Life insurance can play a key role in ensuring that your loved ones will have the financial stability they need if something happens to you. When choosing a life insurance policy, it’s important to ensure that you’re getting the right policy for your situation from a company you can trust.
Here, we explain how life insurance works and help you find the best life insurance policy for your needs.
Life insurance is a type of insurance that pays out in the event of the policy holder’s death. Essentially, in exchange for paying monthly premiums on your policy, the insurance company agrees to pay out a specified sum of money if you die while the policy is in effect. The money goes to your beneficiary, who may be your spouse, a child, or anyone else you name on your policy.
There are several important terms to know when evaluating life insurance policies:
There are several different types of life insurance, but the 2 most common are term life insurance and whole life insurance.
Term life insurance is a life insurance policy that lasts for a set number of years. If you pass away during the policy’s term, the insurance company will pay out your death benefit. If you live past the end of your policy’s term, your policy will simply end. You can either purchase a new policy or go without life insurance.
With term life insurance, your premiums stay the same over the entire length of your policy. Terms typically extend from 5 to 40 years. Longer terms usually have higher premiums since the likelihood that you’ll pass away while your policy is in effect is greater the longer your policy lasts and the older you get. The cheapest life insurance policies are short-term life policies for young, healthy individuals.
Term life insurance can be a good option for parents with dependent children, homeowners with a mortgage, families with a single breadwinner, or anyone else under age 70 with significant financial obligations. Your policy can cover you for your working years and lapse after your children have grown up or your mortgage has been paid off.
Whole life insurance is a type of permanent life insurance. With whole life insurance, your policy never expires. As long as you pay your premiums on time, your policy remains in effect until you die. Your premiums remain the same over the entire life of the policy.
Importantly, most whole life insurance policies also have a “cash value” component. Most of what you pay in premiums goes toward covering the cost of your policy. The remaining portion of each premium is set aside in a cash account and is invested on your behalf.
Many whole life insurance companies allow you to withdraw cash from your policy’s cash value while you’re still alive. You can use the cash to pay your policy’s premiums, to help pay for your children’s college tuition, or for anything else you want. However, any withdrawals are considered a loan. If you don’t pay them back, your policy’s death benefit may decline over time.
Whole life insurance policies typically aren’t cheap. Since they last your whole life, they are guaranteed to pay out eventually, unlike term life insurance. In addition, the cash value component of these policies means that you’re paying for more than just life insurance coverage.
Whole life insurance can be a good option if you want to accrue cash value in your life insurance policy or if you want to use your life insurance policy as a tax-sheltered investment. These policies are often used for estate planning.
Let’s take a closer look at how term and whole life insurance policies compare:
|
|
Term Life Insurance |
Whole Life Insurance |
|
Coverage term |
Typically 5-40 years |
Never expires as long as you pay your premiums |
|
Premiums |
Low, increasing with age and term length |
High |
|
Guaranteed death benefit |
Yes |
Benefit can be impacted by borrowing against your policy |
|
Cash value |
No |
Yes |
|
Suitable for |
Those who want to ensure their financial obligations are covered in the event of their passing |
Investment and estate planning |
There are 2 parts to figuring out how much life insurance coverage you need. The first is figuring out what term you need, and the second is figuring out what death benefit you need.
When considering your policy term, think about your financial obligations. If you have kids, you may want your policy to last at least until they graduate from college. If you have a mortgage, you may want a policy that lasts until your mortgage is paid off. Note that many life insurance companies set a maximum age for term life insurance coverage of 70-80 years old.
A good rule of thumb for determining how large your death benefit should be is to multiply your annual income by 10. You may also want to add $100,000 per child for college expenses. Of course, make sure that your death benefit is large enough to cover any financial obligations you already have, such as a mortgage or student loan debt.
Longer policy terms and larger death benefits will increase your policy’s premiums. When comparing life insurance quotes online, you can customize your coverage and see how different levels of coverage impact the cost of your policy.
The best life insurance companies typically offer riders for both term life and whole life policies. These riders can ensure that you’re covered under situations that standard life insurance policies don’t cover.
Some common riders include:
Eligibility for purchasing life insurance varies from company to company.
Some life insurance companies offer life insurance to anyone, regardless of age or medical history. Even individuals older than 80 can buy life insurance, although these policies typically come with high premiums and a relatively small death benefit.
Other life insurance companies limit policies to healthy individuals below a certain age. For most term life insurance policies, you must be under 70 to purchase a new policy.
Life insurance companies are regulated by each individual state. While state laws differ, all 50 states require life insurance agents and brokers to be licensed in states where they operate. In addition, state regulators monitor term and whole life insurance policies to make sure that premiums are commensurate with the benefits these policies provide.
Life insurance policies may be issued by one company but underwritten by another. Underwriting is the process of assuming the risk of a policy. So the company that underwrites your life insurance is ultimately the company responsible for paying your death benefit. In many cases, your beneficiaries will need to contact the underwriting company, not the company that issues your policy, to file a claim.
Life insurance agents and brokers are required to be transparent about what company is underwriting your life insurance policy. The best term life insurance policies are underwritten by companies with strong financial stability ratings, which signal that the company will be able to pay out your death benefit if and when the time comes.
You can find whole and term life insurance quotes online or by speaking with a licensed life insurance agent or broker. Check out the 10 best life insurance companies above to get a free quote today.