How to buy life insurance on a budget

Life insurance is a little like clothing, in that it’s an essential part of a responsible person’s life. Also: That you have a nearly limitless array of options, and you can spend a wide range of money on those options — from thrift-store bargain bin finds to custom clothing made with the finest and rarest fabrics.

But just like no one really needs, say, a bespoke cashmere jacket encrusted with precious diamonds and the yolks of Faberge eggs (we assume), it’s unlikely that you will need the highest-value life insurance policy you qualify for (and the higher premiums that will come with it). And just like that thrift store cardigan might come with a few holes, buying a cheap policy will save you money — but it might leave you with less coverage than you want when you need it most.

So how do you find the right policy to meet your financial needs? And how do you make sure you get the most affordable rate? We’re so glad you asked. Here are our tips for finding affordable life insurance on a budget.

Determine what type of life insurance plan you need

As with anything else you can shop for, the first step is to zoom out and learn what your options are. So first, let’s define life insurance. In short, it’s a policy wherein the customer pays a regular premium, typically every month, in exchange for a financial payout if and when the policyholder dies. This money, in turn, can help offset a whole host of costs, from burial expenses to college tuition for any children the deceased has left behind.

Bigger picture, what’s happening is that customers are paying premiums to the life insurance company, which uses that money to pay out those death benefits (and cover the costs of administering their life insurance policies). Insurers use actuarial tables to determine how likely a customer is to pass away after a certain time period, based on factors including the customer’s health. This is all done to help make sure that when a customer dies, there is money in that fund to cover the death benefit.

So why get a life insurance plan? Because as we all know, sometimes the unexpected happens. And if something were to happen to you, having a life insurance policy can help your loved ones pay for anything you leave behind. This includes immediate, one-time needs like the cost of a funeral. It also includes long-term, ongoing needs like offsetting the loss of your income. If you have outstanding debts — from your college loans to your mortgage — your beneficiaries can use the money to pay those off. When you take out a life insurance policy, you hope you’ll never need to use it. But if the worst should come to pass, you’ll be glad you have it.

So who needs life insurance, and when in life should you think about it? A few examples:

• You’re a new parent (or planning on starting a family).
• You use your income to pay (or help pay) the bills for your family.
• You are concerned with leaving behind a financial legacy.
• You and your partner or spouse share financial commitments, like a mortgage.

So what are your options? Let’s start with these.

Term life insurance

True to its name, term life insurance is a type of life insurance coverage with a set term. Typically, you take out a policy that covers a set period of time — common term lengths are 10, 15, 20 and 30 years — during which your beneficiaries will receive a death benefit should something happen to you. Yes, the term ends, and that’s why many people choose a term length that coincides when their expenses decline — after their kids have completed college, for example. If you are still alive when the term expires, you will not receive a payout. But you’re still alive, which should provide some comfort. (At least, we hope so.

One major advantage of term life insurance is that the rate is typically fixed throughout the term, something called guaranteed level premiums. That is to say, the premium you pay in month one will be the same amount you pay in the last month of your term (and every month in between). (That’s why many professionals suggest getting life insurance when you’re young and healthy, as it will help you lock in a lower rate throughout the entirety of your coverage. More on that in a bit.) This consistency helps you budget for the future, and also means that once you take the time to get an insurance policy, you won’t have to worry about it again so long as you keep making payments. A few decades’ worth of peace of mind? Priceless.

Add it all up, and term life insurance is one of the most affordable types of coverage out there. Which is also why it’s the most popular, especially if you’re on a budget.

Permanent life insurance

Also known as whole life or universal insurance, permanent life insurance is exactly that: Permanent. The policy will last your entire life. A permanent life insurance policy typically also has a cash value that can grow or shrink over time, which is why it’s best if you work with a financial professional when considering whether it’s right for you. Because it lasts your lifetime and builds cash value (unlike term insurance), the rates are higher than what you’d pay for term life insurance coverage, anywhere from 5 to 20 times as much as a term life insurance policy.

Decide how much life insurance you need — and how much you can afford

If you’ve read this far, you’re probably thinking that life insurance sounds like a good idea. You might even be thinking that term life insurance is the right fit for you. Great! But the next question is: How much coverage do you need? Well, you’ve come to the right place.

A rule of thumb for determining your life insurance needs

The reality is that what’s affordable to one person might be expensive to someone else, and vice versa. That’s why there’s a quick rule of thumb that most people use when determining how much insurance to get. Take your annual income. Multiply it by five or even ten. And there you have it: A good starting point to understanding how much life insurance you might need.

Why that number? Think about it. If something were to happen to you, your annual income would become $0. But your annual expenses might remain — think of any outstanding debts you might have. And the expenses of your loved ones — your kids, if you have them, your partner or spouse, even an aging parent who counts on you financially — will continue. A term life insurance policy is a way to soften that blow by creating a source of income (typically a lump sum, typically tax-free) that will help your family absorb the financial blow of losing your salary. (This will also leave them with one less thing to worry about during an already-stressful period of mourning.)

Let’s be clear: You should run the numbers before committing to this back of the envelope math. And there is such a thing as too much coverage. (Didn’t expect to hear that from a life insurance agency, did you?) But if you are the major breadwinner in your family, you might need a higher coverage amount. If you are a stay-at-home parent, you might need less. (Though you probably still need some, because while you might not earn a salary, you still provide value to your family, which might need some form of paid child care in your absence.) But the basic idea is to give you a window of roughly what kind of coverage you need. At Haven Life, you can buy a policy for $100,000, or you can go all the way up to $3 million.

To find out how much coverage you need, start with an online life insurance calculator.

Picking the right term length

So you’ve determined the coverage amount you need. But how do you decide how many years of that coverage you need?

In a sense, it starts with where you are on your journey in life. If you are near the start — you’re a newlywed, for example, or just starting a family — you’ll want to consider a longer term. That’s simply because you have many years ahead of you in which someone will be relying on you financially. (The good news is that, while a longer term will of course cost more overall, the younger and healthier you are when you apply, the lower the premium can be.)

If you’re later in life, or even looking to bridge the gap after your existing term life insurance policy is no longer in effect, you’ll want to consider a shorter term. Maybe your mortgage took longer to pay off than expected, or maybe you had another child later in life (truly the best kind of surprise). Whatever the reason, a 10-year term is typically the shortest available.

And a final factor to consider here is your budget itself. The reality is a 20-year policy will cost less than a 30-year policy, and 20 years of coverage should still last until your children are grown and out of the house. You might also be better positioned in 20 years to take on a 10-year policy, again to bridge the gap.

One place to start: An online life insurance calculator, which can help determine how much coverage is right for you and your loved ones.

Shop around for the best fit for you

Smokey Robinson sang it, every financial blog advises it, so we’ll say it, too: You better shop around. There are more options, online and off, than ever. It can be overwhelming, so here’s what to look for and what to consider.

Compare life insurance rates

If you’re on a budget, this is probably your top priority. (Besides, you know, getting insured.) The magic phrase here is “guaranteed level premium.” That means you’ll pay the same premium throughout the life of the term, which is an easy way to lock in a predictable monthly cost for getting insured. There are lots of other factors at play in what you will ultimately pay, including your age and your health. But it’s smart to start with getting a quote from each of your insurance options and seeing what’s best.

Read customer reviews

When you’re signing up for, at minimum, a ten-year commitment, it’s wise to see how other people rate their experience. Is it easy to get in touch with customer service? Was the application experience hassle-free? Are customers happy with their life insurance premiums rate? You wouldn’t move into a new house without seeing it for yourself, and checking out what the schools are like. An insurance policy is a similarly large and long investment. There aren’t typically reviews on a house, but there are for life insurance providers. Take advantage.

With life insurance, you can consult online customer reviews through Google or services like Trustpilot. But there are also third-party ratings agencies that consider a company’s financial strength and its claims-paying ability.

Do a little homework

When you’re buying a t-shirt, you’re hoping it will last you a few years. When you’re buying life insurance, you’re likely committing to 10, 20 or even 30 years of coverage. That means you’ll want to be confident that you buy insurance from someone who will be there at the beginning and the end of your term

One thing is to consider the history of who you’re buying insurance from. If they’ve been around a long time, it’s likely they’ll be around for a long time to come. That experience can bring peace of mind.

Of course, it’s often the younger, newer entities that are the most innovative. Take Haven Life, an insurance agency that makes life less hard by taking an online-first approach — you can do everything from getting a quote to applying for insurance on the internet. Haven Life is also backed by MassMutual, an insurance company with more than a century and a half of experience. It’s the best of both worlds, really.

Get life insurance while you’re young and healthy

One reason why you get life insurance: No one knows what tomorrow brings. That’s also a good reason to get life insurance as soon as humanly possible: You’ll never be as young as you are today, and there’s always a chance a health issue is around the corner.

With that bleak warning out of the way, let’s pivot to a celebration of your youth and good vigor. (And, why not, your charm.) Point is, you are attractive to insurers when you’re young and healthy because it means you’ll likely live a long time. Again, the future is unknowable, but the upshot of this is that you’ll get the lowest possible rate, because insurers want someone like you in their pool. Two things to consider:

If you smoke, kick the habit

This is just plain good advice. But it’s also worth noting that being a smoker typically means you’ll pay more for life insurance. (Some experts estimate as much as two to four times as much.) That’s in addition to the hit that buying cigarettes already takes on your wallet (and the possibility of an even greater hit in the form of medical bills down the road). Take it from us: Quitting smoking is good for your body, and good for your budget if you want to get affordable life insurance rates.

If you skydive, kick the hobby

Call us killjoys if you must, but the reality is that dangerous hobbies will increase your life insurance premiums. (And failure to disclose them could mean your policy won’t pay out, leaving your loved ones bereft after you lose your grip during your next free solo adventure.) If you’re looking to get the best possible rate on your life insurance premium, you’ll have to get your kicks the way the rest of us do: Watching others perform death-defying stunts on YouTube.

Apply and find the best rate

And then comes the final step: Once you’ve done your research, simply begin your life insurance application. From there, you’ll get a real rate, and the opportunity to determine whether that fits into your budget. If not, keep shopping. If so, congratulations: You’re about to get peace of mind for yourself, and for your loved ones, that comes with every term life insurance policy. Better yet, that peace of mind is included for free.