How to buy life insurance
Learn about the different types of life insurance, how much protection you need, and getting the right policy for you.
Life insurance exists because it can provide an important solution to pressing emotional needs: People worry about how their family will carry on if they pass away unexpectedly. A life insurance policy can provide their financial dependents with a significant sum of money – often enough to replace several years' worth of income. And while that kind of assurance is valuable to many, the reality is that not everyone actually needs a policy. So before you shop for coverage, it's worth asking a simple question:
Do you need life insurance?
Your financial and personal circumstances are unique. Some people don’t have a family or dependents; others have enough assets saved up to ensure their loved ones’ financial future. They may not need the financial protection of life insurance. On the other hand, you probably should get coverage if:
You have family members who would face hardship without your income
You have debts – or a mortgage – that would fall on others if you died
You want to make sure your children or spouse have funds for college tuition or retirement
Get an instant Term Life quote
If you want to buy life insurance, a good way to start is by getting a quote for coverage. Or, read on to find out about:
Life insurance basics
Deciding which type of policy you need
How much coverage you need
When you should get life insurance
Where to get coverage
Applying for a policy
Life insurance basics
There are two main types of life insurance – term life insurance and permanent life insurance:
Term life insurance covers you for a limited period of time, typically 10 or 20 years, but some policies may go up to 30 years. Once the term expires, you are no longer covered, and because there’s no cash value, there’s nothing left. However, compared to permanent life insurance, these policies cost less for a given level of coverage.
Permanent life insurance, like universal or whole life insurance, provides coverage that lasts your entire life and has an asset-building "cash value" component.1,2 These policies tend to cost more because a portion of your premium dollars can grow as cash value, tax-deferred over time and can be used while you're alive.3,4 Importantly, the entire coverage amount is immediately payable from the first day you have the policy.
Here are some key terms that come up when reading about life insurance:
Premium: The payment you make to maintain your policy, which can be made monthly or less frequently. Some premiums may be variable; level premiums stay the same for the duration of the policy.
Term: The amount of time your policy will help protect you and your beneficiaries.
Death benefit: The payment your beneficiaries receive when you pass away, typically paid out as an income tax-free lump sum.
Beneficiary: The person(s) or organizations that will receive the death benefit from your policy.
Cash value: Funds that grow in a permanent policy which you can access while you are alive.
Rider: A feature adding optional additional protections to your policy.5
Deciding what type of policy to get
According to the 2022 Insurance Barometer Study from LIMRA, approximately 50% of Americans have some type of life insurance. Of those with coverage, 51% have permanent insurance, 34% have term insurance, and 15% have both.6
If you think you just need to get coverage for a limited period of time – for example, while your children are growing up, then term life insurance can be a good choice. These policies are relatively easy to buy and can be a cost-effective way to get a significant death benefits.
If you need coverage that lasts your entire life – or you’re not sure how long you’ll need coverage – then a permanent policy (whole life insurance or universal life insurance) may be a better option. While the cost is higher than for term life, that concern is partly offset by the fact that these policies build tax-efficient cash value. It can be a valuable financial asset that can used for things like starting a business or funding a child’s education, and it can help ease estate planning as well.
Which type of permanent policy is best for you? Whole life insurance is simpler – the premium remains the same for life, the death benefit is guaranteed, and the cash value grows at a guaranteed rate. Universal life insurance can be less expensive, but the premiums, death benefit and cash value growth rate can vary, making the policy more complex.7
You don’t have to choose just one type of coverage
Many people who buy life insurance choose to get both term and permanent policies because each type offers different benefits. For example, you could choose to get a 20-year term policy with a significant death benefit while your children are still financially dependent on you, and also decide to invest in a permanent policy to provide lifetime protection – and a tax-efficient asset – for you and your spouse.
How much life insurance should you have?
The American Council of Life Insurers reports that the average size of an individual life insurance policy purchased in 2021 was $189,830.8 But that's just an average – the amount you need may be significantly higher or lower depending on where you are in life and how many people rely on your income.
In general, the younger you are, the more coverage you’ll need to compensate for the years of potential wage-earning ahead of you. And the more people depend on you, the more coverage you’ll want to meet all their needs in the event of your untimely death. There are different ways to estimate your need, but one rule of thumb is to consider getting:
up to 30X your income between the ages of 18 and 40
20X income at age 41-50
15X income at age 51-60
10X income for age 61-65
Of course, you’ll pay more for a policy with higher coverage, so you’ll need to weigh the level of protection you want against the premium you can afford.
When you should get life insurance
The simple answer: Now. That’s because the most cost-effective way to buy life insurance is almost always to do so when you are younger and healthier. So, no matter how old you are now, chances are your rates will only go up if you wait. (One notable exception: If you have recently quit smoking, you may have to wait one year to qualify for lower non-smoker rates.)
Not in your twenties anymore? Don’t worry. There are still lots of affordable options. But if you want to get the most value out of each premium dollar, it pays to do your homework and figure out exactly what you want from your coverage. Most policies have riders (optional provisions) that can provide valuable added benefits while you’re still alive.
Where to get life insurance
Your employer may offer coverage at work
Group term life insurance through work can be an excellent choice for a number of reasons:
It's easy to get: Depending on the offering, you may not even have to answer health questions or have a medical exam.
It’s easy to pay for: Premiums are typically deducted automatically from your paycheck.
You'll get favorable group rates: Because companies are buying insurance for many people at once, they typically get favorable rates.
However, there can also be limitations. For example, workplaces may only offer one type of coverage (typically term), and the total coverage available may not be enough for your needs. And, of course, many companies don't offer any life insurance benefits. Fortunately, there are many other coverage options available.
Getting life insurance as an individual
Term life insurance is very easy to shop for and get on your own. Many insurance companies, including Guardian, make it simple to compare rates by giving you an instant online term life quote. Premiums may not be much higher than with a group term life plan, especially if you're healthy. And coverage isn't dependent on your company or employment status – as long as you keep paying premiums, your policy will remain in force until the end of the term.
Also, if you get a policy as an individual policy, you have more options, starting with the fact that you don't have to get term coverage. You can opt for whole life insurance or universal life insurance that provides permanent, life-long protection that also builds cash value. No matter which type of individual policy you choose, most insurance companies will also let you tailor individual plans with riders (optional provisions) that can provide valuable added benefits. For example, many term life policies offer a convertibility rider that lets you change over to a permanent policy without getting a new life insurance medical exam. Permanent life policies are even more customizable. But if you decide to buy life insurance as an individual, consider talking things over with someone who can help you decide whether term life, whole life, or another type of coverage is right for you.
Choosing a life insurance company
Your life insurance policy is only as good as the life insurance company that stands behind it. Here are two things to consider:
Check customer service ratings. J.D. Power's life insurance ratings can give you insights into how happy customers are with a company's services.
Check their financial ratings. Third-party agencies such as A.M. Best, S&P, and Moody's rate life insurance providers based on things like available cash flow, customer complaints, and acceptable risk. A higher rating indicates a more solid fiscal foundation and long-term financial health.
Applying for a policy
Once you've considered what type of life insurance you should get, decided how much you need, and narrowed down the list of companies you want to work with, it's time to start the application process. If you’re working with an agent, they will go over your personal financial situation with you and review policy options. When you apply, the insurance company may ask for several details, including:
Medical records and history
Personal finances and annual income
Primary care physician and other doctors
Your occupation
Lifestyle choices, such as tobacco use and dangerous hobbies
Expect a medical exam
If the policy you're applying for requires a medical exam (which is likely if you're applying for a significant benefit amount), the life insurance company will arrange for the exam and cover the costs. In most cases, a professional will contact you to schedule your appointment, and the examiner will come to your home or office. The exam usually only takes 15 to 45 minutes, depending on what's required. It may include any or all of the following:
Names and dosages of any medications you have taken for a current or past health condition
Names and contact information for all physicians you've seen during the past five years
A list of any medical conditions you have, along with the date you were diagnosed, the physician's contact information, the type(s) of treatment received, and the treatment outcome
Your height, weight, and vitals
A urine sample
A blood pressure reading
Blood drawn for several tests, including nicotine and drug use
You may also be asked for other tests as you get your policy.
What if you're not in good health or have known health issues? There are "simplified acceptance" life insurance policies that do not require a medical exam and "guaranteed acceptance" policies that don't even ask medical questions. However, the life insurance cost per dollar of coverage is much higher, and protection amounts are typically limited. These policies aren't usually meant to provide significant income replacement and are more often used to cover final expenses.
The underwriting process
Underwriting is where the insurance company reviews your application and determines if it meets their criteria. This can take as little as 24 hours but more often lasts 4 to 6 weeks. During that time, an underwriter will look over the details of your application, your health information, and your lifestyle to determine your insurance risk class. The larger the policy, the more detailed the underwriting process. Once it's completed, you'll find out if you were approved and at what rate. If you've been working with an experienced agent and no health surprises are uncovered, you're unlikely to have higher premiums than you expected.
Naming a beneficiary
Your beneficiary is the person named on the policy documents to receive the payout if you pass away. You can name more than one beneficiary and assign each one a specific percentage of the payout. Typically, people name their spouse or children as beneficiaries, but those aren't your only options. You can also name a charity, a trust, your estate, or another person close to you as a beneficiary.
Mistakes to avoid when buying life insurance
People make a few common mistakes with life insurance, such as buying the wrong kind of insurance for their circumstances. For example, someone in their 20s or 30s who purchases term life to protect a young family may find that their policy expires while their children still depend on their income. Another common mistake is not buying enough coverage, so the benefit paid to beneficiaries may be too small to cover their needs. Finally, waiting too long to purchase a life insurance policy can also be costly since premiums are generally more expensive for older buyers.
A broker or financial professional can help you avoid these kinds of mistakes, help you compare options, and determine which type of policy best suits your needs. If you don't have someone to discuss insurance with, Guardian can help you find a nearby financial professional who will listen to your needs and help guide you to the right solution.
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1 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
3 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
4 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
5 Riders may incur an additional cost or premium. Riders may not be available in all states.
6 https://www.limra.com/en/research/research-abstracts-public/2022/2022-insurance-barometer-study/
7 A Universal Life Insurance (UL) policy provides a flexible premium, choice of death benefit options, and a guaranteed crediting rate e.g. 2%). Policy growth is based on adequate funding, increasing crediting rates, and if costs of insurance is lower than expected. If any of the three factors just mentioned are lower than expected (policy funding and crediting rates), and/or higher than expected (cost of insurance), the policy may lapse.
8 https://www.acli.com/-/media/acli/public/files/factbook/2022lifeinsurersfactbook_v2.pdf
This article is for informational purposes only. Guardian may not offer all products discussed. Please consult with a financial professional to understand what life insurance products are available for sale.