Buying life insurance for the first time can be confusing at best – and intimidating at worst. Though it seems like a simple concept – you determine how much coverage you want, then search for the best rate possible – there are complications. There are different types of life insurance, many containing fuzzy provisions, plus all kinds of riders that can make it seem as though you’re trying to solve an algorithm, rather than simply buying a life insurance policy.
To cut through some of the confusion, here some of the basics that you need to know if you’re buying life insurance for the first time.
Term Life Insurance Is Your Best Value
Many life insurance companies, and their agents, will work hard to get you into a life insurance policy that contains an investment provision. Generally speaking, this is how whole life insurance policies work, including the more super-charged investment variations, including universal life and variable life.
If you are buying your first life insurance policy, you’ll probably be best to steer clear of these plans. For starters, they’re very expensive. The emphasis on investments will restrict the amount of insurance coverage that you will be able to afford to keep. For another, they’re usually not particularly good investments either.
The better course of action is to go with a term life insurance policy. Typically, you can buy term life insurance for less than 10% of what it will cost you for an equivalent amount of life insurance in a policy that contains an investment provision. That means that you have a choice either buy a higher level of coverage, and/or to invest the savings in a more traditional and profitable investment vehicle, like an index mutual fund.
Buy Only As Much Coverage As You Need – And No More
One of the main reasons why first time insurance buyers end up paying too much for insurance is that they simply buy more coverage than they actually need. Part of the reason for this is that there is a wide difference of opinion as to what actually constitutes an adequate level of coverage.
A frequently used rule of thumb is to multiply your income by a certain number. This can be anywhere between five and 10 times your annual income. But that’s actually an oversimplified convention. For example, a person who is single and has no dependents will likely be over-insured at 10 times his annual salary. But the person who is married and has young children will likely be under-insured at five times her annual salary.
All kinds of variables have to be considered when deciding how much coverage is the right amount. For example, even if you are married and have children, if your children are teenagers, having coverage that is even close to 10 times your annual income is probably too much. That will mean that you are paying more for your life insurance coverage than you need to.
You Probably Don’t Need Multiple Policies
Another reason why people – not just first-timers – pay too much for life insurance is that they carry too many policies. For example, you might have one policy to leave money to your spouse, and another to cover your children’s college education. You might also have a policy to payoff your mortgage, and still others to pay off other large debts.
But if you have more than one or two life insurance policies, you’re almost certainly paying too much for your coverage. As a rule, life insurance becomes less expensive on a per thousand basis the larger the policy that you buy. Smaller policies mean that you are always paying a premium rate. One large policy covering all of those needs could fix the price problem quickly!
Make a Careful Evaluation of Your Health
The state of your health is a crucial factor in determining how much life insurance you can afford. If you have chronic health conditions, you will generally pay more for coverage.
For this reason, it’s important that you make a careful evaluation of your health before applying. It’s important to be completely truthful about your health, so that you can get the right insurance policy for any existing health conditions that you have.
This is also why general life insurance quotes are not entirely reliable. Just because ABC Life Insurance Company is quoting $500,000 of life insurance at $50 per month doesn’t mean that you’ll get that rate. The only way to know for sure how much you will pay is when the agent and the company know the specifics of your health.
Work With an Independent Agent
Given all of the variables related to buying life insurance – particularly as a first-time buyer – the best strategy is to work with a good independent life insurance agent. Since he works with a large number of companies, he will be able to find the best policy, at the most affordable rate, based on your specific circumstances.
He will also be there to wade through all of the technicalities and paperwork that accompany the life insurance application process. And if and when it comes time to change policies, he’ll be there ready to help you with that process as well.
Call our office and let us help you get the best and most life insurance coverage, for the smallest possible premium. That’s what we do!
