If filling the insurance gap in your financial plan is on your to-do list, here are the basics you need to know.
1. Get to know your life insurance options
In general, life insurance falls under two umbrellas: term coverage or permanent life insurance. Term life insurance covers you for a set time period, such as a 20- or 30- year term. Permanent life insurance, on the other hand, covers you for life as long as you pay your required premium payments on time. Certain kinds of permanent life insurance, such as whole life and universal life, can build cash value over time.
Term life can typically offer lower premiums, but you won't build cash value. Meanwhile, permanent coverage can cost more, but you may be able to borrow against* your accumulated cash value if you need to. Keep this in mind as you compare policies.
2. Assess your life insurance needs
The next step is deciding how much coverage is enough. This number is different for everyone and it goes back to what your goals are for purchasing life insurance.
For example, if your goal is simply to leave behind enough money to pay burial expenses, a smaller policy amount may work. On the other hand, you may prefer a larger death benefit if you want to leave money behind to pay off debt, cover basic living expenses for your loved ones or ensure that your children can pay for college.
3. Decide how to get your policy
Next on your life insurance checklist is choosing how you will purchase your policy. You can work with a local agent or start the process by getting a life insurance quote online. Your choice depends largely on what you're most comfortable with. Checking insurance company ratings and reading consumer reviews can help you choose a life insurance company or agent to work with.
4. Complete the life insurance application checklist
The next step after choosing a life insurance policy is completing the application and any necessary medical exams. On the application, you'll need to be prepared to submit information including your:
- Date of birth
- Height and weight
- Doctors' names and phone numbers
You may also need to disclose any potentially risky occupations and hobbies or health issues, such as working a dangerous job, skydiving or being diagnosed with diabetes. From there, you may be asked to complete a medical exam which can be done in your home or at a doctor's office. The exam should be fairly quick and often involves drawing blood and checking your height and weight.
5. Choose your beneficiaries
Your beneficiary is the person(s) or entity(ies) who receive a death benefit payout from your in-force policy when you pass away. If you're married, your spouse might be your beneficiary, for example. Or you might choose your adult children or a sibling. Think carefully about who you want to benefit from your policy when deciding who to name as beneficiary.
6. Choose your riders and payout options
A rider is optional coverage you can add on to your policy. For example, if offered, you might include a long-term care rider that may allow you to receive living benefits from the policy to pay for long-term care costs.
Riders can enhance your life insurance coverage, but they can also increase your premium costs. As you look into riders, think about what's most important to have and how that might translate to a higher premium.
7. Finalize your policy
Once you've provided all of your information and completed the medical exam, the last item on your checklist for buying life insurance is underwriting. It's during this process that the life insurance company reviews your application and assesses the degree of risk that it will accept by issuing you a policy. If your application is approved, the last thing you'll need to do is sign the paperwork and arrange to pay your initial premium and continue to pay your premiums on time moving forward.
*Loans against the policy accrue interest and decrease the death benefit and cash value by the amount of the outstanding loan and interest.