How to Buy Life Insurance: Steps & Choices

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Not everyone has or wants life insurance, but for those that want that extra security or want to pass on a sum of money when they die, choosing the right life insurance is a fairly big decision. Learn what steps to take in this lesson.

Life Insurance

Barry is 36 years old, married, and has 3 kids. He wants to buy life insurance now just in case something happens to him. He wants to make sure that when he dies, his family will have the financial means to bury him as well as have additional funds to live without worries. What is life insurance? Life insurance is an insurance policy that pays out a predetermined sum of money when you die or after a certain period of time. Let's follow Barry as he makes an important decision about purchasing the right life insurance policy for him and his family.

Choosing an Agent

Barry is new to the world of life insurance. He doesn't know much about what is available or what type of life insurance is best for him. Before even considering the choices, Barry needs a good life insurance agent to help him. Choosing a life insurance agent is a very important step for Barry. If he doesn't choose the right life insurance agent, he may be misdirected into purchasing a life insurance policy that doesn't meet his needs.

A good life insurance agent will explain the various life insurance options using terms you can understand. The agent will work to understand what your needs are, how your finances are, and life obligations that you have, such as a spouse and/or children. The agent won't pressure you into deciding before you are ready. The agent will take the time to explain to you your available options, and he or she will also periodically get back in touch with you to make sure the policy is still meeting your needs. And lastly, your agent should be licensed by your state.

Checklist

To help Barry find the right life insurance agent for him, he makes a checklist. The right agent will meet all the items on the checklist.

Licensed
Uses easy to understand terms
Doesn't pressure to buy
Understands my needs
Explains my options

As Barry searches for the right agent, he also asks his friends and colleagues for any recommendations they might have.

Types of Insurance

After finding the right agent, Barry can now look at the different types of insurance available to him.

Barry's agent explains there are two major types of life insurance. There is term life insurance that covers you for a set period of time, and then there is permanent life insurance that also acts as a kind of savings plan that covers you for life. Permanent life insurance has a cash value for you while term life insurance is just insurance with no cash value. Also, permanent life insurance increases in value as you get a return on your investment like you do with a savings account at a bank. Barry's agent recommends term life insurance since Barry is still young, doesn't have that much extra money at the end of the month, and he has kids. He says permanent life insurance is sometimes used for estate planning purposes and is also more expensive. He says when Barry gets older, he may want to think about purchasing permanent life insurance that will cover him till he's 100 years old. Term life insurance right now will give him more protection at a more affordable cost.

If Barry chose permanent life insurance, he has some additional choices to make. He can choose between whole life insurance, universal life insurance, or variable life insurance. Whole life insurance gives you a fixed monthly premium in return for a small return on your investment for as long as you have the policy. With universal life insurance, you can choose what happens to your return on your investment. You can choose to pay your premiums using your return on your investment and you can change your coverage amounts as needed. Variable life insurance mixes life insurance with a mutual fund, so your rate of return changes according to the mutual fund. You also get to choose how your money is invested.

Barry knows that he chose a good insurance agent when he tells Barry to do some research on his own to check out the current companies that are offering life insurance. Barry's agent tells Barry to choose a company that has a good record and that has been in business for a while. He says you don't want to purchase a life insurance policy from a company that won't be around in five years.

Costs

Barry's agent explains that life insurance costs can be as little as just $20 a month or as much as a few hundred dollars a month. It all depends on the health and age of the individual and of course the life insurance type and amount of coverage. The younger you are, the cheaper it is. The healthier you are, the cheaper it is. Life insurance is also cheaper if you are a non-smoker.

Settlement Options

Barry's agent then goes on to explain the settlement options available to Barry's beneficiary, his wife. He explains that Barry's wife, when she puts in a claim on Barry's life insurance upon his death, can choose to get a lump sum of the life insurance coverage, or she can choose to get paid in smaller amounts over time. There is an interest income option where the life insurance company keeps the funds but pays out interest earned on the funds. This is a good option if the funds are not needed right away and are to be kept for use at a later date. There is also an option called the life income option where the beneficiary is guaranteed an income for the rest of his or her life. Of course, with this option, the actual amount received per month depends on the age of the beneficiary and the life insurance amount.

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