Buying life insurance is a big step and one that you should not take lightly. So, before you purchase a policy, you need to understand all of the different elements that can go into it. Fortunately, we’ve done most of the work for you – all you have to do is go through these steps, and you should be more than prepared to make a decision.
So, here is how to buy life insurance online.
Step One: Determine the Type of Life Insurance You Need
Before you can start comparing rates and monthly premiums, you need to be sure that you’re getting the right coverage. Technically speaking, there are only two types of life insurance: term and whole. However, depending on your specific needs, you can also purchase universal and/or burial insurance.
Here is a breakdown of each of these options.
Term Life Insurance
If you have never heard of this kind of coverage before, this is the simplest form of life insurance. All you have to do is figure out the size of your death benefit (more on that later) and how long you want your policy to last.
There are a few advantages of buying term life insurance, including:
- Affordable – Most policies can cost around $20 per month, depending on your age and whether you are a smoker. Compared to other plans, however, term insurance is definitely the cheapest.
- Easy to Understand – While you can add extra coverage to your plan in the form of riders (more on those later), these policies are straightforward and don’t require much knowledge of the industry.
- Immediate Coverage – In most cases, as soon as you are qualified for a policy, you will be covered from that day until the plan expires. With other types of insurance, there may be a waiting period before you can access the full death benefit.
- Fast Approval – Typically, term insurance plans only require a few details to get a quote. In many cases, you do not need to submit to a medical exam to qualify.
- No Rate Increases – Once you purchase term life insurance, your monthly rates will never go up. So, the earlier you buy, the cheaper it will be for the life of your policy.
A Few Drawbacks
- No Cash Value – Although these plans are affordable, they don’t accrue any value. Once the term expires, so does your coverage. If you have a 30-year term, you will have nothing to show for it if you outlive the policy.
- No Adjustments – It is hard to determine your life insurance needs 20 or 30 years into the future. Unfortunately, if your circumstances change, you will either have to purchase additional coverage or cancel your plan and buy a new one.
- Premium Increases – Some insurance companies may increase your monthly rates as you get older. Make sure that your plan comes with “level premiums.” For example, AARP term insurance offers “level benefits,” but the monthly rate goes up.
Overall, term insurance is ideal if you want to protect your loved ones for a specific period or if you don’t want to pay a lot for coverage. For example, if you want to be covered until your children graduate from college, you may not need insurance in another 20 years.
You can also opt to purchase a short-term plan right now (i.e., for 10 years) and then revisit your insurance needs when that policy is about to expire. This way, you have some peace of mind while you figure out your future plans.
Whole Life Insurance
This type of policy is also called permanent life insurance because it will cover you forever, as long as you continue to pay your premiums. As we’ll discuss in the next sections, there are multiple variations of whole life insurance, but the essential elements are always the same, including:
- Cash Value (CV) – A portion of your monthly payments goes into a cash value fund. Over time, this money can grow, allowing you to borrow against it or use it to pay off premiums later in life.
- Lifetime Coverage – One of the primary benefits of this kind of insurance is that you can have it forever. That being said, the CV is often not part of the death benefit, so you may want to spend it before you die.
- Adjustable Coverage – Because your policy lasts forever, you can customize it as you go. For example, you can potentially raise or lower your death benefit based on your needs. However, keep in mind that making adjustments can affect your monthly rates, so talk with your agent before making any final changes.
In many cases, whole life insurance premiums will stay level, but not always. Some companies will readjust your rates every two years or so, which means you could wind up paying a lot more as you get older. Again, look for the phrase “level premiums.” That means your rates will be locked in as soon as your coverage starts.
While whole life insurance is relatively similar across providers, you can choose two unique options: universal and burial insurance. Here is an overview of each of these choices.
Universal Life Insurance
This type of coverage is almost identical to standard whole insurance, but with one crucial distinction – you have more control over your cash value.
The purpose of universal life insurance is to allow policyholders to invest their cash value more aggressively. With standard coverage, the insurance company is in charge of the money, so you can’t control how fast it grows.
When choosing universal coverage, you can opt for fixed, indexed, or variable investment options.
- Fixed – Your money grows at a fixed rate, regardless of how the market performs. This option is excellent because you can accumulate funds during a downturn. However, if the market is doing very well, your rates don’t go up accordingly.
- Indexed – If you want your CV to grow with the market, you can choose to tie your funds to a specific index (i.e., the S&P 500). There is a risk, however, as your earnings could be zero.
- Variable – This option works similarly to indexed plans, but your money is tied to the market, not a specific index. Again, you can potentially earn more than a fixed policy, or you could wind up with negative returns during a downturn.
No matter which option you choose, universal life insurance policies allow you to overfund to your CV as you see fit. Each plan comes with the cost of insurance (COI), which can inflate as you get older. Any additional amount you pay to the insurance company will go toward your CV.
Overall, universal life insurance is ideal for those who can contribute to their CV as quickly as possible. Because you can grow the account faster than traditional whole life insurance, you can start receiving dividends sooner.
However, keep in mind that this option is not necessarily better than investing in stocks or mutual funds. Instead, it is a good choice if you want permanent life insurance but want more control over your cash value portion. Universal life insurance should never be your only investment account.
Finally, if you simply want to leave behind enough money to help your loved ones pay for end-of-life expenses, burial insurance can be a good option. Typically, these plans have a maximum death benefit of $25,000 or $50,000, depending on the insurance company and your age.
Here are a few advantages you can get with burial insurance:
- Pay Off Premiums – Because this is permanent insurance, you never have to worry about losing coverage. Better yet, if you buy a policy early enough and pay into it for a long time, you could wind up paying off the death benefit. At that point, your coverage remains, but you don’t have to pay a monthly premium.
- Guaranteed Coverage Available – If you are at an advanced age (i.e., 80 or higher) or have a serious health condition, most life insurance companies will decline you. However, burial insurance often has a guaranteed issue option, meaning that anyone can get coverage. However, the downside is that there is a two-year waiting period, and the premiums will be much, much higher.
Overall, burial insurance is ideal if you only want to leave money behind for final expenses. However, keep in mind that the funds do not have to go toward your funeral or casket. Your beneficiaries can spend the money however they like.
Step Two: Determine Your Coverage Needs
Once you have figured out the kind of life insurance you want, the next step is to determine the size of your death benefit. Here are some crucial factors to consider before buying life insurance online.
Term vs. Permanent Life Insurance
As discussed above, term insurance is ideal if you are trying to save money or don’t think that you’ll need coverage later in life.
However, if you’re not sure what your life insurance needs will be in 10 or 20 years, permanent life insurance might be a better option. The primary reason to buy whole life insurance is to lock in lower rates and adjust your coverage amount later on. With term life insurance, you will have to buy a new plan at an older age, which will only get more expensive.
Calculating Your Death Benefit
This is the million-dollar question – sometimes literally. While everyone’s situation is different, here are some vital components to consider when calculating your death benefit.
- Number of Dependents – These can include children, non-working spouses, and parents. The number of dependents you have will inflate your death benefit significantly.
- Current Income – Many insurance companies will have income tables that restrict how much coverage you can buy. Typically, you can purchase 25 times your income up to age 40. From there, the multiplier reduces by five for every ten years. So, at age 50, you can only buy 20 times your income, and so on.
- Assets and Debt – While your loved ones won’t necessarily be on the hook for your debt, you need to consider the cost of various assets in your name. For example, if your spouse and children want to keep living in the same house, you need to calculate mortgage costs for them.
- Final Expenses – The average funeral can cost at least $7,000, so be sure to include those fees in your total death benefit.
You can have multiple beneficiaries named in your life insurance policy. However, keep in mind that most states will require you to name your spouse before anyone else.
When you have multiple beneficiaries, be aware that children under 18 cannot receive a death benefit. Instead, the money will have to go into a trust. You can also choose to pay all beneficiaries equally (per capita) or have multiple levels of payouts (per stirpes).
Step Three: Compare Companies and Rates
Once you know how much coverage you need and the type of life insurance you want, the final step is to compare rates from as many companies as possible. Here are some points to consider when doing this.
How are Your Rates Determined?
Each insurance company will use its own calculations and algorithms to set its rates. However, it helps to know which variables are included in the underwriting process, so you know how to prepare for them.
- Age – The older you are, the more expensive your insurance will be. After a certain age (i.e., 70), most companies will no longer allow you to buy specific plans.
- Gender – Because women tend to live longer than men, they pay less for life insurance.
- Smoking – Being a smoker won’t prevent you from getting coverage, but you will have to pay more.
- Health Issues – Here is where companies differ the most. For example, some providers may decline you for having diabetes, while others won’t. Be upfront and honest about your medical conditions, as you may have to take an exam.
- Risky Behaviors – If your job is dangerous or you partake in risky hobbies (i.e., hang gliding), your rates can substantially increase. In some cases, you may even get declined.
Life Insurance Riders
If you want extra coverage for yourself, you can add a life insurance rider to your policy. These add-ons can differ between companies, and some of them will cost extra while others may be free to include.
As a rule, riders will offer living benefits, such as a waiver of premiums if you become disabled. Be sure to talk with your insurance agent about the riders offered by the company so you can weigh the pros and cons before finalizing your policy.
In some cases, however, you might be able to add a rider after starting coverage. Ask if that is a possibility, though, as some companies don’t allow that.
Bottom Line: Do Your Homework Before Buying Insurance Online
If you are trying to buy life insurance online, you need to know as much as possible to get the best rates and coverage. This guide should give you an excellent idea of what to expect, but there are plenty of other details to consider.
Fortunately, at NextGen Life Insurance, we make it easy to compare and find policies to protect you and your loved ones. Get your free quote today or call us at 646-216-4199 to get started.