How to Choose Life Insurance

A record number of Americans adults — 102 million, or more than four out of 10 people from 18 to 75 years old — say they have no or not enough life insurance, and 37% of them told industry researchers they intend to buy coverage soon.

Are you one of them? If so, here are the important facts to consider when you shop around for life insurance that is best for your family.

A good start is to understand the different kinds of life insurance and how they can provide for your loved ones when you die.

"Life insurance is a policy you purchase from an insurance company that guarantees a sum of money . . . will be paid out to the policy's beneficiary or beneficiaries when the insured individual or policyholder dies," says Brian Steiner, executive director of Life Happens, the public education arm of the National Association of Insurance and Financial Advisors.

"It's a great option for people with loved ones who financially depend on them, as it replaces income after one's death," Steiner adds.

The money from life insurance can be spent on a variety of needs, such as mortgages, school tuition and other living expenses, as well as the cost of a funeral for the deceased.

There are many options when buying coverage; the two most common types are term life insurance and permanent life insurance.

"A term life insurance policy provides protection for a specific amount of time (think 10, 20 or 30 years) and is best for people that need protection for a set period of time, such as until children graduate from college or a mortgage is paid off," Steiner says. "Term policies typically offer the most amount of coverage for the lowest initial premium."

When coverage stops, policyholders do not get any money back.

Permanent life insurance policies have lifelong structures and tend to be more expensive than term life insurance but allows policyholders to take out some money before they die.

"(Permanent) life insurance provides lifelong protection for as long as the policyholder pays the premiums," Steiner says. "It has the benefit of accumulating cash value on a tax-deferred basis, which means it can be used to buy a home, supplement retirement income or cover emergency expenses. (Permanent) policies tend to have initial higher premiums compared to term coverage due to the added benefits."

Universal life insurance is a type of permanent life insurance that gives policyholders the option of raising or reducing the premiums they pay.

"If they decrease their premiums, the difference is withdrawn from the overall policy, so it is worth less," explains Michael DeLong, research and advocacy associate at the Consumer Federation of America.

One type of life insurance isn't meant to replace income but instead pays enough to cover burial expenses.

"Final expense insurance pays a small death benefit to beneficiaries to help cover someone's end-of-life expenses. It is not intended to replace lost income," DeLong says.

Another type of life insurance, variable life, lets policyholders invest the money they've paid in premiums into stock market funds offered by the insurance company.

"While death benefits in other life insurance policies come with a guaranteed amount of money, here the cash value amount is not guaranteed and depends on the market," DeLong says.

The amount of life insurance to buy depends on the financial needs of the insured person's family. Someone who intends to use life insurance only to cover burial costs can get by with a smaller policy. If the life insurance is meant to replace a family member's income, a larger policy is needed.

"Some experts recommend having enough coverage to replace at least 10 years of your salary," DeLong says. "For example, if your salary is $50,000, a $500,000 policy would be a good idea. But if you want to guard against inflation or other costs, you could get a larger amount."

Legal & General America has a worksheet that people can use to calculate how much life insurance they need.

"How much life insurance you should buy boils down to a consumer's personal financial situation and their coverage needs," says Michelle Buswell, senior vice president and chief operating officer for Legal & General America.

"We recommend making sure life insurance can cover your annual salary for your family for seven to 10 years, as well as provide funding for funeral and other final expenses, outstanding debts — like the balance on a mortgage — and childcare/education expenses."

The type of policy you choose, the amount of coverage you buy, your age and your health are the four main factors that insurers use to determine your life insurance costs, according to Life Happens.

Being young is a definite advantage when buying life insurance.

"A healthy 30-year-old looking to buy a 20-year-level term policy can get $250,000 in coverage for $13 a month," Steiner says.

Buswell says people can obtain life insurance at almost any age, "but there is an advantage of youth when it comes to premium amounts."

"According to LIMRA's Life Insurance Barometer Survey," she adds, "nearly 40% of insured consumers say they wish they would have purchased their policies at a younger age."

Older adults may pay higher premiums, but they can still obtain coverage. Here are examples of life insurance costs for people aged 50, 60 and 70 from Legal & General America.

Once you know the type of insurance policy you would like and how much coverage you need, it is wise to shop around for the best deal.

DeLong recommends researching several different insurance companies; make sure they're financially healthy and provide good customer service. Request and compare life insurance quotes, either online or via an agent.

Be prepared to provide a lot of personal information. The company might ask to verify your medical history and your income. Some insurers may require you to take a medical examination.

When the time comes to collect on a policy, the beneficiary should file a claim that includes death certificate of the insured person. The payout generally arrives tax-free in a lump sum.

"It's a flexible safety net that helps eliminate financial worries during difficult times," Buswell says.