When you’re shopping for life insurance, there are many variables that can determine which plan is right for you.
If you currently don’t have life insurance, or if you’re one of the 30% of Americans who have life insurance, but say they need more, then you know how challenging picking the right plan can be.
The good news is, there are some parameters that can make choosing from among life insurance quotes a much easier process.
Wherever you stand on the purchasing spectrum, these handy comparison tools will help. Then, you can feel confident that no matter which plans you pick –it’s the right one for you and your family.
Interested in learning more? Let’s dig in!
Understanding Life Insurance
Before we begin talking about how to compare quotes, let’s back up just a bit and talk about Life Insurance 101.
You’ve heard about life insurance, and you know you need it for long-term protection, but do you know how it works?
In a nutshell, life insurance is an account you pay into while you’re living, that’s paid out upon your death. It helps protect your dependents financially when you’re gone and can be used to pay for everything from your funeral expenses to your children’s college tuition.
Yet, while the concept sounds simple, life insurance quotes are a far cry from one-size-fits-all.
Let’s take a look at some things to consider when you begin shopping around.
1. Figure Out Which Policy Type Is For You
The first thing you’ll need to decide when you begin comparing life insurance quotes is whether you want term life insurance or permanent life insurance.
Not sure about the difference between the two? Here’s a quick breakdown:
Term Life Insurance
Term life insurance provides coverage for a set number of years (usually 10, 20, or 30). If you die within the time period, your beneficiaries receive the death benefit, which typically equals the amount of the premium you’ve paid.
Some things to consider when comparing term life insurance quotes include:
With term life insurance, you’re essentially just paying down your death benefit, and only for a set number of years. Thus, the initial payment is lower.
In comparison, premiums paid on permanent life insurance are used to fund the death benefit, and to accrue cash value. Therefore, they typically come at a higher price.
Season of Life
Because term life insurance is only paid into for a set number of years, it can be especially beneficial to people in their early family years, such as couples with young children.
This is because, if one spouse dies, the other is left not only caring for himself or herself, but for family, with such financial responsibilities as college payments, weddings, and more.
Do you have a big expense coming up in the next 20 years or so? If so, term life insurance may be for you. When that timeframe is up and your policy expires, you’ll always have the option to reevaluate your policy and switch to another if you desire.
Permanent Life Insurance
This is a policy that guarantees financial protection for your lifetime, as long as you make the required payments.
Permanent life insurance does not expire after a certain time, as term life insurance does. A key feature of permanent life insurance is that it includes a savings or investment account that can build up cash value over time, and which you can borrow against tax-free. For that reason, it’s often referred to as “cash-value life insurance.”
There are breakdowns within the permanent life insurance umbrella, including whole life insurance, universal life insurance, variable life insurance, variable universal life insurance, and survivorship life insurance. Here’s a handy guide to the main types.
For simplicity’s sake let’s focus on one of the most prominent types: whole life insurance.
Whole Life Insurance
Whole life insurance is a form of permanent life insurance that has a set premium you pay into every year and accumulates tax-deferred cash value.
Some things to consider when comparing whole life insurance quotes include:
A whole life insurance policy purchased by a young person in good health will come at a lower premium than one purchased by someone older. With set payments, this option could save money over the course of a lifetime.
However, keep in mind that premiums paid for permanent life insurance can be significantly higher than those paid for term-based plans.
Certainty of Death Benefit
If you want to be 100% certain that your death benefit will be extended to your beneficiaries when you die, this option might appeal to you. Term life insurance requires that you die within the set timeframe for such benefits to be extended.
Access to Cash Value
This policy type allows you to accumulate cash value as you pay your premium. If you need to access that cash as a loan, it’s there when you need it.
2. Determine How Much Coverage You Need
The next step in comparing life insurance quotes is to determine how just how much coverage you and your family will need.
To do so requires adopting a long-term perspective. It’s not enough to simply consider your current circumstances. You must also look at what you want in the future, and what your long-term goals and objectives include.
Not sure where to start? We’ve broken it down into two steps:
Step 1: Figure out your immediate obligations.
Simply put, if you died today, how much would your family need to survive? Key figures to include in this calculation include your mortgage, childcare, outstanding medical bills, and current college costs.
Keep this number in mind.
Step 2: Think about the future.
How much money will your family need to comfortably survive without you, not just immediately, but for a long time into the future? There are many tools and calculators designed to help you determine this number.
While you can rarely predict the amount to the penny, experts recommend the following formula to get started:
- Take your current annual salary
- Multiply it by the number of years your income will need to be replaced after your death
- Add your immediate obligations and debts (Step 1)
- Add your family’s future obligations, such as funeral and estate planning expenses and future college tuition
- Subtract your liquid assets (existing accounts and savings, existing life insurance), making sure to account for future growth of these investments
While you’ll be left with a figure that should give you an approximate idea of how much coverage you’ll need, keep in mind that for the most part, these are estimates.
Industry recommendations point to leaning toward a little more life insurance than you think you’ll need, to account for any unforeseen expenses or circumstances.
3. Compare Each Policy’s True Price
Once you’ve determined which policy type best fits your needs and how much coverage you’ll need, your next step in comparing you life insurance quotes is to determine their true price.
If all you had to go on were the premium payments, this would be an easy comparison. Term life insurance payments are typically cheaper, as they only cover a set period of time.
Yet, it’s not that simple. To see how much each policy is truly worth, you must consider the entire cost of the plan over the course of time.
For example, money paid into a policy today is worth one amount, but over the course of a lifetime or even a decade, that worth can (and will) change.
So how do you know how much you’re really paying? Check your insurance ledger statement.
The National Association of Insurance Commissioners (NAIC) requires that life insurance companies provide you with two interest-adjusted cost indexes, which show the adjusted price of your policy depending on when your payments are received.
One is your net payment cost index. This reveals how much your policy will cost per year, on average, as you continue to pay into it. It’s calculated by taking into account your premiums paid annually and your dividends received, then adjusting for interest.
This is a helpful resource, especially if you’re primarily interested in a number of death benefits the policy you’re considering will provide.
Overall, the rule of thumb is that the lower the net payment cost interest, the lower the policy is overall.
The other index is your surrender cost index. This index, used for permanent life insurance policies, reveals how much you’d stand to make if you surrendered your permanent policy in the future, and claimed your cash value.
This index will be especially important to you if you’re looking at life insurance as an investment.
Another important piece of financial information to ask for when shopping around life insurance quotes is a cost disclosure form.
Mandated by the Department of Insurance, this form outlines all related costs and fees of the policy, accounting for changes in the time value of money. This form can be especially useful when you’re comparing your policy in question against other plans.
Comparing Life Insurance Quotes: Your Next Steps
It’s true that not all life insurance quotes are created equal. In fact, almost none of them are.
However, navigating the diverse and complex world of life insurance doesn’t have to be a solo effort.
We’re experts in the field of life insurance and we’re here to help you every step of the way. Feel free to contact us or leave a comment below if you’d like more information. We’re in this together