Six Things to Look for in a Life Insurance Policy

If you’re an adult with a house, a spouse, kids, or any financial liabilities, and you don’t have a life insurance policy already, getting one should be near the top of your to-do-list. With life insurance in place, you won’t have to lose sleep worrying about the financial burden your loved ones would inherit if you were to die unexpectedly.

But, how much life insurance should you buy? And what type of life insurance would work best for your needs? Those are tough questions, and according to the experts, it depends.

Here at The Simple Dollar, we’re a big fan of term life insurance since it’s affordable to purchase and fairly easy to qualify for if you’re in good health. In terms of how much coverage you need, many life insurance agents suggest you purchase five to 10 times your income in coverage ($250,000 to $500,000 for every $50,000 you earn). However, you may need even more coverage if you have a lot of liabilities, or kids, or expenses coming up in the next 10 to 30 years.

The length of your ideal policy also depends on your personal circumstances. If you’re fairly young and want income replacement for your entire career, then a 30-year term policy could be ideal. If you’re older, or you have few debts and tons of savings, on the other hand, a shorter-term policy might be better.

At the end of the day, it’s smart to think through how much coverage you need and how long it should last. However, you should also keep in mind that any coverage is better than nothing.

What to Consider When Buying Life Insurance

But, what should you look for in a policy? And how can you know whether the life insurance you’re considering is actually ideal for your needs? Because of the wide selection of life insurance companies and policy details available, it’s smart to conduct some due diligence before you dive in.

To help with the process, we interviewed Chris Huntley, president of Huntley Wealth & Insurance Services and author of “25 Best Ways to Save 50% (or More) on Life Insurance.” Here are the main factors Huntley says you should look for – and try to steer clear of:

#1: Affordability

When I wrote about why I would never buy whole life insurance last year, I shared some basic quotes I received for both whole life and term life insurance as a 37-year-old woman. Long story short, a 20-year term life insurance policy for $750,000 would set me back $717.50 annually, while a whole life policy with the same amount of coverage would have cost $9,875 per year.

This is obviously a huge disparity, and one consumers should know about when weighing the pros and cons of buying whole life or term life. While whole life insurance provides a death benefit your whole life (until you die), it’s a stretch to say the benefit of perpetual life insurance is always worth the added expense.

As Huntley notes, however, scoring an affordable life insurance policy is not only important now – it is important for the future, too. That’s because, when life happens and times get tough, life insurance is often one of the first items people stop paying for.

If you buy a policy that’s affordable, you’ll be much more likely to be able to hold onto it if you have to make any serious cuts to your budget.

“The problem is, if you let your policy lapse, you might find it incredibly expensive to reinstate, or even impossible if your health has changed,” says Huntley.

The bottom line: Plan on a premium you can afford to pay long-term, he says.

#2: Immediate Payout

Huntley notes that, if you see a commercial on TV offering you quick and easy coverage with no medical exam, it’s probably from a company that offers what’s called “simplified issue” life insurance. Because there are few questions on the application and no exam, it’s true that you can easily qualify for these type of policies.

However, there’s often a two- or three-year waiting period after purchase before they’ll pay out 100% of the proceeds upon death. If you want life insurance coverage that starts right away, this is obviously imperfect.

Huntley says that to make sure your policy pays 100% of the “face value” from day one if possible. “Stay away from simplified issues policies unless it’s a last resort,” he says.

#3: Underwriting Leniency

You could be making a huge financial mistake if you buy a policy from a company that does not treat your particular health or personal activities fairly, says Huntley. Companies range widely on how they price out risks like diabetes, smoking, travel outside the U.S., or your family’s medical history.

“Be sure to speak to a knowledgeable independent agent who can ‘shop’ various companies to find the best rates for your particular situation,” says Huntley. If you don’t, you risk overpaying for a life insurance policy – or not being accepted altogether.

#4: Automatic Payments

While there are certain bills you may want to pay manually, life insurance is one of those recurring expenses that is usually best set up as an automatic bank draft or credit card charge – especially in the case of term life insurance where your premium stays the same.

The reason for this is simple: If you forget about your life insurance bill and don’t make your payment on time (or within your grace period, which is usually 30 days), your policy may be cancelled altogether. At that point, your issuer may not allow you to pay back your missed premiums, and they’re not required to reinstate your policy, either.

Look for a life insurance company that will let you pay your monthly premium automatically, and you’ll never have to worry about letting your policy lapse or missing a bill.

#5: Conversion Feature

If you’re looking into term life insurance, beware of policies that don’t allow you to “convert” your term policy into a permanent one, says Huntley. This feature typically allows you to exchange your term policy for a permanent plan (such as universal life or whole life) without proving you’re still healthy.

“If you buy a 20-year term life insurance policy, for example, and decide after 19 years that you still need coverage but have developed some medical conditions since your initial term purchase, the conversion feature would allow you to keep your coverage, whereas you may not be able to qualify if you were to go back out to the market for a new policy,” says Huntley. “Most term policies include a conversion feature, but not all, so be sure to find out.”

#6: Living Benefits

Huntley says that, thanks to a new wave of life insurance companies striving to meet consumer needs, there are more ways than ever to use life insurance while you’re living.

For example, many newer policies give you the option to receive payments if you get a chronic illness or need to be placed in a care facility, Huntley says. “Several companies also give you 20- or 25-year windows at which you can get back some or all of your premium paid into the policy if you no longer want or need the coverage,” he adds.

If you want the option to get cash out of your life insurance policy if you get cancer or need end-of-life care, then looking for a company that offers this option is a smart move.

How to Save Money on Life Insurance

Now that you know what to look for in a life insurance policy, you need to know the best ways to score a policy at the perfect price. As you shop for life insurance, consider these money-saving tips:

Compare the costs of term and whole life before you buy. If you decide whole life insurance is best for your needs, that’s perfectly fine. But you still might want to shop around for term life insurance so you can compare costs. In the example I shared above, whole life insurance could have cost me $9,000 more per year for the same $750,000 in coverage as a term policy. In the case of such a big disparity, you might discover you’re better off buying term life insurance coverage and saving the difference yourself.
Get several quotes online. Applying for life insurance coverage online or with a broker that sells multiple policies is a much smarter move than visiting a life insurance agent that works with a single company. Ideally, you’ll want to get quotes from several companies so you can compare costs as well as policy details.
Don’t buy way more coverage than you need. Buying the right amount of life insurance (and not too much) is one way to cut down on costs. A good life insurance calculator can help you figure out how much coverage you need.
Buy now, not later. Last but not least, don’t put off your life insurance policy for another year – or even another week. The rates you’ll pay for coverage will go up every year, no matter what. The sooner you buy, the better chance you have at affording the level of coverage you need.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

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