do You Need Life Insurance?

Life insurance is needed until there is not a potential financial loss. The time could be a 30-year mortgage, 18 years to pay for a child’s college education or forever to cover the costs of a funeral. Each person needs to do what is referred to as a Needs Analysis to see what financial risks exist and how much remains for how long.

Do I Need Life Insurance if I Have No Dependents?

No one needs life insurance whether they have dependents or not. It is prudent to have insurance with dependents and forward-thinking to get life insurance if you are young and may one day have dependents. Older individuals with no dependents may opt for a small policy to take care of funeral expenses or even a large life insurance policy to leave to a charity.

Which Is Better: Term or Whole Life Insurance?

Term life insurance and permanent life insurance (whole life or universal life) each serve a specific purpose. It depends on the needs and desires of the person obtaining the insurance policy to define what is better. Beware of those who vigorously state one is better than the other.

You will hear all sorts of “plan types.” Don’t get bogged down in details.  I’ve sold insurance for more than 20 years. It boils down to this: do you want a cheaper plan that expires after a period of time or do you want something for your entire life, even if its more expensive?

What is Term Life Insurance?

Term life insurance is temporary life insurance. It means you don’t anticipate needing to cover financial losses beyond a defined period of time. When the period of time is over, the contract is over. There is no insurance and you must go out and get a new policy if you want one. Term life insurance is less expensive than whole life.

For example, a parent wanting to make sure his daughter has enough to get through college may take out a 20-year term policy for $150,000 to cover those expenses. After the 20-year term, the dad would need to apply and qualify for a new policy if he decided he wanted life insurance for a longer period of time.

What is Whole Life Insurance?

Whole life insurance is permanent insurance meaning once you get approved, you are insured for the remainder of your life (as long as you pay your premiums). Whole life is more expensive because the risk extends longer when people most likely get ill or hurt and die as a result. In addition to being insured for a lifetime, whole life insurance offers a cash value component.

The cash value is where those who don’t like whole life say it isn’t worth it. Many insurance agents sell this cash value as a pseudo-savings account. If it was considered merely an investment, there are other investments one could find that probably offer better returns. However, those who understand and want life insurance to last but want an option to cash out find great value in whole life insurance.

What is Universal Life Insurance?

Universal life insurance is a type of permanent life insurance. Once a policy is approved, as long as premiums are paid the policy remains in force for the remainder of a person’s life. The premiums are flexible, allowing policyholders to adjust payments. The policy also has a cash value portion that grows over time.

Universal life insurance can seem very attractive because initial premiums are less. However, many policies are not correctly sold and life insurance policyholders expect to keep that premium payment with the interest in the cash value segment covering the difference in premiums. If the annual increase in the cost of insurance isn’t met by earnings, policyholders must pay more or the policy starts to cannibalize itself.

A life insurance policy eating itself isn’t a good thing. It will die usually before the policyholder making it a very very expensive term policy.

What Type of Life Insurance Should I Get?

The type of insurance you get will be determined by how much you owe, how much you make and what you want to leave behind. You might get a mix of term and permanent insurance for different needs. When the mortgage is paid and the kids are on their own, you may only need to worry about funeral expenses and a legacy.

Before you choose on what type of life insurance you should get, take the time to do a Need Analysis:

• Loans: Tally all mortgage, loans, and debt
• Income: Note your annual salary and multiply it by the number of years you want to leave for your family
• Funeral: Expected burial costs when the time comes
• Education and Other: The things you wanted to pay for like education, aging parents care, or weddings for the kids.

If costs didn’t matter, most people would get permanent insurance. Even after the need is gone, the legacy to leave to children, grandchildren and even great-grandchildren extends for years. But the cost of permanent insurance is often cost-prohibitive when families start to consider a legacy.

Is Life Insurance Taxable?

The proceeds taken in lump sum are not taxable. Any interest earned and paid is added to income tax returns as interest received. If the beneficiary is a trust, estate taxes may apply. That’s one to check with the tax advisor on.

Permanent life insurance is used for estate planning purposes. It’s how the super-rich keeps passing money on from generation to generation because of the tax benefits. When a person inherits life insurance, the proceeds are not taxable. It passes through outside of the estate and avoids probate. Those who can afford it buy as much as they can.

Final Thoughts on How to Buy Life Insurance

If you’ve read this far, you probably know you need life insurance. Here is a quick checklist of what to do as the first steps:

1. Talk to a couple of life insurance agents. Ask a lot of questions about the types of insurance and start to get a feel for their philosophy when it comes to protecting lives. If they say, “This is the best life insurance,” ask them why and ask them to compare it to others. Someone who can’t specifically tell you why one is better for your situation isn’t really looking at your needs.
2. Prepare yourself for the application process. While there are policies that don’t require medical exams, most do. It usually means basic height, weight, blood pressure, and heart rate along with a full panel of bloodwork. You’ll be asked about your medical history one way or another. Be honest – remember those exclusions.
3. Decide if you want to buy now. You’ll have the option to bind the policy by paying the first expected premium when you sign the application. This is called a conditional receipt and means you are covered when you walk out the door contingent on policy approval. If you don’t get approved, you get your premium back.

There isn’t much you can do about bad life insurance decisions after you are dead. Only your beneficiaries will know whether or not you did the best thing. Find a life insurance agent you trust who works with reputable carriers.