Life insurance applications have been on the rise during the coronavirus pandemic. During the first half of 2020, application activity for life insurance rose 1.5% from the previous year, according to the MIB Life Index.
Application activity for Americans under 44 rose about 3.4% year-to-date, while activity for ages 45 to 59 was up 0.5%, the industry group reports.
While protecting yourself and your family from financial fallout is never a bad thing, a fear of contracting Covid-19 should not be the determining factor for buying life insurance, Barbara Ginty, a certified financial planner and host of the “Future Rich” podcast, tells CNBC Make It. “I only would recommend buying life insurance if you have a need for life insurance,” she says.
Generally, the questions to ask yourself before buying life insurance are: Will there be a financial hardship for your loved ones if you pass away? Do you have a spouse, partner or child depending on your income? Did you buy a home with a spouse or partner that is based on two incomes? Did a parent co-sign a student loan that will not be discharged if you die?
“You don’t want a loved one to experience the tragedy of losing a loved one in addition to a financial tragedy,” Ginty says. “A financial tragedy is preventable.”
If you do have a need for life insurance beyond just fear that the pandemic may affect you and your family, here’s a look at what you should know about this type of protection before you dive into any purchase.
The difference between term and permanent policies
If you do feel you need life insurance, you should first understand the different policies available to you. There are two basic types: term and permanent. Whole life insurance is an example of a permanent policy.
Term life insurance covers you for a specific period of time, typically 10, 20 or 30 years. If you die while the policy is in place, you’re covered. Once the term expires, you’re no longer covered. Term life insurance is best for those who may only need coverage during a certain period of time, such as when you’re raising kids or paying off your mortgage. Or for those who want some coverage, but don’t want to pay a lot for it.
Permanent life insurance — which includes universal life, variable life and whole life — covers you throughout your life. Unlike term life, which is pure insurance that simply offers a payout if you die, permanent policies essentially create a savings account where you can earn a minimum guaranteed interest or a dividend. These earnings are generally tax-deferred and referred to as the “cash value.” Over time, this builds up and you can borrow against it, but you’ll typically need to repay it. With some policies, you can even use it to cover your premiums. This may be ideal for those who want to cover any kind of inheritance or estate taxes, or if you need to take care of a lifelong dependent, such as a child with special needs.
But keep in mind that those extra perks on permanent policies also increase the price. They can cost up to 10 times more than term, which can lead to people missing a payment or abandoning them all together. Many people may not need the extra benefits, so term life insurance is the way to go for most, Ginty says.
“Term insurance provides the most coverage for the least amount of money, allowing most people to continue to work toward other more fun goals like buying a house, saving for vacation, saving for retirement — I swear this is fun — and paying off student loans,” she says.
Whether you buy term life or permanent life policy, you can specify the amount that will be paid out if you die, which is called the “death benefit.” Your monthly payment is the “premium.” As long as you keep up with the premiums, your insurer will pay your beneficiaries when you die, usually as a lump sum.
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To put the difference in cost into perspective, a 30-year-old, relatively healthy woman who’s considering buying a $500,000 policy will typically pay roughly $32 to $55 a month for a 30-year term life policy, as opposed to $300 to $400 a month for whole life coverage, Ginty calculates.
Within that, experts advise taking out level term life insurance, which guarantees you pay the same rate throughout the life of the policy. If you’re worried about being covered later in life, you usually can convert a term policy into a permanent policy up until a year before it expires, Ginty says.
What to keep in mind when buying life insurance
“There is a big difference between buying life insurance and being sold life insurance,” Ginty says. “I recommend people educate themselves and then go shop for what they need.”
Once you settle on what type of policy to get, decide how much life insurance you need to buy. Most standard policies range from $250,000 to $1 million. How much you need depends on how the money will be spent. Do you need the policy to help pay off any funeral costs? Your mortgage? If you’re not sure, non-profit insurance information organization Life Happens offers several calculators that can help you figure out how much coverage you may need.
Some employers offer group life insurance as part of a benefits package. But those policies usually end when your job ends, so if you quit or are let go, you’ll be left with zero coverage. That may be OK if you don’t really need life insurance, but if you do, you may want to consider buying your own additional coverage.
Keep in mind that the buying process may take some time, especially since some policies require you to get a physical or medical exam before you’re approved. Typically, it takes about four to six weeks to get a traditional application approved, Adam Winslow, chief executive officer of life insurance at AIG Life & Retirement, tells CNBC Make It. For policies that don’t require an exam, you can be approved (or denied) in as little as five days.
During the pandemic, the application process has changed a bit, especially when buying a policy that requires a medical exam. Some insurers are extending deadlines, using previous doctor’s visits or even sending a medical professional to your home. Other life insurance companies are expanding the number of policies that don’t need an exam.
Before starting an application for life insurance, it may be helpful to gather up some documents and information in advance. Most insurance companies will ask you for general information, such as your name, age and address, as well as personal questions about your height and weight, your history of smoking and/or drug use and any diseases or medical conditions that may run in your family. If you don’t know this information, it may help to call your parents or a family member to ask. It’s also likely that you’ll be asked for your driver’s license number to verify your recent driving record. If you’ve been in a lot of accidents, you may be considered more of a risk.
When you’re ready to start your application, it can pay to shop around and compare different policies and providers, Ginty says. Sites like Policygenius and LendingTree’s QuoteWizard can help you compare your options.
You should also work with someone who isn’t an insurance salesperson or use a marketplace so you can ensure you’re getting unbiased help and a plan that fits your needs. “I always tell clients that if you go to a Ford dealership, the salesperson is going to sell you a Ford … they aren’t going to say, You know, you really ought to get a Volkswagen,” Ginty says.
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