Tips If You’re Buying Life Insurance For The First Time

Life may be like a box of chocolates. But buying life insurance is more like ordering coffee at Starbucks, says Faisa Stafford, CEO and president of Life Happens, an industry-funded nonprofit that educates consumers about insurance. There are so many options that it’s hard to know what to get. “It can be extremely confusing,” she says.

In fact, confusion over how much and what type of life insurance to buy is one of the top reasons people give for not having life insurance, according to a survey by Life Happens and LIMRA. But the COVID-19 pandemic has been a wake-up call for many Americans, with almost one in three people (31%) reporting they are more likely to buy a policy because of the pandemic, according to the 2021 Insurance Barometer study.

If you’re considering buying life insurance but are confused, these 10 tips will help.

Tip No. 1: Assess Your Current Financial Situation

You need a true picture of your financial health before you can figure out what type of life insurance you need and how much, Stafford says.

Consider what you have in place to support loved ones who depend on you financially. This would include an emergency fund, retirement savings and any life insurance coverage through work. You might find that you’re not as prepared for the unexpected as you thought.

Stafford recommends working with a financial planner to discuss what needs you should cover with life insurance—whether it’s a mortgage that will need to be paid, children who will need to be supported, a small business to maintain or a legacy you want to leave. Your workplace might offer access to a financial planner as part of your benefits. Or you can find a fee-only planner through the National Association of Personal Financial Advisors.
Tip No. 2: Know How Much Coverage You Need

Typically, people underestimate how much life insurance they need, says Adam Winslow, CEO of Aviva UK & Ireland General Insurance, part of Aviva’s international savings, retirement and insurance business. They tend to think only about how much would be needed to pay off their major debt, such as a mortgage. However, they should consider how much more would be needed to help a spouse or partner pay bills, support children, pay for college tuition or cover any other long-term needs, he says.

One rule of thumb is to have a policy with a death benefit equal to 10 times your annual salary. But your own situation and financial goals might require that you have more—or less—than that amount. A financial planner can help you come up with a more-precise figure.
Tip No. 3: Choose a Life Insurance Policy Type

Life insurance buyers often think about term life vs. whole life insurance. A term life policy will provide coverage for a certain period of time—typically 10, 15, 20 or 30 years. It can be an affordable way to get coverage until you reach a certain financial milestone, such as paying off your mortgage or putting your kids through college.

There are other types of permanent life insurance in addition to whole life. A permanent life insurance provides lifelong coverage, which is one reason why it’s more expensive than term life insurance. It’s also more expensive because it builds cash value. That cash can be used for whatever you want—to cover emergencies, supplement retirement income, help pay for long-term care or even cover the policy’s premiums. Whether you choose a term or permanent policy depends on your needs and financial goals.
Tip No. 4: Understand What Affects Your Life Insurance Rate

The two key factors life insurance companies consider when determining the rate you pay for coverage are health and age. The younger you are when you buy life insurance, the cheaper it tends to be, Winslow says. That’s because you are more likely to be healthier when you’re younger, and therefore less risky to insure.

The rate you pay also depends on the type of policy you get and how large the death benefit is. If you get a term life insurance policy, the length of the term you choose also will affect your premium.

If you can only afford a term life policy now but want permanent life insurance, most term life policies offer the option to convert to permanent life insurance. You can lock in a low rate with term life now and switch to a permanent policy if your income increases.
Tip No. 5: Compare Life Insurance Companies for the Best Rate

Many insurers offer free quotes online, which makes it easy to compare life insurance quotes. Because rates can vary, you should get quotes from several companies to help you decide which company to apply to for coverage. You also could work with an independent insurance agent who works with several insurance companies and can help you find the best coverage at the best price.