How to buy life insurance

Life insurance can provide financial protection for your family when you die. That's especially important if you have children at home, a mortgage or other major expenses your income is expected to cover.

It can fill other needs, too, including serving as an investment or paying for a funeral, medical bills and other-end-of-life expenses.

It's one thing to know life insurance is important, but understanding how to buy a policy can be confusing — especially considering how many different kinds of plans there are.

If you're ready to shop for life insurance, here's what you need to consider.

When deciding on how much insurance to buy, there are a number of questions to answer:  

• If you died, how much income would your family lose during your prime working years?
• How much is your mortgage, car loan and other major debts?
• Do you have children and do you expect to pay for their college education?
• How much do you have in savings, investments and other assets?

There are several different ways to crunch the numbers: 

The 10 times method

One way to get a ballpark figure is to multiply your annual income by ten. So, if you make $100,000 a year, you want a death benefit of at least $1 million (In comparison, most workplace life insurance policies only pay out one or two times your salary.)

The DIME method

Another strategy is to add up your:

• Debts: All the debts you would leave to your family after your death.
• Income: Your annual income multiplied by the number of years you think your family would need your financial support after you die.
• Mortgage: The balance on your home loan plus insurance and property taxes.
• Education expenses: How much would it cost to put each of your children through college?

Of course, these are broad approaches that might not fit your circumstances. Working with a financial advisor will enable you to get more personalized guidance. 

While there are many types of life insurance, the two main categories are term and permanent.

Term life insurance

Term life provides coverage for a specific number of years and is generally more affordable than permanent life insurance. Many families rely on term life to protect them during their high-earning years when they may be raising children or paying off a mortgage.

Two of our top picks for term life insurance, Ladder and Amica both offer affordable rates and an easy application process.

Permanent life insurance

As the name suggests, permanent life remains in force for your entire life as long as the premiums are paid. It also can include a cash value component that grows over time.

This type of policy is much more expensive but it can also be more beneficial for long-term financial goals, like estate planning or providing for a dependent with lifelong care needs.

There are a few types of permanent life insurance:

• Whole life insurance: Like term life, whole life insurance has a fixed monthly premium and a guaranteed death benefit. Because whole life insurance is more complex, you usually need to work with a broker or advisor to buy a policy.
• Universal life insurance: With a universal life insurance policy, your premiums are invested in the market. That can mean lower monthly payments for you but it requires you to monitor your policy carefully or risk your plan being underfunded.
• Final expense life insurance: If your prime interest in life insurance is making sure your loved ones aren’t burdened with paying for your funeral or other end-of-life expenses, a final expense or burial insurance policy is another kind of permanent life insurance. Policies are usually capped at $25,000, but you can often get approved with no medical exam.

State Farm is one of our top choices for whole life insurance, with plans that offer a variety of payment options and riders like a waiver of premium, an accelerated death benefit and the option to add a child's term policy.

Ethos offers a standout final expense policy, with a payout of up to $25,000 and free estate planning tools.

To ensure you're getting the best deal, get rate quotes from at least three providers. Be sure to consider:

Available policy options 

Some life insurance companies only offer term, while others may lack no-exam policies. Limit your search to providers that offer the kind of policy you want.

Coverage limits

If you've figured out how much coverage you want, pick providers that offer that amount. If an insurer has a minimum death benefit that's far beyond your requirements, it might not be a good fit. On the other hand, if you're the breadwinner for a family with a mortgage and three kids going to college, make sure the maximum coverage limit will be enough. 

Restrictions

Not all insurance companies are licensed nationwide or offer the same products in every state. In addition, some plans are only available to applicants within a certain age range.

Before you get too deep into investigating a company, make sure you're eligible for the policy you want.

Rates

While low premiums sound like a good idea, it doesn't tell the whole story : A cheaper policy may have a smaller death benefit, fewer options for riders or more restrictive requirements for approval.

That's why it's best to get quotes from multiple insurance companies with the same term length, death benefit and riders.

Riders

Also known as endorsements, riders allow you to customize your policy. Common riders include being able to convert a term policy to whole life, coverage for dependent children, guaranteed insurability and the option to receive benefits if you're diagnosed with a terminal illness or need long-term care.

Customer service

You'll have your policy for a long time — potentially for the rest of your life — so make sure the insurance company you choose delivers the kind of customer service you want. J.D. Power's individual life insurance surveys are a good way to see how current customers feel about their providers and the claims process. You can also look at a company's Better Business Bureau rating and the volume of complaints registered with the National Association of Insurance Commissioners.

You should also consider whether it's important for your provider to have an easy-to-use website and mobile app, and to offer customer service hours on nights and weekends.

Financial strength

Check out a company's A.M. Best financial strength ratings to see how likely it will be able to pay out your benefits when the time comes. A grade of "A" or better is a good indicator that the company is stable.

If you've decided on term life insurance, you can often apply for and get approved completely online. If you're opting for whole life, however, you'll probably need to work with an insurance agent or broker who can walk you through the process.

As part of the application process, you'll need to provide personal information, including:

• Proof of identity
• Your age and gender
• Personal and family medical history
• Lifestyle habits, including drinking and smoking, any risky hobbies

You may have to undergo a medical exam, typically performed free of charge in your home or office. Your insurer may also want to know your credit score and driving history.

An underwriter will then review your application to determine your eligibility and premiums. The wait for a response can range from 24 hours to several weeks.

If you've been approved and are happy with the terms, you can complete the purchase of your life insurance policy. You'll have to set up payment, select your and notify them.

It's a good idea to review your policy annually to ensure it still aligns with your financial goals.

In October 2024, a term life insurance policy averaged about $30 a month (or $360 a year) for a 30-year-old male in good health with a $500,000 death benefit and a 20-year term, according to Policygenius. A 30-year-old female would pay about $23 a month (or $ 276 a year).

The average cost for a whole life insurance policy with a $500,000 payout is $440 per month for a 30-year-old nonsmoker in good health.

Individual premiums vary greatly, however, based on your age, gender, medical history, smoking status and the type and amount of coverage you buy and any riders you add.

While life insurance premiums vary by company, there are strategies to keep costs down.

Get a term life policy

While term life is only active for a set period and doesn't build cash value, whole life insurance is, on average, six times more expensive. Make sure you pick a term length that protects your family when you need the most coverage, like while your children are still at home or you're still paying off your mortgage.

Buy it when you're young

Life insurance prices increase as you get older because you're more likely to develop a condition that raises your risk profile. Locking in a level-term policy will keep your premiums the same for the length of your policy — and the sooner you get it, the lower they'll be.

Maintain a healthy lifestyle

We can't control every aspect of our health, but regular exercise, a healthy diet, limited alcohol use and good sleep habits can help you get a better rate as it places you into an insurer's preferred health category. Not smoking is a huge money saver: Tobacco users can pay as much as twice for the same policy as nonusers, according to the UCSF Department of Social and Behavioral Sciences.

Don't skip the medical exam

If you're young and relatively healthy, a policy requiring a medical exam has lower premiums and higher coverage amounts than a no-exam policy. The exam is free and can take as little as 30 minutes.

Comparison shop

Not every insurance company considers your risk factors the same, so make sure you get quotes from several providers with a range of offerings. Be sure to ask about any discounts, including if there's a rate reduction if you have a homeowners or auto insurance policy with them.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed financial decisions. Every insurance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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