The thing about buying life insurance is you know you need it, but because it falls into the “important but not urgent” bucket, you put it off, again, and again.
Sometimes until it’s too late.
Don’t be that person.
In my case, I’ve relied for too long on the free term life insurance benefit offered by most Silicon Valley employers of twice your salary. Given the average $130K salary in Silicon Valley, that would be ~$250K in coverage.
That might be fine for a single person, but not if you’re married, and definitely not with kids. In my case, with a stay at home wife and now 2 little ones tearing up the place, I needed more coverage, and I needed it now.
While I ended up purchasing insurance with an insurance company I have an existing relationship with, it’s good to shop around. Whether you use Policy Genius, Select Quote, or someone else, there are plenty of tools to help you comparison shop for life insurance. That said, cheaper is not always better! Remember that you are depending on this company to survive for the duration of your life insurance policy, to be there for your family when you are not. So while you may not want to go with the most well known (expensive) company, think twice about signing on with a low cost newcomer who is yet to be proven.
And keep these points below in mind as you’re starting the life insurance purchase process, no matter who you ultimately choose as a life insurance provider.
#1: Take Care Of Yourself To Get A Life Insurance Discount
Every life insurance company is betting on how long you’ll live.
They have detailed models, called actuarial tables, based on massive amounts of data showing odds of having to pay out a life insurance claim. Other than avoiding risky behaviors like skydiving, the most important thing you can do to reduce what you pay for life insurance is to improve your health.
These are the obvious things you’ve been told all your life.
- Stop smoking
- No drugs or alcohol
- Lose weight
- Exercise regularly
- Eat right
Unless you’re buying an expensive “no medical exam required” policy, you’ll have to answer questions about your lifestyle, and get a physical where they measure height, weight, blood pressure, and take blood for the usual blood panels. For the physical, some agencies may require you to go to a health center, others will send someone to your home to give you a once over at home.
Given the importance of your health, every agency has different rates they will offer depending on your health. Be aware most online quotes will show your their lowest rates assuming you’re in optimal health. Fail the physical and your rates will go up dramatically!
You know what to do, get started now.
#2: Purchase Term Life Insurance
Term life insurance is insurance you purchase for a specified amount, say $500K, for a specified time, like 20 years. Die in that period, and your beneficiaries receive the $500K. Die in 20 years and 1 day, and no payment is made. It’s much cheaper for the same coverage, and frees your remaining money to invest as you see fit.
I’m no life insurance expert. Depending on your specific situation, you may decide you want universal life insurance, a.k.a ‘whole life”, or one of the variations, like variable life insurance, which pay a determined amount on your death, but also have a cash value if you choose to terminate the policy. Or “term life with premium refund” where you receive your premium payments back when the policy expires (much more expensive!).
Personally, I’d rather invest my money in dividend stocks, peer to peer lending, real estate, or even a plain index fund, than invest in my life insurance and have that money tied up for the duration of my policy / life. Maybe you agree, or perhaps you feel otherwise. You know your situation best.
I like term life.
#3: Buy Life Insurance Early
Don’t make the same mistake I made, by depending on my employee benefit, and delaying purchasing my own life insurance until I was married with children.
The younger you are, the cheaper your insurance rates. Dramatically so.
Paying for a multi-million dollar policy when you’re 25 with no dependents doesn’t make sense. But you can have as many life insurance policies as you want, whether it’s with the same insurance company or you want to hedge your bets by having policies with multiple companies. So tier your life insurance, adding more insurance as you need it.
- Single in your 20s, buy a 30 year (or longer if you can find it) term life policy to cover your death expenses, and provide additional support for your aging parents you’re no longer able to care for.
- Get married at 30? Add a second term life insurance policy to provide for your spouse, for everything you won’t be available to help them with – paying down your mortgage, rebuilding a career for a stay at home spouse, etc.
- Kids start arriving? Kids are expensive! Food, clothing, school, hobbies, and all the rest! You can add another policy to provide for each child – perhaps a 25 year policy to cover their expenses until they graduate college.
Everyone’s life and life stages will be different. But the earlier you purchase your insurance, the cheaper it will be. So seek an optimal path of purchasing what you need, when you need it, but erring on the early side.
You’ll save money in the long run.
#4: Get More Life Insurance Than You “Need”
People tend to over-estimate how much life insurance they actually need. Sit down and take the time to estimate your expected expenses this policy is supposed to provide for. Come up with a number.
Now increase it. Potentially dramatically.
How much you increase it depends on the intended use. While it’s impossible to predict the future, you can extrapolate based on the past. Is the policy to pay a college tuition? Account for the recent explosive growth in college tuition the past decade.
Is this a 30 year policy? Inflation over 30 years can have a outrageous effect. You would need $215 today to have the same purchasing power as $100 30 years ago! Inflation is a bear that can take huge bites out of your intended support.
Be sure to plan ahead and take all these variables into account to ensure you have sufficient coverage.
That said, don’t go overboard. You have other assets – investments, retirement accounts, etc. – and you don’t want them to suffer to provide insurance you hope you’ll never need.
Finally, in the worst possible scenario, people do horrible things for money. Life has many twists and turns. You never want a beneficiary looking at you with dollar signs in their eyes, considering you a possible solution to their latest financial problem. People are killed for life insurance money at a shocking rate, but at least it’s better now than the bad old days when anyone could take out secret life insurance on anyone else without their knowing.
#5: Have A Will
Hopefully you’ve already completed your emergency financial information organizer, and as part of that process have completed a will.
Die without a will? Your local state government will take over and decide how your insurance benefit along with the rest of your estate will be distributed, and to whom. Always, always, always have a will. It will dramatically simplify the process for your loved ones left behind, and ensure that your last wishes are carried out.
Whether it’s a complicated estate plan with multiple trusts completed by an estate planner, or something completed with WillMaker or LegalZoom, the most important thing is to have something. And while you’re at it, make sure it’s not stored in your safety deposit box where no one can reach it when you not there to open the box!
As for beneficiaries, it depends on your situation, but keep in mind how long it will take your estate to be settled upon your death. It may be in your beneficiaries’ best interests that you name them directly in your life insurance policy so they can receive the benefit of your life insurance separate from your estate.
Do It Now
There you have it. Five rules to live, or insure, by. I’m glad I finally have my life insurance squared away. Better late, than never, or than too late…
What’s your story? Do you have enough life insurance? If not, what’s stopping you? If yes, do you agree with these rules? Please share your thoughts in the comments below.