A Beginners Guide to Buying Life Insurance Online

Feb 24, 2021

A Beginners Guide to Buying Life Insurance Online

Life insurance is an important financial decision people cross paths with at some point during their life. Whether you’re a married couple or a family of six, life insurance has one simple goal. To ease financial hardship on those you hold dearest if something were to happen to you.

But is it worth it? Would you accomplish a similar goal simply by saving or investing the money instead? Let’s find out.

Before we begin exploring alternatives and whether life insurance is worth it, let’s start with the basics.

The different types of life insurance

Life insurance comes in two different types, term and whole. The cost difference between these two is huge, so let’s touch on each one for a moment before we explore rates.

Term life insurance – most affordable

Term life provides you with coverage for a predefined term, like 20 years, for example. During this time, if you pass away, your beneficiaries would receive your coverage amount.

If you don’t pass away during the 20-year term, the policy expires and becomes worthless.

This type of life insurance is the most affordable option. Depending on the carrier, it’s available up to age 70, but it’s most popular for individuals between the ages of 20-60.

Whole life insurance – most expensive

Whole life is expensive, roughly 3 to 8 times more expensive than term. Why? Because it lasts your entire life. You could get a policy at age 20, and if you are lucky enough to live to age 100, your policy will still be in force.

That in itself is a big reason why whole life insurance is so much more expensive. After all, life insurance only gets more expensive as you get older. With a permanent policy, you can lock in a rate while you are young.

But the other reason that increases the cost so much is the cash value component. This cash value is accessible in various ways. You can use it to pay for the policy itself, take out a loan, or grow your death benefit.

Which is best? Term or whole life insurance?

That mainly depends on three things:

Do you want coverage for the rest of your life, or just when you need it most?
Do you want to pay more for the cash value benefit?
Do you qualify for term life insurance?

Most people, especially in the last decade, opt for term. The cost is hard to beat, and it gives you the coverage when you need it most, like when you get married or start a family.

The cash value that a whole life policy builds is nice, but we don’t feel it justifies the immense cost difference.

And lastly, it also depends on whether or not you qualify for term life insurance. If you are in poor health, have serious health conditions, or are too old, your only option may be guaranteed issue or final expense insurance. Both of these are types of permanent life insurance.

How much does life insurance cost?

Now that you understand the two different types of life insurance, let’s explore the cost.

Term life insurance – the most popular option – is very affordable. In fact, most people overestimate the cost of term life insurance by 50 to 300%.

Whole life insurance on the other hand is pretty expensive for various reasons we’ve previously discussed.

Here are 20-year term life insurance rates for a healthy non-smoking male that lives in California:

Age	Coverage	Cost
25	$100,000	$9.15
	$250,000	$12.35
	$500,000	$19.11
35	$100,000	$9.23
	$250,000	$13.38
	$500,000	$21.15
45	$100,000	$15.69
	$250,000	$26.31
	$500,000	$46.27
55	$100,000	$32.65
	$250,000	$60.56
	$500,000	$114.74

Things that affect the cost of life insurance

While the sample rates above are accurate, they are calculated for a healthy non-smoking male living in California. But let’s be honest, not everyone is healthy. And not everyone lives in California. So let’s explore various things that will affect the cost of life insurance:

Age

It’s no surprise, but how old you are is probably the biggest factor in how much life insurance will cost. The older you are, the more likely you are to develop health problems. So keep in mind, the longer you hold off on life insurance, the more expensive it will be.

Health

Just like age, health is a huge factor in the cost of life insurance. And by health, I don’t just mean whether or not you have health conditions. It’s also your BMI (body mass index, a formula based on your height and weight).

Insurance providers don’t tell you that when you compare rates, you are assigned a health class behind the curtains. This health class is based on your health history, BMI, medications, and more and will determine how much your rate will be.

An example of these health classes are:

Preferred plus (excellent health)
Preferred (good health)
Standard plus (fair health)
Standard (poor health)

These, often hidden, health classes will affect your life insurance rate by up to 100%.

Nicotine use

You may be thinking – you mean tobacco, right? No, I mean nicotine, as any product that contains nicotine will mark you a smoker. That includes; chewing tobacco, cigarettes, cigars, vaping – even nicotine patches.

If you use nicotine products, prepare to pay up to twice the cost. To qualify for non-nicotine rates, most insurance providers want you to be nicotine-free for 1 or 2 years.

Location

This one may surprise you, but the state you live in also affects your rate. While entirely dependent on the insurance provider, life insurance for a resident of some states can cost twice as much as other states.

Hobbies & activities

Wait, what? Yes, it’s true, although it’s mainly referring to a handful of “dangerous” activities. Such activities include, but are not limited to, skydiving, scuba diving, and racing with a motorized vehicle.

Your gender

Your gender will also affect the cost of life insurance. If you are a male, you can expect to pay roughly 5% more for the same life insurance as a woman would. Even if everything else is the same, like age, health, activities, and so on.

It may sound unfair, but statistics show that men are more prone to dying at a younger age. They are more likely to develop heart conditions, for example.

Medical examination

This one is more of a personal preference. If you are OK with undergoing a medical exam, you could shave a few bucks off your life insurance policy. Those couple bucks can add up, though, especially if you’re talking a large coverage amount and a policy term of 20 or 30 years.

The insurance provider

There are dozens of life insurance providers, and they all charge a different price. While the coverage and term could be identical, some providers offer benefits or riders that other providers don’t. It’s for this reason that it pays to use a life insurance broker.

How does buying life insurance online work?

It’s the year 2021, and the recent pandemic has rapidly sped up the evolution of moving things online. So you may be wondering, is life insurance something I can buy entirely online? The answer is yes.

It depends on the insurance provider, though. While most insurance companies and brokerages allow you to get a quote online, many of them still require a phone call, manually signing paperwork, or a physical medical exam.

Let’s say you got a life insurance quote from a provider that offers an online application method. Here’s how the online process will work:

Qualification

Since this is an online process, there’s no physical medical examination involved. Depending on the provider, they will pull your public records to see your health history, driving history, and financial history. After all, you can say you’re in perfect health, but without proof, your word is just your word.

Your driving history can indicate how risky of a driver you are – and in turn, how risky you are to the life insurance provider. Speeding tickets and DUI’s are serious things that can affect your rate, as well as your eligibility to qualify at all.

Underwriting

In the past, underwriting meant that a life insurance agent would look at your file, double-check the numbers, and handle the paperwork. Sometimes that could mean weeks or even months of going back and forth, faxing papers, and so on. But companies that have evolved with time have dramatically improved on that process.

Some providers will have an underwriting process that takes minutes or even seconds. As far as paperwork, you’ll be presented with an online document that you can read, fill out, and sign.

Quick phone call

While the entire process is online, a phone call may still be required, mainly due to federal law. This could be as simple as verifying your name and giving a voice signature.

What is a life insurance broker, and should I use one?

A life insurance broker is a company or person who works with multiple insurance providers. Rather than giving you a single price for a single company, they can present you with dozens of companies’ prices.

This allows you to shop and compare more effectively. Sometimes paying a dollar or two more for the same policy, but from a different provider, is worth it. That slightly more expensive policy could include a rider that allows you to convert your policy once the term ends, for example. This could save you time and money 10, 20, or 30 years from now.

The same is true for the reputation of companies. There are dozens of life insurance companies out there that are borderline hoaxes. You may encounter these through ads or email. By using a reputable broker, chances are likely they already weeded out the good from the bad.

Life insurance compared to saving or investing money

It’s not a crazy thought. Especially if you feel like surviving your life insurance policy would be a complete waste of money.

So let’s use Bob as an example here and run some numbers:

Scenario 1: Bob gets life insurance

Bob is a healthy 30-year old non-smoker male that lives in California. A $100,000 life insurance policy, with a 20-year term, would cost Bob $9.15/month. This policy would provide $100,000 to Bob’s beneficiaries if he dies between age 30 and 50. If Bob lives past age 50, though, his policy will become worthless.

Scenario 2: Bob saves instead

So following the initial example of $100,000 for $9.15/month, let’s say Bob puts that money in a savings account instead. According to Bankrate, the best savings APY for 2021 is 0.5%. So let’s use that in this example.

$9.15 * 12 = $109.80 per year. $109.80 * 20 years is a total of $2,196. With a daily compounding interest of 0.5% APY, that brings the total to $2,309.54 over 20 years.

Unfortunately, $2,309 doesn’t even cover half of the cost of a basic funeral. And that’s only if Bob lived to age 50. If he passed at age 40, for example, he would have saved just over $1,100.

Scenario 3: Bob invests instead

Investing in index funds and mutual funds can be a relatively safe way of investing. Traditional annual gains are typically between 6% and 10%. So let’s use an average of 8% in this example.

So Bob invests $9.15 a month in his preferred investment option, with an 8% annual yield. Since the yield compounds, that brings Bob’s total to $5,024.66 after 20 years. Much better compared to saving, but still nowhere near as close as $100,000.

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Conclusion

Is it worth saving or investing in the cost of life insurance rather than buying life insurance? Not really. If Bob survived the 20-year term policy, he would have had about $5,000 in investments – that is, if he didn’t lose, as investing always carries risk.

If Bob did pass away, his beneficiaries could sell Bob’s investment for a couple of thousand dollars, but it wouldn’t help them financially as $100,000 would have.

Final words

To many individuals, life insurance is a topic they would rather avoid. But if you understand it, you can make a more educated decision on whether or not you need it.

Don’t be afraid to talk about it with your spouse or family member. It’s is a wonderful product for peace of mind. And if the thought of paying something without ever needing it gnaws at you, think of it this way. It’s better to have it and not need it than to need it and not have it.

The reality is, life insurance is very affordable, especially if you are 50 or younger. Even if your budget is just a couple of dollars a month, you could likely still get $10,000 to $50,000 worth of coverage.

What's your take on life insurance?

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