Guide to life insurance

Life insurance may be a good option to help support your family after you pass away. A life insurance policy enables you to assign beneficiaries to a death benefit. Your beneficiaries can use this benefit to pay bills, cover funeral expenses, pay tuition and more. But with the different types of life insurance policies available, how do you know which is right for you? Bankrate’s team of insurance experts breaks down the basics with this life insurance guide, highlighting the differences between the types of policies available.

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Whole life insurance combines life insurance with an investment component.

• Coverage for life
• Tax-deferred savings benefit if premiums are paid
• 3 variations of permanent insurance: whole life, universal life and variable life include investment component

Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.

• Fixed premium over term
• No savings benefits
• Outliving policy or policy cancellation results in no money back

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What is life insurance?

Life insurance is a policy between you and your insurance provider. Life insurance premiums are typically paid on a monthly, quarterly or annual basis. If you pass away while the policy is active and the terms of the policy have been met, your beneficiaries will receive a lump sum of money called a death benefit.

There are two main types of life insurance: permanent life insurance and term life insurance.

There are several different kinds of policies that exist under these categories. For instance, whole life insurance, universal life insurance, variable universal life insurance, indexed life insurance, guaranteed life insurance and final expense insurance are all types of permanent life insurance.

What is permanent life insurance?

Permanent life insurance policies are active until the policyholder’s death as long as the terms of the life insurance agreement are met. In other words, they do not expire as long as the policyholder is still living and paying the premium.

Some types of permanent policies, such as whole life, have fixed premiums and death benefits. This means that the premiums you pay and the death benefit your beneficiaries receive after you pass never go up or down. Other types of permanent policies, such as universal, have flexible premiums and death benefits. This means you may be able to adjust your premium payment and death benefit at certain points in the policy term. Medical exams are typically required before permanent life insurance coverage is extended.

While life insurance policies do have certain exclusions, like suicide clauses or safeguards against those who are untruthful during the application process, your premium payments will typically mean that your beneficiaries receive a death benefit upon your passing, as long as the terms of the policy have been met.

Additionally, most permanent life insurance policies come with a cash value account that allows you to pay premiums and withdraw or borrow money against the policy once it has accumulated enough funds. However, the growth potential for some types of permanent life insurance policies may be minimal, while others come with inherent risk as their cash value is invested in the stock market (variable, for instance). For more information on cash value accounts, you may want to speak with a licensed insurance agent or financial expert.

Permanent life insurance policies could be ideal for those who want coverage without the concern of a policy expiration date. As permanent life insurance is generally more expensive than term, permanent policies might also be best for policyholders that are not on a strict budget.

What is term life insurance?

Term life insurance policies last for a predetermined period of time, usually between 10 and 30 years, before expiring. The death benefit is fixed under some term policies, while it may decrease or increase under others as the policy ages. Premiums for term life insurance are usually, but not always, fixed. Also, a medical exam may or may not be required. Before you purchase a policy, you may want to ask an insurance agent about this. Unlike a permanent life insurance policy, a term life policy will not come with a cash value account.

As the name implies, term life insurance policies only pay out a death benefit if the policyholder dies, extends or converts their policy to a permanent policy before the end of the term. In other words, if the policyholder passes away after their policy term expires, then no death benefit will be paid.

Some term life policies are convertible by means of a conversion rider. A conversion rider is a policy endorsement that allows you to convert your term policy into a permanent policy before the term expires, and it typically comes at an additional cost. The conversion rider will sometimes waive any additional medical exams that would typically be required before permanent life insurance is extended. This is not an option offered by all insurance companies, so you may want to ask your agent if conversion is possible before purchasing your term coverage.

Term life insurance may be ideal for those who only want coverage for a certain period and are looking for a cheaper policy, as term policies are typically less expensive. For instance, family breadwinners may wish to purchase a term policy that is active while their children are young or during the years they still owe on their mortgage.

How does life insurance work?

Although there are many different types of life insurance policies, the general idea behind them is the same. In exchange for a premium, the policyholder purchases a life insurance policy. If the person insured under the policy passes away while the policy is active, the life insurance beneficiary (or beneficiaries) receives a death benefit to use as they see fit.

To understand how life insurance coverage works, it may help to learn some basic life insurance terminology:

• Policyholder: This is the person who takes an insurance policy out on themselves or someone else. The policyholder and the insured are usually the same person, but the insured may be someone else, such as a spouse or child. As the policyholder, you own the policy and can adjust your coverage, add riders, choose your beneficiaries, etc. You are also the one responsible for paying the premiums.
• Death benefit: This is the money paid to beneficiaries when the insured passes away. When you purchase a life insurance policy, the coverage limit you select is the amount of money that will be paid out in the form of the death benefit. Most life insurance policies have a maximum and minimum death benefit, and you can choose amounts between these. The higher your death benefit is, the more expensive your policy will typically be.
• Beneficiaries: The individuals you have selected to receive death benefits in the event of your death are called beneficiaries. You can choose one beneficiary or multiple beneficiaries, and you may also have the option to designate a primary and secondary beneficiary. Most people choose a spouse or significant other as the beneficiary, but you may also be able to name a charitable organization, business or even a funeral home as the beneficiary, depending on the type of policy you have.
• Premium: The amount of money you will pay to the insurance company for life insurance coverage is called the premium. Some life insurance policies have a fixed premium that stays the same for the duration of the policy, and others do not. You must continue to pay your premium for your policy to remain in force, otherwise the insurance company can cancel your coverage.
• Cash value: Permanent life insurance policies have a cash value component that grows over time. When you pay the premium, a portion of the money goes into the cash value account. At a certain point, you may be able to borrow the cash value as a loan or use the funds to pay your premium.
• Riders: Riders are endorsements, or add-ons, that you can purchase for tailored coverage. Every life insurance company offers different riders, but some of the most common ones are the long-term care rider, child rider, accelerated death benefits rider and critical illness rider.

Who should buy life insurance?

Buying a life insurance policy is an option many should consider. Below are the common reasons people consider buying life insurance:

Parents with young children

If you have children, having a life insurance policy in place may provide financial support if you were to pass away unexpectedly. The money can be used to pay for child care, educational expenses or for whatever your beneficiary sees fit. In this case, a term life insurance policy may be a good option to consider, because it could be specifically tailored to expire once children become independent.

Young adults who want cheap coverage

Individuals who are young and healthy typically pay the cheapest life insurance premiums. Buying a policy at a young age may help you lock in a more affordable rate for the future. For young adults, a term life insurance policy with the option to convert to permanent coverage may be a good option to consider.

Adults with significant debt

If you are an adult who has many debts, whether through a mortgage, loan or credit card, having life insurance could protect your loved ones from assuming your debt if you were to pass away. Note that some of your expenses, like credit card debt, won’t necessarily be your loved ones’ responsibility if you pass away — it is either paid off by the estate or becomes the responsibility of the joint account holder, if there is one.

Seniors who want to pay for their funeral

Past a certain age, it becomes more difficult for seniors to purchase life insurance, especially those with health complications. But for seniors who want to pay for their own funeral expenses, buying final expense coverage may be beneficial. It lowers your family’s financial burden when you pass away, and it also allows you to make arrangements for your own funeral.

How much life insurance do I need?

Everyone has different life insurance needs. When you purchase life insurance, you may want to determine how much coverage is appropriate for your situation. Many experts recommend basing your life insurance coverage on your salary, but there are other factors you may want to look at. The following considerations could be beneficial when deciding how much life insurance to purchase:

• Your income: Your life insurance coverage could be based on your income, especially if you’re the breadwinner in your family. For example, if you make $100,000 per year, you will likely need more coverage than if you made $40,000 per year. This is because your income determines your family’s lifestyle. Basing your life insurance coverage on your income may allow your family to keep up with their cost of living expenses without moving or adjusting their lifestyle.
• Your debts: If you pass away with outstanding debts, the amount you owe may not be automatically erased. In some cases, it may get passed down to your family members. For this reason, you may want to ensure that you have enough life insurance coverage to pay off your debts, such as a mortgage, business loan, credit cards, medical bills, etc.
• Your children’s education costs: If you have children, you may want to consider the cost of their future education when choosing your life insurance coverage. If your kids currently attend private school, you might want to get enough life insurance coverage to pay the remaining tuition. The same goes for your kids’ college tuition if you want to help them pay for school.
• Your funeral plans: Some people have specific preferences when it comes to their end of life expenses and burial wishes. For example, if you intend to enter an assisted living facility when you get older or know you want an elaborate funeral, you may want to consider that when you buy life insurance.

If you are not sure how much life insurance coverage you need, consider using an online life insurance coverage calculator. You will input some basic information, like your income, expected burial costs and the number of children you have, and the calculator will estimate how much coverage may be right for your situation.

How much does life insurance cost?

Life insurance is individualized — how much a life insurance policy costs depends on your policy type, coverage amount and rating factors. For instance, your age, lifestyle and existing medical conditions typically help determine how much your life insurance premium will be. Generally, younger people in better health with a low-risk lifestyle are typically afforded some of the cheapest rates.

The type of life insurance policy you choose will also significantly impact your rate. Typically, permanent policies are more expensive than term policies. However, since rating factors and coverage levels will vary across policyholders, it’s impossible to say that permanent policies are always more costly than term policies.

If you need help deciding which kind of life policy is best for you, it may be helpful to have a conversation with an insurance agent or certified financial professional.

How do I buy life insurance?

After researching different life insurance companies, you’ll likely want to request life insurance quotes from insurance providers to find out about how much you’ll pay for your desired coverage. Note that life insurance premiums are generally based on your age and health and do not typically vary greatly among providers for similar coverage and policy types.

After you have reviewed quotes and selected which company you want, you will complete that company’s application process. Many of the largest life insurance companies offer an online or phone application process for your convenience. As part of the application process, you may be asked to get a medical exam to assess your general health or complete a health questionnaire.

Finally, once your application is approved and you have agreed upon a premium, you will sign the policy, pay the premium and your coverage will take effect.

Frequently asked questions

• • What is the best life insurance company?

    It depends. The best life insurance company for each person varies since each policyholder brings a unique set of needs and preferences to the table. For instance, some people may be willing to spend a little bit more for a company with excellent customer service. Those shoppers may want to seek out carriers with high customer satisfaction scores from J.D. Power. Others may be most concerned that their insurance company is financially stable since, generally, companies with a history of financial stability may be able to pay out claims quickly. If that’s the case, finding a company with solid AM Best ratings could be a good strategy.

  • How can I get a cheaper life insurance premium?

    Unlike home or auto insurance, discounts are not available for life insurance policies. However, there are still ways to potentially get a lower rate. To help you receive the cheapest life insurance for your situation, consider improving your health by not smoking, maintaining a healthy weight, exercising regularly and managing existing conditions with your doctor. You may also want to purchase life insurance when you’re younger, as premiums are typically less expensive.

  • Can you purchase life insurance with pre-existing conditions?

    Whether or not you can purchase life insurance with pre-existing conditions depends on the conditions and the company. For example, if you have diabetes, high blood pressure or asthma, you can likely still purchase coverage, but you will pay a higher rate. On the other hand, if you have a terminal illness, it may be harder to find an insurance company that will extend coverage, and you may be limited to certain policy types.

  • Is life insurance worth it?

    For many, life insurance is an important piece of their financial plan. However, whether life insurance is worth it to you is an individual choice. If you have a family that depends on your income or you have debt that your spouse or co-signer will be responsible for after you pass, then life insurance may be a good choice. Even if you don’t have dependents or debt, life insurance could help your loved ones follow through with your funeral and burial plans. If you’re unsure whether you need life insurance, you could consider consulting with a financial professional.