BBB Tip: How to buy life insurance

  Life insurance is an important aspect of financial planning. However, with so many options available, finding a policy that fits your budget and financial goals can be a real challenge. In fact, a recent study revealed that people who don’t feel knowledgeable about life insurance are less likely to have coverage. The Better Business Bureau (BBB) recommends the following tips to help you decide if you need life insurance, what kind of insurance is best for you, and how to purchase a policy.

  Tips for purchasing a life insurance policy:

• Determine if you need life insurance coverage. Life insurance is practical for many, if not most, people, but there are situations where you might not need it. You should definitely consider purchasing a policy if:

You want your funeral and burial expenses to be paid without eating into your assets

Loved ones depend on you financially and would need significant financial support if you passed away

Your family would be left with a large debt in the event of your death

You want to pay for a dependent’s childcare, tuition or retirement expenses

You wish to leave a charitable legacy behind for a cause close to your heart

  If none of these situations apply to you, you might not need life insurance.

• Think about how much life insurance you need. Think specifically about the financial needs of your beneficiaries to figure out how much insurance you should buy, recommends the Insurance Information Institute. Three questions can help you determine a number. Once you determine the answers, subtract your survivors’ resources from their needs to determine a specific coverage amount to purchase.

  What financial resources, including social security benefits, group life insurance payouts, and any other assets or income, will your survivors have to rely on?

  How quickly will the resources become available to them?

  What are your survivors’ financial needs when it comes to paying your final expenses, covering debts, and general income requirements?

• Get to know different types of life insurance. Term life policies generally have lower premiums than permanent policies, as they only cover a specific term of your life. They typically last between one and 30 years. The longer the term, the higher your premium will be. Once the term is up, you stop paying and no longer have coverage. There is generally no cash value given back to the insured when the term is complete. That said, some life insurance companies might allow you to extend the term of your policy or convert it to a permanent policy, and in a few cases, they may offer a return of premium. A term life policy is a good choice for someone on a tight budget or who only wants life insurance for a specific time. Worth noting, too, is that if you have a group life insurance plan from your employer, it’s likely a term policy that ends when you leave the company.
• If you are looking for coverage that will span several decades until your death, you’ll want a permanent life insurance policy, which is sometimes called a “whole” or “universal” policy. Permanent policies cost more, but they have extra benefits, such as receiving the policy’s cash value if you terminate it early and borrowing the amount of the current cash value from the insurance company as a loan. There are a few different kinds you can choose from:

  Whole or ordinary life insurance. The most common kind of permanent life insurance, this kind of policy is straightforward. It offers a death benefit and works as a savings account. You agree to pay premiums for a specific death benefit, and the company agrees to pay you dividends periodically. Usually, this kind of policy includes a guaranteed interest rate and predictable premium rates over the course of the policy’s life.

  Adjustable or universal life insurance. This kind of policy gives the policyholder more flexibility than whole policies. Sometimes you can increase your death benefit by passing a medical exam. In addition, you can choose to pay more than your premium up to a limit, and the extra money goes into your cash account. Or you can pay less than the premium and draw from the cash account to cover the difference. These options make this kind of plan appealing to workers with fluctuating incomes. With universal life insurance, the cash value account (the savings aspect of this kind of policy) usually earns interest based on current market rates, which can change over time. All these factors mean this kind of policy needs to be monitored regularly by the policyholder. Keeping an eye on the cash value of your policy will help you avoid a lapse in coverage, especially if you pay less than the minimum premium on occasion.

  Variable life insurance. With this policy, policyholders receive death benefits, and they can also use their cash value account to invest in stocks, bonds and money market mutual funds. This means there is a potential for growing the value of your policy quicker, but there is quite a bit more risk involved. One example of variable life insurance is indexed universal life (IUL), which is best for someone with a good understanding of the stock market, fees and forecasts. IUL is increasing in popularity, but without at least some experience with investments, it can be easy to allow coverage to lapse. Plus, market crashes could mean you’ll need to pay higher premiums to keep your policy in force.

  Variable-universal life insurance. This kind of insurance lets you invest your cash account in the stock market while at the same time offering you the ability to adjust your death benefit and premiums.

• Decide if you need any life insurance policy riders. Policy riders are extra benefits used to customize policy coverage. Adding riders usually means paying a higher premium, but they are worth it in many circumstances. For example, you might want to include a children’s term rider, which allows parents to cover their children and receive a death benefit if the child dies before a specified age.
• Compare life insurance companies. There are many providers to choose from, so you’ll want to do comparison shopping. You can contact an insurance agent, a broker or an insurance company directly to get help comparing policies and pricing, or, in many cases, you can comparison shop online. Once you’ve narrowed down your selection, make sure the companies you are interested in are licensed and have a good business reputation. Read reviews, look up the company on BBB.org and ask your friends and family if they have any experience with it. Take the customer service level into account, along with the company’s financial rating. Remember that the financial rating they’ve received is a projection, not a guarantee.
• Review the insurance contract carefully. Make sure you fully understand any policy you are considering. All terms and conditions of an insurance policy are outlined in the contract. You should know how much you’ll be paying for how long in order to receive protection, what will happen if a premium payment is late and any information on restrictions as to insurance company investments. Since insurance contracts are legal documents, they can be wordy and difficult to understand. If you’re having trouble with the language of the contract, ask your agent to explain it in layperson’s terms.
• Be ready to answer lots of questions and be honest with your answers. You’ll likely need to fill out a lengthy application, which might include giving specific information about your health, family history, profession and even your driving record. Be ready to spend some time answering honestly. Insurance companies use third-party sources to verify your answers, so any untruths will probably be discovered, putting your policy in jeopardy.
• Store your documents in a safe place. Once you’ve purchased a life insurance policy, keep it in a safe place, like a safety deposit box. Let your beneficiaries know about the policy, what you want them to do with the death benefit and where they can find a copy of the policy. Otherwise, it’s possible their benefits could go unclaimed. Give your lawyer a copy of your policy, too.
• Watch out for mail-order life insurance. You might get offers to buy life insurance through the mail at attractively low prices. The pitch might say you will be approved regardless of age and health. Be careful! Never purchase such a policy until you have read and understood every word, not just the advertising. Also, check with state insurance authorities to find out if the company is licensed to sell insurance in your state.

For more information

  Read BBB’s tip about insurance companies (https://www.bbb.org/article/tips/14094-bbb-tip-insurance-companies). Read other BBB tips about other types of insurance, including car insurance, travel insurance, flood insurance and long-term care insurance, at bbb.org. Stay alert to insurance scams by reviewing the tips found at BBB.org/AvoidScams.

  Always look for businesses that follow BBB Accreditation Standards and BBB Standards for Trust.