Gaining access to more tools and options is great for you as a consumer. When it comes to shopping for term life insurance, it can also make the process more confusing.
Some life insurance companies actually sell you policies and some don’t, such as insurance comparison websites that collect price quotes. Identifying the differences can be confusing.
In this post, I’ll help you understand the four types of life insurance companies and explain what you should know about them when you’re shopping for term life insurance.
No matter where you make your purchase, remember that it’s important to choose a financially-solvent company.
Table of Contents
- Companies That Issue Policies Directly
- Comparison Sites That Provide Quotes
- New Brands Backed by Legacy Insurers
- Simplified Term, Also Known As Instant Issue
1. Companies That Issue Policies Directly
- Best For: People who appreciate doing business with stable companies when making an important decades-long financial decision
- Examples: MassMutual, New York Life, Northwestern Mutual, State Farm
Traditional “mega insurers” fit into this category. In many cases, these companies have existed for more than 100 years. But there are also some relatively new companies that fit the mold.
You can get price quotes and purchase term life insurance directly from these companies. Most of their products require you to undergo a medical exam before the company will finalize your insurance policy.
The purchasing process for each of these companies varies. For example, although Northwestern Mutual makes my 2020 list of the best term life insurance companies, it’s difficult to find policy details online or to get a price quote without talking to an agent.
On the other hand, MassMutual offers a direct term life insurance product that allows you to apply online and get an immediate decision.
Most term life insurance policies are 20-year or 30-year decisions. So make sure you do your homework. It may make sense to shun temporary convenience in favor of doing business with a more stable company that offers better prices.
2. Comparison Sites That Provide Quotes
Comparison sites are not insurance companies in the literal sense. They pull price quotes from several sources to make it more convenient for you as a shopper. Ultimately, you’ll be buying your policy from another company.
If that sounds confusing, think of it like buying a book from Amazon. It’s not a traditional bookstore, but it allows you to compare prices from several companies and individuals that are selling the book you want. That’s what these online brokers do.
Of course, they have to make money somehow. Usually that’s through some combination of selling ads on their websites, getting commissions if you purchase insurance through their sites or even by selling your information to insurance companies as a “hot lead.”
These websites are helpful because you can fill out your information once and get price quotes from multiple sources. That’s convenient.
It’s also important to use the same inputs when you shop for life insurance. If you go to multiple companies and enter different answers about your weight, family medical history or current medications, you won’t get an apples-to-apples price comparison. Using a comparison site eliminates that potential mistake.
Be aware that some of those sites hand-pick their partnerships. They may provide prices from only a few insurance companies. And the options you see may be those that will earn the comparison site the most in commission. Some of the cheapest policies may be through companies that they don’t list.
3. New Brands Backed by Legacy Insurers
- Best For: People who want a more convenient and digital customer experience while retaining the financial stability that comes with a large legacy insurer
- Examples: Haven Life, Fabric
Haven Life is a great example of this type of life insurance brand. Founded in 2014, Haven Life is owned and backed by MassMutual.
In other words, if you buy a policy through Haven Life, you’re getting a MassMutual policy. One of the oldest insurers in the country, MassMutual holds an A++ rating from A.M. Best, an insurance credit rating agency that judges companies’ long-term financial viability.
However, Haven Life operates like an independent startup. Its operations are kept separate from MassMutual. It’s more nimble, so it can experiment with new features. It can respond faster to the wishes of its customers by building new products.
Haven Life also offers more frictionless purchases that appeal to digital natives. In some instances, it’s easier to get online prices and buy policies without medical exams than it is with MassMutual. Haven Life Plus also offers some digital perks that you don’t get from its parent company.
If you believe in the saying “if it ain’t broke, don’t fix it,” perhaps you’re totally fine buying your insurance from one of the legacy companies. They tend to focus more on face-to-face conversations (or at least voice-to-voice) and aren’t as digitally inclined.
But if you like making your purchases online with less interaction with gatekeepers, this category of life insurance companies may appeal to you.
4. Simplified Term, Also Known As Instant Issue
- Best For: People who want (or need) to purchase life insurance without a medical exam.
- Examples: Bestow, Ladder
These types of companies don’t require a medical exam. Often you can apply online and get an answer very quickly.
Some term life insurance companies are built around the idea of no medical exams. Bestow is an example of this. Bestow is completely online and offers policy terms as short as two years. It tends to offer small coverage amounts without many riders.
In other cases, legacy companies offer at least one product that fits this category even though most of their policies do require medical exams. State Farm’s “Instant Answer Term Insurance” is a good example.
“The insurers are getting better and better at automated underwriting, and instead of it taking two months to get a policy, it’s done right away,” money expert Clark Howard says.
“I think that’s a real advantage if you’re the kind of person who would not get around to having the visit with the nurse and not quite get around to filling out medical forms. Going with an instant-issue company would be a good idea for you.”
Simplified term (or “instant issue”) insurance can also give some people with pre-existing conditions a way to access life insurance.
The algorithms that simplified term companies use are getting more and more sophisticated in their ability to assess each person’s risk of dying within the term. That said, buying term life insurance that doesn’t require a medical exam can still be more expensive.
Which Type of Term Life Insurance Company Should You Use?
Any of the four types will work if the company you choose has an A++ rating from A.M. Best. That’s Clark’s top criterion for evaluating term life insurance companies.
Clark also says it’s probably better to buy level term life insurance online. He doesn’t think you need a salesperson because it’s a relatively simple process.
Plus, if the salesperson works on commission, they’re incentivized to upsell you to whole life, universal life or variable life insurance, which you almost certainly don’t need.
Stick to level term life insurance.
Be certain your company carries an A++ rating on A.M. Best (or A+ if your term is less than 20 years).
The biggest mistake you can make is buying term life insurance from a company that goes out of business before the term ends. You will have paid monthly premiums for years to make sure that your dependents are taken care of financially if you die. But if your insurance company goes belly up, that payout vanishes.
Clark thinks it’s probably best if you carry out the entire process online. Although some legacy insurers with stellar reputations can be worth it, even though you have to go through a person.