No one likes to think about what would happen if they were to pass away. But for people who have family members and loved ones who depend on their income, it’s an important thing to consider.
Although it’s not the only way to protect dependents, life insurance can be an important part of ensuring a family’s needs are met if their primary source of support is not around to meet them—which is well worth the uncomfortable feelings the topic might stir up.
Figuring out how to get life insurance from start to finish can be broken down into simple steps so this not-so-fun task doesn’t feel overwhelming and confusing to boot.
Step One: Determining What Type of Life Insurance Is Needed
The first step in learning how to buy life insurance is to get really clear about what, exactly, the products are.
Life insurance is a protective financial plan that provides a lump-sum payment to designated beneficiaries when the insured person dies.
This money can be used to replace the income that the deceased person would have been earning, so that beneficiaries can continue to afford basic expenses such as food and housing—making life insurance particularly important for people with children and other dependents.
Life insurance comes in two major categories: term life insurance and whole life insurance, with several more sub-types.
Term Life Insurance
Term life insurance is the more straightforward and simple of the two types: The plan pays the beneficiaries only during the time when the policy is active, otherwise known as the policy’s “term” (hence the name).
Term life insurance policies generally range from one to 30 years in length. Under the umbrella of term life insurance, there are two basic sub-types: level term and decreasing term.
• In a level term life insurance policy, the death benefit—the amount paid to the beneficiaries at the time of the insured’s death—stays the same, or “level,” throughout the length of the policy term.
• In a decreasing term life insurance policy, the death benefit slowly but regularly drops, often with each passing year of the policy’s term.
Level term life insurance policies are far more popular than decreasing-term life insurance policies. The most common term is 20 years, though 5-, 10-, 15-, 25- and 30-year terms are also available. Some insurers also offer a yearly renewable term life insurance product.
Some term life insurance policies are “renewable,” meaning it can be continued for an additional term, or terms, up until a certain age, even if the insured person has undergone health changes or deterioration.
This can be helpful, since certain health and age are used to determine life insurance eligibility and cost.
Whole Life Insurance
Whole life insurance, sometimes also known as “permanent” life insurance, pays a death benefit no matter when the insured person dies—even outside the term of the plan. Again, underneath the umbrella of whole life insurance, there are several sub-categories.
• Traditional or ordinary whole life insurance is the most common type of whole life insurance, and offers a savings account—also known as the policy’s “cash value”—along with the death benefit. As the insured party pays premiums toward the death benefit, the insurance company issues dividends, increasing the cash savings that are tax-deferred and tappable during the insured’s lifetime. The cash value may also earn interest at a money market rate.
• Universal or adjustable life insurance works similarly to traditional whole life insurance, but provides some extra flexibility: by passing a medical examination, the insured person may be able to increase the death benefit, and by accumulating money in the attached savings account, they may also be able to alter premium payments—or even stop paying them altogether for a time. Of course, if the cash in the account is depleted to the point where premiums can’t be covered, it’s possible for the insurance policy to lapse and for coverage to end, so it’s important to keep a close eye on one’s finances in this scenario.
• Variable life insurance allows the insured party more control over the attached savings vehicle, which can be manually invested in stocks, bonds, and other assets. While this can mean the value of the account grows quickly, it comes with all the same risks of any other investment—and if the investments underperform, it’s possible to lose money in both cash value and the payable death benefit.
• Variable-universal life insurance, as its name suggests, combines the characteristics of variable and universal life insurance policies: The policy holder gets the investment ability (and associated risks) as well as the ability to adjust the premiums and death benefit.
Because whole life insurance policies provide coverage outside of their terms, its premiums tend to be more expensive than term life insurance coverage—sometimes significantly so.
That said, there are still other factors to weigh before deciding which type of life insurance is the best for a person’s needs.
Pros and Cons of Term and Whole Life Insurance
With so many types and subtypes, getting familiar with the ins and outs of life insurance may just make the whole mess seem that much more confusing. Even once all the policies’ ins and outs are understood, how does a consumer figure out which one is right for them?
If affordability is a top priority, term life insurance may be tempting off the bat. Whole life insurance can cost as much as 15 times what term life insurance costs, and the cash value savings vehicle that’s included with these types of policies can easily be replaced with a regular investment account.
Term life insurance is often enough to cover the expenses of children who, in 20 or 30 years, (hopefully) won’t still be financially reliant on the insured parent. Available for as little as $25 per month in some cases, term life insurance may seem like a no brainer.
That said, permanent life insurance does have some attractive features.
For example, parents of special needs children or those who have dependents who will be reliant on someone else for the rest of their lives might consider a permanent life insurance policy to be safer since it is meant to be in place for the insured’s whole life.
This differs from a term life insurance policy, in which after the term is over the insured is left to make their own plans to ensure their loved ones are taken care of after their death.
A whole life insurance policy can also go toward covering the estate tax , which is a tax levied by the federal government, and some states, on your right to transfer your property to loved ones after death.
However, most people don’t have to worry about the estate tax, as it’s only levied on estates valued at over $11.5 million in 2020.
It can also be nice to know that the premiums being paid each month will be worth something to the insured, which isn’t the case with most term life insurance policies.
When it comes to term life insurance, when time’s up, it’s up—and if the insurance wasn’t needed, the insured doesn’t get their money back. (After all, the paid service of just-in-case protection was still rendered; the “just-in-case” scenario simply never happened.)
With whole life insurance, however, the insured will at least have access to the cash value of the policy, no matter what, which can feel a lot better than what feels like flushing money down the toilet.
Pros of Term Life Insurance
• Significantly more affordable than whole life insurance.
• Simple and straightforward.
• Offers enough coverage for the needs of the average buyer.
Cons of Term Life Insurance
• No additional provisions aside from death benefit.
• Death benefit may decrease over time in some plans.
• Once term is over, the insured party doesn’t get any money back and must either shop for a new policy or self-insure.
Pros of Whole Life Insurance
• Permanent coverage for the entirety of the insured party’s lifetime.
• Cash value savings vehicle allows for monetary growth and use of funds during life.
Cons of Whole Life Insurance
• More expensive than term life insurance.
• Can be more complicated than term life insurance.
• Investment aspect of whole life insurance brings risk into the equation.
• The interest rate earned on the cash value savings vehicle might be eclipsed by other, less costly types of investment.
Step Two: Deciding Which Kind of Life Insurance is Right
After looking at the different types of insurance and understanding some of the basic pros and cons of whole versus term life insurance, applying that knowledge to one’s personal circumstances can be a challenge. Figuring out which policy to buy requires assessing an insured’s particular situation.
First of all, are there dependents who rely on someone’s income for their basic living expenses? If not, there might not be a need for a life insurance policy at all. The purpose of life insurance is to provide support for people left behind after the insured dies—so if they’re not supporting anyone financially while they’re alive, they might not need this kind of coverage.
That said, the cost of coverage might be lower now, and if a person anticipates this circumstance to change (if they’re, say, planning to have kids in the future). Even if the plan is to stay single and childfree, a charity or other organization can be named as a death benefit beneficiary.
What is reasonably affordable? Given how much more affordable term life insurance is than whole life insurance, cost may be a big factor in determining which kind of policy is right for a person’s particular financial situation.
Will a person’s dependents still be reliant on them in 10, 20, or 30 years? This is an important question to consider in choosing term life insurance.
If someone is deciding on a life insurance policy when their youngest child is already 15, for example, a 5- or 10-year term may make sense—but a 20- or 30-year term might not.
Does the insured have dependents who will be reliant on their income for the rest of their life or have a collection of assets that may be subject to estate tax? It is important to look at all of your options to determine if a whole life insurance policy or a term one makes more sense for you.
What is the insured’s level of risk tolerance? If signing up for a variable or variable-universal life insurance policy, investment risk will be part of the picture.
How Much Life Insurance Coverage Is Needed?
Along with choosing the best type of plan for a person’s individual needs, they must also consider how much life insurance they require.
Term life insurance policies tend to run from about $20,000 to $10 million. That’s a broad range! How can someone determine how much coverage is right for their family’s needs?
The idea is to ensure that family members are well cared for in case of the insured’s death, so many experts recommend a life insurance policy of about 10-15 years worth of income. However, the most accurate way to determine how much life insurance to purchase is to break down the expenses the family might be expected to meet should the insured pass away.
Along with basic living costs, it might be wise to keep additional expenses such as children’s college tuition and the cost of the insured’s own funeral, which can add up to as much as $10,000 or more on its own. Loved ones may also be on the hook for debt left after the insured’s death if they co-signed on it.
Taking every expense—and every asset—into consideration when deciding how much coverage is appropriate is an important part of deciding how much life insurance to buy. Keep in mind that as time goes on, prices tend to go up; factoring in inflation is also important.
While many calculators are available online to help people determine how much life insurance they might need, a professional financial planner is likely the best resource for making a customized, specific plan with individual circumstances in mind. Which leads to the next—and in many ways, most important—step in the process.
Step Three: Choosing a Provider
Life insurance is just one of a sea of insurance policies a person may own or plan to own: Homeowners insurance, renters insurance, and auto insurance are just a few of the types of insurance policies available. (In fact, some of these insurance policies may even be required by mortgage lenders, or mandated by states in order to legally drive a vehicle.)
And as with these other policies, life insurance can be purchased from a wide range of vendors, both directly and through an agent or broker.
Since many insurance agents work on commission, it’s unfortunately common to run into pushy sales tactics when shopping for coverage. But fortunately, the super-connected, digital world makes it easier than ever to find and purchase insurance policies on a person’s own terms.
SoFi, for example, has teamed up with Ladder to bring term life insurance coverage to members at affordable rates.
Coverage runs from $100,000 to $8 million and is available in 10- to 30-year terms, all of which can be adjusted at any time. Getting a quote takes just a few minutes and medical tests are not required for eligible applicants.
Ladder policies are issued in New York by Allianz Life Insurance Company of New York, New York, NY (Policy form # MN-26) and in all other states and DC by Allianz Life Insurance Company of North America, Minneapolis, MN (Policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to offer life insurance in the state of New York. Coverage and pricing is subject to eligibility and underwriting criteria. SoFi Agency and its affiliates do not guarantee the services of any insurance company. The California license number for SoFi Agency is 0L13077 and for Ladder is OK22568. Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other. Social Finance, Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderLifeTM policies. SoFi is compensated by Ladder for each issued term life policy. SoFi offers customers the opportunity to reach Ladder Insurance Services, LLC to obtain information about estate planning documents such as wills. Social Finance, Inc. (“SoFi”) will be paid a marketing fee by Ladder when customers make a purchase through this link. All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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