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Roughly 1,000 life insurance companies sell life insurance in the U.S., but many are members of groups of companies and so aren’t really competitors with each other. Having separate companies enables a group to offer its products through separate distribution channels, to more efficiently meet the regulatory requirements of particular states, or to achieve other organizational goals. There are an estimated three hundred company groups.
Moreover, not every group has a company licensed to operate in each state. As a general rule, you should buy from a company licensed in your state, because then you can rely on your state insurance department to help if there’s a problem. And if the insurance company becomes insolvent, your state’s life insurance guaranty fund will help only policyholders of companies it has licensed. To find out which companies are licensed in any state, contact that state’s state insurance department.
There are several other points to keep in mind when selecting a life insurance company:
- Product – most, but not all, companies offer a broad range of policies and features, so choose a company that offers the product and features that meet your needs.
- Identity – life insurance company names can be confusing, and different companies can have similar names. Life insurance company names often use words that suggest financial strength (such as Guaranty, Reserve, or Security), financial sophistication (such as Bankers, Financial, or Investors), maturity (such as First, Pioneer, or Old), dependability (such as Assurance, Reliable, Trust), fairness (such as Beneficial, Equitable, or Peoples), breadth of operations (such as Continental, National, or International), government (such as American, Capital, or Republic), or well-known and respected Americans (such as Jefferson, Franklin, or Lincoln). Be sure you know the full name, home office location, and affiliation (if any) of any company you are considering (for an example, click here).
- Financial Solidity – life insurance is a long-term arrangement. There is no guarantee for life insurance policyholders similar to that provided for bank accounts by the Federal Deposit Insurance Corporation (FDIC). Select a company that is likely to be financially sound for many years, by using ratings from independent rating agencies.
- Market ethics – some life insurance companies subscribe to the principles and codes of conduct of the Insurance Marketplace Standards Association, a nonprofit organization that promotes ethical conduct in life insurance marketing.
- Advice and service – for many people, life insurance is a strange, complex product, so that it helps to deal with a representative with whom you can communicate and who is attentive to your needs. This might be connected to the selection of a life insurance company because some agents represent only one or a very few life insurance companies. See How do I select a life insurance agent?
- Claims – you may want to check a national claims database to see what complaint information it has on a company. Also, your state insurance department will be able to tell you if the insurance company you are considering doing business with had many consumer complaints about its service relative to the number of policies it sold.
- Premium and cost – The premium is the amount you pay the company for the life insurance contract with all of its benefits. Even for a given death benefit and type of insurance (e.g., term life), the premium can vary widely among companies, either because some companies’ policies have features that others don’t, or because some charge more than others for the same coverage. So the first step in comparing policies is to make sure you compare similar insurance plans, based on:
– Your age
– The type of policy and policy features
– The amount of insurance you are purchasing
The premium for the policy isn’t the same as the cost of the protection portion of the policy. One policy might have a higher premium but also offer more benefits (for example, it might pay policy dividends) than another. Or both might promise dividends, but in different amounts at different points in time. In each case, the higher-premium policy might have a lower cost of protection. How can you tell what a policy’s cost is? Companies should tell you a policy’s Net Payment Cost Index and its Surrender Cost Index. Use the Surrender Cost Index if you’re thinking of keeping the insurance only for a specific period of time; use the Net Payment Cost Index if you expect to keep the policy indefinitely. Generally, the lower the cost index, the better.
8 smart steps for buying life insurance
How to buy life insurance in 8 smart steps
Life Insurance
IN THIS ARTICLE
- 1. Verify whether you need life insurance coverage.
- 2. Calculate how much life insurance coverage you need.
- 3. Decide on your financial goals for your life insurance.
- 4. Determine what type of life insurance best meets your financial needs.
- 5. Find out if you need to add any “riders” to the policy.
- 6. Shop around to find the best life insurance coverage for you.
- 7. Decide whether to pay annual premiums at once or in installments.
- 8. Tell your beneficiaries about your life insurance policy.
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Life insurance can be a vital tool for financial planning, but finding coverage that meets your goals and budget can be challenging without guidance. Don’t worry. A few simple steps will help you focus on the essential aspects of buying a policy that fits your needs.
1. Verify whether you need life insurance coverage.
Yes, life insurance is useful but it is not necessary for everyone. Consider purchasing a policy if any of these conditions apply to your situation.
- Someone depends on you financially and would likely still need significant financial resources after your death.
- Your estate won’t have enough liquid assets (cash, investments, property, or other saleable items) to cover its taxes and debt, eroding the inheritance you plan to leave behind.
- You wish to cover your funeral and burial expenses at least so that your assets remain intact for your legacy and heirs.
Otherwise, it is possible you don’t need life insurance. You may also consider life insurance as a viable strategy to leave a charitable legacy for a cause you support.
2. Calculate how much life insurance coverage you need.
This part of the process can be daunting for many people, but it need not be. Take a quick snapshot of your finances and answer the following three crucial questions:
1. What financial resources will be available to your survivors or heirs after your death? Look at three primary categories of resources:
- Social security and other retirement-related survivor benefits;
- group life insurance (e.g. a policy you may have through an employer); and
- other assets and financial resources
2. When will these resources become available? For example, social security survivor benefits are payable immediately to a surviving spouse if there are dependent children. If not, social security may not be available to your spouse until after age 60.
3. Determine what your survivor’s financial needs may be after your death. For simplicity, you might focus on three categories of requirements: final expenses, debts, and income needs.
Next, subtract your survivors’ financial resources from their financial needs to determine how much coverage to buy. Many people are underinsured, often because they skip these steps or take a shortcut (such as simply buying a multiple of annual income). For more help in determining the right amount of life insurance, see: How Much Life Insurance Do I Need?
3. Decide on your financial goals for your life insurance.
The overall reason for buying life insurance is to leave behind financial resources for who or what is important to you. Premiums payments to the insurance company go toward the death benefit, the financial payout after your death. Many people plan for this money to take care of their final arrangements, cover living expenses for loved ones, or support a favorite cause. However, you can also use a life insurance policy to accumulate savings, maximizing the income you will have for your retirement or providing an income stream after your death for your survivors.
4. Determine what type of life insurance best meets your financial needs.
You may have heard about various categories of life insurance, including term life, whole life, and universal life. Each of these comes with fundamental distinctions. Consider how these differences might work for you.
Term life policies offer payment of a specified death benefit for a specific term of your life, such as five, ten, 15, or 20 years. Term life insurance coverage for most people tends to involve lower premiums; however, the longer the term, the more expensive your premiums may be. If you want insurance coverage for only a specific period or are on a limited budget, a term life policy may be a good fit.
However, what if you want to purchase insurance coverage for several decades until your death. Or, perhaps you’d like the option to use some of your premiums to accumulate savings? A whole or universal policy might be a good option in either of these cases. Basic whole life insurance involves a fixed premium and promises a minimum rate of return on the dollars invested, which builds the policy’s cash value. A universal life insurance policy may offer the potential to increase the death benefit or adjust premium payments.
5. Find out if you need to add any “riders” to the policy.
Life insurance policies offer primary benefits according to the type of policy you purchase. But your coverage can be expanded or personalized through riders, optional additions to a life insurance policy that provide supplemental coverage or benefits you wouldn’t receive with a standard policy. Adding some riders may increase your premiums, while other riders might be free.
There are two riders that you may want to consider: waiver of premium and guaranteed insurability. Some policies come with one or both included with the basic contract, but if not, it is generally a good idea to add them. Waiver of the premium pays the life insurance policy premium for you if you are disabled. Guaranteed insurability permits you to add to the death benefit without providing additional evidence that you are in acceptable health.
6. Shop around to find the best life insurance coverage for you.
There are many ways to save money when buying life insurance, but they don’t always entail paying a lower premium immediately. Nonetheless, life insurance is a very competitive business, and, therefore, quotes can vary significantly between companies. Consider that what’s important is that you get the coverage that fits your budget and financial goals. If you choose to work directly with an agent, make sure your agent knows about your financial situation and takes time to explain your options in easy to understand terms.
7. Decide whether to pay annual premiums at once or in installments.
You may have the option to pay an annual lump sum or spread out the yearly cost over smaller, more frequent payments. It may be more cost-effective to pay annually as often there may be a relatively large additional charge for paying in installments. Decided what works best for you.
8. Tell your beneficiaries about your life insurance policy.
Once the policy is purchased, tell your beneficiaries which company issued it, where to find the paper copy of the policy, and any specifics about what you want them to do with the death benefit. While it is rare for people to be unaware they are the beneficiary of a life insurance policy, it does happen, and benefits may go unclaimed. Don’t forget to store your documents so that your beneficiaries can easily access them.
