Buying Life Insurance for Dummies
By James Tobin, CFP®
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Life Insurance Help Desk reviews
In the spirit of the famous Dummies line of books, this buying life insurance for dummies article is meant to help decode some of the confusing life insurance terms and products. This article will help guide you to make sound decisions about how much insurance you want and need for how long, what it will cost and how to choose a carrier and more.
Do I Need Life Insurance?
This is the first question to ask yourself when considering a life insurance purchase. For most people the answer comes down to "How will people I care about be affected if I die tomorrow?"
Most (but not all) people want their spouse to be helped out if they are no longer there. This feeling tends to be even stronger with young children involved. Some people want to make sure that educational opportunities will be available to their kids even if they are not around. These policies are usually term policies that can range from 50K to 5MM.
The other end of the spectrum covered bu this life insurance for dummies article is so called "final expense" policies that are much smaller (3K-25K) and are meant to cover funeral and burial expenses. These small whole life policies are designed to alleviate any pressure on your loved ones to come up with the money to pay for you final expenses. Final expense policies may only make sense if there is no estate that would pay for the burial expenses.
How Much Life Insurance Do I Need?
If you have come to the decision that you require life insurance, reading the buying life insurance for dummies article is a good first step. The next step is to determine how much and for how long. In the case of final expense insurance, the how long question of how much is generally determined by your budget and the cost of burials in your geographical area. Whereas the question of how long is simple (until you pass).
In the case of younger folks with (or without) children the calculation is a little more complicated. In fact, there are programs that will spit out 40 page needs analysis. However the Life Insurance Help desk believes that the acronym L.I.F.E provides an excellent formula to get to the basic want/need analysis..
"L" is for loans outstanding- Simply add your outstanding loan payments (,mortgage, student debt, auto..etc)
"I" is for Income - Simply multiply your income by the number of years until retirement ( you can add an adjustment for inflation if you choose).
"F" is for Future expenses - Add up any future (non- educational) expenses that you would like to fund ( for instance, an addition to house your elderly parents).
"E" is for Education- This is the anticipated secondary education cost for a child (room tuition and board)
The sum of these figures is a reasonable needs analysis of desired coverage. In the real world, this figure is often lowered by budget restraints, but it is a great starting point.
How Long Do I Need Life Insurance
The answers to this question are largely decided by the L.I.F.E. formula.
If you are a homeowner, you simply look at the remaining length of your mortgage ( and give some thought to if you are in your "forever" home. Do the same exercise with other debts.
Calculate how many years out from retirement you are, and that is how long you will need income replacement.
Calculate how many years out any future expense obligations appear to be (an inexact science to be sure).
Calculate the number of years until your children will be done with educational expenses (if you intend to help).
After doing these calculations, you will likely come to the conclusion you need differing amounts of insurance for differing years. For instance, if your home loan will be paid in 10 years but your kids won't be done with school for fifteen and you don't expect to be concerned with your parents health for another twenty years. In cases like this it may make sense to "ladder " policies. Laddering policies is a cost effective way to make sure you are not over insured.
Most carriers offer life insurance terms of 10,15,20,25 & 30 years. Some carriers are experimenting with 40 year term policies.
How Much Will Life Insurance Cost
This is the number one question asked and therefore is addressed here in buying life insurance for dummies.
Term life insurance and "final expense" are priced in a materially different manner. The reason is that life insurance carriers don't expect to pay out on term policies and they are priced accordingly. Final expense policies , on the other hand, are a guarantee to pay out as long as payments are made. Afterall , we are all going to die. To see a final expense quote please see the final expense page on our site.
The pricing of term insurance has several variables. These variables are age, gender, amount of coverage, length of term , health of applicant (including smoker/non smoker) and the carrier chosen.
Since your gender and age are set in stone, the most important variables to cost are coverage amount term and choosing the carrier who is most likely to see your health condition in the best light. We will address carriers differing appetites for specific health conditions in the sections below.
As for manipulating price by changing coverage amounts and terms (and health ratings) simply experiment with the quoter on this page. Just remember that the carriers all have different underwriting standards , so "preferred" with on company may be 'standard" with another.
How Do I Choose the right Carrier
This is a complicated question with a pretty simple answer: use an independent agency with access to many carriers and have them shop for the best deal. "best deal" may mean the lowest price or it may mean a policy with a child rider attached. To some the "best deal" may mean a carrier who doesn't require a medical exam. For others it may mean the carrier with the fastest underwriting time.
Most of these various "wants" are not publicly available information. Furthermore, if you speak with an agent that is dedicated to one company, you won't get the full slate of options.
Different underwriting standards
In addition to having different product offering and different policy riders, life insurance carriers all have differing reinsurance agreements- which means they have different appetites for certain conditions. For instance height and weight tables are different at all companies (sometimes significantly so).
It's not just build either, one carrier like Lincoln Financial will entertain serious conditions like prostate cancer and Atrial fibrillation where other carriers like SBLI will not. These underwriting standards are tightly held for fear of adverse selection. The result being that without the guidance of an experience agent with access to 50+ carriers you will be flying blind.
Life Insurance for Dummies Buyers Guide
Shopping for life insurance can be overwhelming and we have tried to give a brief overview of the basic questions. Additionally there are several links you can follow to get a little more substance on these subjects. However, if you don't have time to go through all the life insurance for dummies article links, you can just download a copy of the buyers guide. This guide will walk you through all the steps and provide you with the tips and tricks necessary to find the best deal.
Thank you for visiting the Life Insurance Help Desk to review Buying Life Insurance for Dummies. We sincerely hope that it helps clear the confusion that life insurance seems to cause.
If You are or soon will be in the market for life insurance, we encourage you to use our quote tools and we will get right back to you. Should you have any questions, please feel free to give us a call at (203) 424-1100.
Bonus: The most common mistakes people make buying life insurance and how to avoid them