How to buy life insurance

What are the basic types of life insurance?

There are two basic types of life insurance -- term life and permanent life. For most people, term life is the best choice, but we'll give an overview of each below.

Term life

Term life insurance provides coverage for a set period of time, called the term length. Common term lengths are 10, 20 or 30 years. Premiums are usually level, which means they stay the same over time.

If you die within the term, the policy pays a death benefit to your beneficiary.

Age and health play large roles in the cost of life insurance. This is true regardless of the type of policy you choose. However, term life tends to be cheaper for almost everyone, and that's because it has a set ending point, and the shorter the term length is, the less likely the insured person is to die during that time period.

Thus, a 10-year-term policy will be cheaper than a 30-year-term policy. For the same term length though, younger people in better health will pay lower premiums.

For a 30-year-old, a 10-year-term policy with a $100,000 death benefit can be purchased for less than $7, based on rates gathered from Compulife. As you age, and as your increase the amount of coverage, that premium will go up. Smokers and people with serious health conditions will also pay more. Still, term life is the most affordable life insurance option.

Permanent life

Permanent life insurance covers you for your entire life. Permanent life is far more expensive than term life for two reasons:

1. It pays a death benefit no matter when you die.
2. Permanent life policies have cash value.

The cash account grows tax-free over time. You can get money from the account or cash in the policy if you decide you no longer want the insurance coverage. (Be aware you may pay hefty fees if you surrender the policy in the early years.)

A variety of permanent life insurance policies are available:

• Whole life insurance is the simplest form of permanent coverage. The premium and death benefit stays the same, and the return on the cash value is guaranteed.
• Universal life insurance provides flexibility. As long as you meet the initial minimum payment, you can pay more or less, skip premiums, and increase or decrease the death benefit.
• Variable life insurance offers the potential for greater growth in cash value than traditional permanent policies, but it comes with risk. You choose how the money is invested, and the policy's death benefit and cash depend on the investment's performance.
• Variable universal life insurance is a hybrid of variable and universal life insurance. It allows you to vary your payments, invest your policy premiums, and your coverage amount.

How much life insurance to buy

When deciding on life insurance, you need to:

• Figure out how long you need coverage
• Think about how much your survivors would need to replace your current and future income
• Factor in the immediate and long-range expenses you want to be covered and the debts you want to be paid off
• Subtract savings and proceeds from other life insurance policies

With these things in mind, you can select the term length (or permanent coverage) as well as the death benefit amount.

How to purchase life insurance

To buy the life insurance policy that's right for you, follow a few basic steps:

1. Choose the type of policy you need. Before you shop, choose whether you need term life insurance or a permanent life insurance policy.
2. Decide on a death benefit. Once you know what kind of life insurance policy you need, use the steps above to decide how much you need the death benefit to be.
3. Request quotes from multiple life insurance companies. Compare life insurance quotes for the same policy type and coverage level.
4. Research life insurance companies. Before you buy, look at financial stability ratings and customer complaints for each life insurance company you're considering. Remember that life insurance premiums are just one factor; you need a life insurance company you can trust.

How are life insurance premiums determined?

Your life insurance quote will vary based on a variety of factors, including:

• Your age and gender
• Your health status
• Lifestyle factors like smoking
• Any high-risk activities, like skydiving
• The coverage you choose

Not all insurance companies weigh these factors equally, so you can expect some variation in the rates, even with all of the coverage levels being equal.

Should you add life insurance riders?

You can pay more to add special features, called riders, to a term life or permanent life insurance policy. Available riders vary by company and policy.

Common riders include:

• Waiver of premium -- Waives the premium if you become seriously ill or disabled.
• Return of premium -- Returns the premiums you paid at the end of the term if you haven't used the policy (term only).
• Guaranteed insurability -- Lets you purchase more insurance later without providing information about your health.
• Accelerated death benefit -- Allow you to collect a portion of your death benefit if you become terminally ill.
• Critical illness -- Provides money if you’re diagnosed with a critical illness.
• Guaranteed insurability -- Provides a policy without a medical exam.
• Long-term care -- Gives money from your health benefit for care.

Riders usually add to the cost of plans. For instance, if you added a return of premium rider, you might pay more than double.

What type of life insurance is right for you?

Similar to every other type of insurance, which kind of life insurance plan is right for you depends on your preferences and situation.

Here's when each type of life insurance would be a good option for you:

You should buy term life insurance if:

• You need coverage for a limited period, such as until the kids graduate from college and the mortgage is paid off.
• Your estate is small enough that it would not be subject to estate taxes.
• You're not interested in life insurance with an investment component.

You should buy permanent life insurance if:

• You have a lifelong dependent, such as a child with a disability, to provide for after your death.
• You have a large estate to protect or a family business to continue. The beneficiary could use the death benefit to pay the estate taxes, so your heirs would not have to sell off parts of the estate or business to pay taxes.
• You want a policy with an investment component.
• You want to leave a legacy.

You also have the option of choosing a combination of term life and permanent life insurance. You might want a large term life policy to cover you while your children are growing up and a smaller permanent policy to cover final expenses if you die after the term life insurance expires.

Most term life policies can be converted to permanent life insurance. You can buy an inexpensive term life policy when you're young and starting a career, and then convert portions of the coverage to permanent life insurance as your earning power grows.

No matter what life insurance you buy, make sure it fits your situation.