- You should consider getting life insurance if you have dependents.
- “Multiply 10” and DIME are two easy methods to figure out how much life insurance you need.
- While term life insurance is cheaper than whole life or universal insurance, it may not be the best option for you.
- Insurers used to require a medical exam but some companies no longer require it.
Death is never an easy topic to discuss, but it’s so important to plan for it.
In the unfortunate event that you pass away prematurely, you want to ensure that your dependents are covered—that’s what life insurance is for.
Getting life insurance doesn’t have to be complicated or expensive. Here are five steps you can take to choose the type of life insurance that fits your needs and financial situation.
Inside this article
Step 1: Determine whether you need life insurance
The primary purpose of life insurance is to financially protect your dependents once you’ve passed. But not everyone will need life insurance right away
“The right time to buy life insurance is when someone else’s livelihood is dependent on your ability to earn money or fulfill other essential activities, such as raising a family,” says R.J. Weiss, a Certified Financial Planner and founder of the personal finance site The Ways to Wealth.
Consider life insurance if you have young children or dependents with special needs. You want to ensure their living expenses are covered after you pass away.
You should also consider life insurance if you’re married and provide most of the income. This is especially important if you and your spouse own property together. Life insurance can help your spouse with payments by replacing your income with death benefits.
Weiss adds that some other instances might also give you a need for life insurance, such as a business partnership or high-net-worth estate planning. But if you aren’t financially responsible for anyone, life insurance may not be necessary.
If you find that life insurance makes sense for your situation, get it as soon as possible
The longer you wait, the more expensive life insurance premiums become. This is because health issues generally increase with age, so older applicants are viewed as risky customers for insurance companies.
Step 2: Figure out how much coverage you’ll need
Your unique financial situation will determine how much life insurance you need. At the very least, you’ll want to have enough life insurance to cover your dependents until they are financially secure. If you want to quickly get an estimate of your life insurance needs, financial experts recommend several methods you can use:
Multiply your income by 10
One common rule of thumb is to buy a policy that will pay out seven to 10 times your income before tax.
This is a good way to get a ballpark figure of your coverage needs, but the “multiply 10” rule doesn’t account for all potential expenses. For instance, if you have young children, you might want to factor in college expenses.
Use the DIME method
Unlike the “multiply 10” method, the DIME method is much more detailed in its approach to calculating your potential life insurance needs. The acronym takes into account your debt and funeral expenses, income, mortgage and future education costs.
To calculate your desired life insurance coverage, you’ll need to have these figures at hand:
Debt and funeral expenses: Determine the total amount of outstanding payments (excluding your mortgage) you owe plus an estimate of your funeral expenses. In the U.S., the average burial costs around $7,000.
Income: Multiply your annual income before taxes by the number of years your dependents might need financial support.
Mortgage: Determine how much you owe on your home and other property.
Education: Estimate how much financial support your children will need for their education. In 2021, the average in-state tuition was $10,740 while the average out-of-state tuition was $27,560 for a student attending a four-year public college.
Add all these numbers up to estimate how much your life insurance policy needs to cover.
Use a life insurance calculator
A life insurance calculator, such as the one from insurance company Northwestern Mutual will help you determine financial factors that might affect your coverage amount even more thoroughly than the “multiply by 10” or DIME methods.
A life insurance calculator subtracts your liquid assets (assets that can be easily turned into cash, like non-retirement investments and savings) from your total financial obligations.
You’ll be asked details regarding your assets, expenses and income, so be sure to have these numbers on hand.
Weiss advises clients, “Take the time to complete three to five more in-depth life insurance calculators you can find online. You’ll get a range of numbers depending on the variables, but over time, find a number you start to feel comfortable with.”
Step 3: Choose a type of life insurance policy
No two life insurance policies are the same. It’s important to identify which policy fits your circumstance so you don’t end up overpaying for a policy you don’t need.
Consider your budget
While it’s important to get enough coverage for your family’s needs, it’s equally important to know how much you can afford to pay in premiums each month. Even if that number is low, some coverage is better than none at all.
According to the Life Insurance Marketing and Research Association, a term life policy averages $160 per year for a healthy 30-year-old man.
Choose among term, whole and universal life insurance
Term and whole life insurance are the most commonly purchased life insurance policies.
Term Life Insurance
Term life insurance protects you for a set period of time—so you’re only covered if you die during that time. If you die during your term, your insurance company will pay your beneficiaries the policy coverage amount. If you die after your term ends, your beneficiaries will not receive a payout.
Term life insurance is best for new parents or healthy, young adults with smaller budgets. Because term life insurance provides death benefits only during a fixed period, the risks are much lower for the insurance company, and premiums are cheaper than whole and universal insurance.
There are several types of term life policies:
Convertible: This policy turns your term policy into whole life insurance (see below) before the term expires. Unlike a typical term life policy, convertible coverage guarantees renewal for a whole life policy.
Increasing term: This policy will increase your death benefit as the policy ages. Your premium will also increase.
Decreasing term: With this policy, your death benefit will decrease alongside your mortgage debts. The logic is that you don’t need as much life insurance, because you don’t have as much outstanding mortgage debt. Your premium stays the same.
Annual renewable: This policy guarantees renewal at the end of the term, but premiums generally increase (potentially by a lot) with each renewal.
Whole and Universal Life Insurance
These types of policies are both referred to as permanent life insurance, and they’re a good option for those with lifelong commitments. For instance, a whole life policy might be helpful if you have a dependent with special needs who’ll need permanent financial support after you pass at any point in life.
However, permanent life insurance can be much more expensive than term life insurance.
A whole life policy is a type of permanent life insurance that provides coverage for your lifetime. You pay a monthly premium until your death, at which time benefits are paid out to your beneficiaries. One feature of permanent life insurance policies is the cash value component.
Weiss explains, “If someone wants to accumulate cash value over time, the permanent life insurance policy would be a better choice. Permanent life insurance, sometimes called universal or whole life, accumulates cash value over time through interest earned on premiums paid.”
With a permanent policy, a percent of the premiums you pay is transferred to a tax-favored savings account that accrues interest. This is your cash value. Your beneficiaries won’t receive this cash value, but you can withdraw funds from this account during your lifetime.
The cash value can also serve as collateral to borrow loans from your insurance company. These loans often have lower interest rates and easier approvals than personal loans from other financial institutions.
Universal life insurance (aka adjustable life insurance) is another type of permanent life insurance. Unlike whole life insurance, the terms of a universal life insurance policy are more flexible. This type of policy lets you adjust premium payments and death benefits.
Just like a whole life policy, you can earn cash value with a universal policy. However, if you withdraw money from your account or terminate your policy, fees are often very high.
Step 4: Shop for life insurance
Premiums for life insurance vary based on the company’s policies. Shop around and compare quotes before you sign up to ensure you’re getting the best value for your dollar.
Research how much premiums might be for your age, policy type, term length (if applicable) and desired coverage. Then figure out how much life insurance you can actually afford.
You can go to the websites of different insurance providers and get a quote from each. But that would take a lot of time.
Speak to an agent or financial advisor
You can also speak to a life insurance agent if you need more help understanding your options. Just remember your agent is ultimately trying to sell you a policy, so be sure you understand all the fine print before you commit.
A knowledgeable agent you trust, however, can be a huge help in navigating the complexities of life insurance policies and assisting you in figuring out what you need.
You can also consider speaking to a fee-only financial planner to navigate through the life insurance process. Seek recommendations from friends and family, or visit the National Association of Personal Financial Advisors for vetted and trusted financial advisors.
Find out whether your employer offers life insurance
Your employer may offer life insurance coverage as a work benefit, but the death benefits are typically smaller than a term life or whole life policy you buy on your own.
If you’re single and have no dependents, this option might be something to consider, especially if you are older. Companies generally charge the same premiums for all employees, so your insurance cost won’t be higher based on your age.
If you have dependents and need more coverage, you might be better off buying a policy directly and paying the extra cost.
Step 5: Prepare for approval
Increasingly, life insurance companies are phasing out underwriting requirements such as the phone interview and medical examinations. Check whether your insurance company requires these steps—you might prefer to apply with a company that doesn’t.
Fill out an application
Your insurance company will ask you a series of questions regarding your health history and lifestyle.
Life insurance policies usually include a “contestability period” that says your insurer can deny claims if you die within the first two years of your policy and it finds discrepancies in your application. So be sure the health and lifestyle information on your application is accurate.
Do a phone interview with an agent
For companies that require this step, after you submit an application, a representative will schedule a phone interview with you. This interview usually requires about 15 to 20 minutes of your time.
During this interview, you’ll be asked about your lifestyle, health history and financial situation. The primary purpose of this phone interview is to ensure the information on your application is accurate and complete.
Take a medical exam
With some companies, you’ll be required to take a medical exam. If you choose to forgo this exam, you could be charged higher premiums. However, many online insurance companies skip it altogether.
Weiss notes, “While more and more companies are offering life insurance without a physical exam, these policies may end up costing more long-term, especially if you’re healthy. Since this is a bill you may be paying for 20-plus years, it’s worth looking into getting life insurance with and without a medical.”
During the medical exam, your body measurements will be taken, and you’ll likely have to provide urine and blood samples.
This exam lasts about 15 to 45 minutes depending on the tests being administered. You can generally choose to take the test in a lab or have a medical professional come to your home or your workplace. Insurance companies generally cover the cost of this exam.