You’ve decided to buy life insurance. Whether your goal is to replace your income so your dependents can cover essential expenses in the event of your death, create an inheritance for your loved ones, or leave a legacy through a charitable donation, life insurance can be a critical component of your financial planning. According to the Insurance Information Institute, these are just a few reasons why people purchase life insurance.
With nearly 1,000 life insurance companies operating in the U.S., choosing the right one can feel overwhelming. However, many of these companies are part of larger groups, meaning the competition is not as vast as it seems. These groups often operate multiple companies to target different markets and navigate state regulations more effectively. Understanding this landscape can help you make a more informed decision when selecting a life insurance provider. To help you with this process, we’ve compiled key tips below to guide you in choosing the best life insurance company for your needs.
Licensing and State Regulations
Not every life insurance group has a company licensed to operate in every state. Therefore, it’s generally advisable to purchase life insurance from a licensed company in your state. This ensures that you can rely on your state’s insurance department for assistance if any issues arise. Additionally, if the insurance company becomes insolvent, your state’s life insurance guaranty fund will only support policyholders of companies it has licensed. To determine which companies are licensed in your state, contact your state’s insurance department.
Key Considerations When Choosing a Life Insurance Company
1. Product Variety
Most companies offer a broad range of policies and features, but not all do. It’s crucial to choose a company that provides specific products and features that align with your needs.
2. Company Identity
Life insurance company names can be confusing and similar. Many life insurance company names include words that suggest financial strength (such as Guaranty, Reserve, or Security), financial sophistication (such as Bankers, Financial, or Investors), maturity (such as First, Pioneer, or Old), dependability (such as Assurance, Reliable, Trust), fairness (such as Beneficial, Equitable, or Peoples), breadth of operations (such as Continental, National, or International), government associations (such as American, Capital, or Republic), or the names of well-known and respected Americans (such as Jefferson, Franklin, or Lincoln). Ensure you know the full name, home office location, and any affiliations of any company you are considering.
3. Financial Solidity
Life insurance is a long-term arrangement, and there is no guarantee for life insurance policyholders similar to the Federal Deposit Insurance Corporation (FDIC) for bank accounts. Choose a company that is likely to remain financially stable for many years, and use ratings from independent rating agencies.
4. Market Ethics
Some life insurance companies adhere to the principles and codes of conduct promoted by the Insurance Marketplace Standards Association, a nonprofit organization dedicated to ethical conduct in life insurance marketing.
5. Advice and Service
Since life insurance can be complicated, it’s helpful to work with a representative who listens to your needs and explains things clearly. This consideration is important because some agents represent only one or a few life insurance companies, which could limit your options. For more guidance on selecting a life insurance agent, refer to relevant resources.
6. Claims Handling
It’s wise to check a national claims database to see what complaint information it has on a company. Additionally, your state insurance department can inform you if the insurance company you are considering has had many consumer complaints relative to the number of policies it sold.
7. Premium and Cost
The premium is the amount you pay the company for the life insurance contract and all its benefits. Premiums can vary widely among companies, even for a given death benefit and type of insurance (such as term life), due to differences in policy features and pricing. Therefore, the first step in comparing policies is to ensure you are comparing similar plans based on your age, the type of policy and its features, and the amount of insurance you are purchasing.
The premium varies from the cost of the protection portion of a life insurance policy. One policy might have a higher premium but offer additional benefits, like policy dividends, compared to another. Alternatively, two policies might both offer dividends but in varying amounts and at different times. In such scenarios, the policy with the higher premium could have a lower cost of protection. To understand a policy’s cost, companies should provide the policy’s Net Payment Cost Index and its Surrender Cost Index. Use the Surrender Cost Index if you plan to keep the insurance for a specific period, and the Net Payment Cost Index if you expect to keep the policy indefinitely. Generally, a lower cost index indicates a better value.
How to Shop for Life Insurance
When you’re ready to buy life insurance, you’ll find the shopping process easier than ever. The days of multiple sales presentations at your dining room table are long gone. However, the ease of access doesn’t eliminate the complexity. With just a few taps on your cell phone, you can find numerous options, making it challenging to cut through the clutter.
Here are some tips to help you narrow down your options and find the best life insurance companies:
1. Compare Insurers
One of the most important factors is the financial strength of the life insurance provider.
Major rating agencies like A.M. Best, Moody’s Investors Service, and S&P Global Ratings rate providers from A to D. These agencies consider factors such as balance sheet strength, operating performance, business profile, and enterprise risk management in their analysis.
2. Compare Products
Life insurance companies offer various products and services, so ensure you’re making apples-to-apples comparisons. For instance, comparing term life insurance to permanent life insurance won’t give you accurate information. Ensure you’re comparing the same type of life insurance.
Even within the same type, details like term duration must match. For example, when comparing Company A’s level term with Company B’s level term, ensure both are 20-year terms or 30-year terms for a true premium comparison.
Products can also differ in riders, exclusions, and fees. Additionally, policies can have different stipulations for what happens when the term guaranteed period ends. When comparing permanent life insurance specifically, consider additional factors like cash value growth rates, dividend schedules, loan terms, and fees.
Policies also have unique qualifications and underwriting requirements. Some may require a medical exam, affecting pricing.
3. Compare Service
Choosing a life insurance provider is a long-term commitment. Besides strong customer service, consider these factors:
- Does the company offer discounts for bundling other types of insurance, like auto or home?
- Do you want a personalized experience from an individual agent or broker? If so, how long will your agent be available?
- How are beneficiaries handled with survivorship services?
Organizations like J.D. Power and the National Association of Insurance Commissioners (NAIC) conduct customer satisfaction surveys and rate life insurance companies. These ratings provide valuable, unbiased feedback for consumers.
Conclusion
Life insurance is a vital part of your financial security. Finding a provider you feel comfortable with ensures you can meet your dependents’ future needs and secure your peace of mind. Before making a decision, compare three main factors: life insurance providers, their products, and the service you’ll receive. This thorough comparison will help you make an informed choice that aligns with your long-term financial goals.
FAQs
What is life insurance?
Life insurance is a contract between an individual (the policyholder) and an insurance company. The insurer agrees to pay a designated beneficiary a sum of money upon the policyholder’s death or after a specified period. The policyholder pays regular premiums during their lifetime to maintain the coverage. This agreement guarantees financial security for the beneficiaries in exchange for the premiums paid.
Why is it Important to Have Life Insurance?
Life insurance is essential because it protects your spouse and children from potentially devastating financial losses if something happens to you. It provides financial security for your loved ones by helping to cover various expenses such as funeral costs, outstanding debts, and everyday living expenses. This ensures that your family can maintain their financial stability and meet their needs even in your absence. Additionally, life insurance can help pay off medical and final expenses, offering peace of mind and financial protection during difficult times.
What Types of Life Insurance Are Available?
- Term Life Insurance: This type of policy offers coverage for a set period, such as 10, 20, or 30 years. It is generally more affordable and easy to understand.
- Whole Life Insurance: This policy provides lifelong coverage and includes a savings component accumulating cash value over time.
- Universal Life Insurance: Similar to whole life insurance, this policy offers permanent coverage but with added flexibility in premium payments and death benefits.
- Variable Life Insurance: This type of policy combines life insurance with investment options, allowing the cash value to increase based on the performance of the chosen investments.
How do I figure out how much coverage I need?
Consider factors such as:
- Outstanding debts (mortgage, loans, credit cards)
- Future expenses (college tuition, retirement)
- Income replacement for your family
- Final expenses (funeral costs, medical bills)
- Financial goals (legacy planning, charitable donations)
What factors affect life insurance premiums?
- Age: Younger individuals typically pay lower premiums.
- Health: Pre-existing conditions or risky lifestyle choices can increase premiums.
- Gender: Women generally pay lower premiums due to longer life expectancy.
- Coverage Amount: Larger coverage amounts lead to higher premiums.
- Policy type: Term life is usually cheaper than whole or universal life.
Can I change my life insurance policy later?
Yes, many life insurance policies offer the flexibility to adjust coverage as your needs change. You can typically convert a term policy to a whole or universal life policy, increase or decrease coverage, or adjust premium payments.
What happens if I miss a premium payment?
Most policies have a grace period (usually 30 days) during which you can make a payment without losing coverage. If you miss the grace period, your policy may lapse, but some policies offer reinstatement options within a certain timeframe.
Can I have multiple life insurance policies?
Yes, it’s possible to have multiple life insurance policies to address various needs. However, it’s essential to ensure the total coverage aligns with your overall financial plan and does not result in over-insurance.
What is a beneficiary, and how do I choose one?
A beneficiary is the person or entity designated to receive the death benefit from your life insurance policy. You can choose anyone, including family members, friends, trusts, or charities. It’s important to review and update your beneficiaries regularly to reflect any life changes.
Is life insurance taxable?
Typically, life insurance death benefits are free from federal income tax. However, there may be estate taxes if the policy is included in the insured’s estate. Consult a tax advisor for specific information related to your situation.
How frequently should I evaluate my life insurance policy?
Review your life insurance policy annually or after significant life events such as marriage, the birth of a child, purchasing a home, or changes in employment. Regular reviews help ensure that your coverage continues to meet your needs.
