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What is life insurance?

Life insurance helps your loved ones financially if you die. The two overarching types of life insurance differ in multiple ways. Term life, which is cheaper and offers higher death benefits, is for a limited time (often 20 or 30 years). If you outlive your policy, your survivors don’t get a death benefit. Permanent life insurance, such as whole life, is in place for life and guarantees a death benefit to your survivors as long as you made your payments and were truthful on your application.

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How does life insurance work?

Policy beneficiaries receive a death benefit when you die. You’ll want to notify the life insurer when your loved one passes. If you’re not sure of the insurer, check the person’s checks and credit card bills. You’ll likely find checks or charges to the insurer.

Types of life insurance

  • Term life - Term life is for a limited time. It’s usually between five and 30 years. These policies are generally more affordable than permanent life. They also provide larger payouts. However, you can outlive your term life policy. That means your loved ones won’t receive a death benefit if you live longer than your policy.
  • Permanent life - Permanent life insurance is for life -- as long as you pay your premiums. Permanent life is often called whole life. Whole life provides a guaranteed benefit, a consistent premium and cash value earnings. Permanent life is usually more expensive and has smaller death benefits than term life. However, permanent life guarantees a death benefit. Permanent policies also have cash value. However, any money taken out lowers the death benefit and usually comes with a penalty. It’s not wise to tap into cash value unless it’s absolutely necessary.

  • Final expenses - Final expenses insurance, also called funeral or burial insurance, is an option for people who can’t get a term or permanent life policy. The policy covers final expenses and funeral costs. These policies are cheaper than term or perm, but they also have lower payouts.

Term vs. permanent life insurance

Term life insurance covers you for a certain period, such as 10, 15 or 20 years.

Buyers typically choose a policy that covers them until their mortgages or other debts are paid off, such as a child’s college education. A term life policy only pays a death benefit during the term. So, you may outlive a term life policy. In that case, your loved ones won’t get anything.

Term life is less expensive than permanent life. The average annual cost for a 20-year, $250,000 term life policy for a 30-year-old female nonsmoker in regular health is $302. A man the same age and with the same health status is $353 on average.

Permanent life, meanwhile, includes whole life and universal life policies. These policies cover you for life as long as you make payments. It doesn’t matter if you die in a year or 50 years from now. Permanent life policies also include an investment component. Cash value allows you to grow an investment, which you can borrow from during your lifetime.

These policies are more expensive than term life, but guarantee your loved ones get something and allow you to invest.

Life Insurance Quotes - How to Choose the Best Life Insurance Quotes for You

The best life insurance depends on your situation, your finances and what you want from a policy.

Life insurance goals can include:

  • Replace your income
  • Take care of your funeral and final expenses
  • Pay off your mortgage
  • Fund your children’s education
  • Provide funds for your spouse

Your goal will influence the policy that’s right for you. First, figure out why you want a life insurance policy. What is the goal?

A term life policy is meant to replace your income during peak earning years. It could be right if you’re looking to pay your mortgage or a child's education. A permanent or whole life policy is better for someone who wants to make sure their loved ones get a death benefit. Final expenses insurance could be the right choice if all you want is money to pay off your funeral expenses.

Once you know what you need, you can then start shopping. Make sure you get quotes from multiple life insurance companies. Ask about the same coverage so that you can compare them accurately. Find out about riders. You might be able to get more from your policy for little to no money. You’ll have an easier time finding term life policies online than permanent life. Insurers also offer guaranteed issue and simplified issue policies online. These policies allow you to skip a medical exam, but they cost more. If you have a pre-existing condition, that might be the only way to get a regular life insurance policy.

Benefits & Tips to get Life Insurance Quotes Online

Online vs. offline

Online

  • Great option for healthy people
  • Instant approval is possible
  • Guaranteed issue policies allow for approval without answering health questions or needing a medical exam
  • Able to compare policies from home, especially term life plans

Offline

  • Buying a policy offline might be the only option for people with health issues
  • You may find more permanent life insurance options offline
  • Might be your only option if you’ve been declined
  • Could be a better option for applicants who like to talk to people face-to-face

Calculate Life Insurance Rates -  What is the Average Life Insurance Cost?

Figuring out how much life insurance you need is critical. Use our Life Insurance Calculator to figure out how much coverage you need.

Comprehensive guide

Is life insurance worth it?

Term life insurance can be a key part of an investment strategy. Taking out a term life policy during the years of a mortgage could guarantee that your loved ones have enough money to pay off the debt if you were to die.

On the other hand, permanent life insurance could give you peace of mind that your beneficiaries will receive a death benefit. That benefit could help them pay off debts and funeral services. A permanent life death benefit could also assist them in making mortgage payments.

Do I need life insurance?

Life insurance can be an important piece in your investment strategy. It depends on what your other savings look like.

Life insurance might not be required if you have money saved in different ways in case of your death. Otherwise, life insurance can play a vital role.

What does life insurance cover?

Life insurance typically pays out death benefits regardless of how you die. Life insurers view suicides the same as other deaths.

There are exceptions though. For instance, there’s usually a two-year contestability window when you take out a policy. During that time, companies won’t pay death benefits if you die. That clause protects the insurer from issuing a policy to someone with a terminal illness or who plans to take his or her life.

Another time when an insurer may deny a death benefit is if you lie on your application. For instance, let’s say you claim that you don’t smoke. Years later, an autopsy finds that you died from smoking-related causes. At that point, the insurer could deny your beneficiary death benefits. The company may argue you lied on your application or should have told them if you started smoking. You avoided years of higher rates for smokers. So, the insurer would claim you committed fraud.

Can I get a life insurance with no medical exam?

Many life insurance companies offer guaranteed approval or simplified issue policies. What’s the difference? Guaranteed issue policies provide coverage without an exam and no questions asked. A simplified issue policy doesn’t require an exam. However, you’ll have to ask a handful of medical questions.

These policies can be the only option for people with health issues. Life insurance companies charge more for these policies since they’re taking on more risk.

Is life insurance taxable?

Life insurance isn’t usually taxable. A life insurance death benefit isn’t considered gross income. So, you don’t have to report it on your federal taxes. However, any interest is taxable.

What’s a life insurance rider?

Many life insurance policies allow you to add riders. These riders add supplemental coverage.

The benefits often enable you to use your life insurance policy while you’re still alive. Some examples of riders are accidental death and dismemberment, long-term care, chronic illness and waiver of premium. Waiver of premium allows you to skip premiums if you ever become critically ill, seriously injured or disabled.

Riders provide flexibility, but there’s a downside. If you tap into your death benefit to fund something while you’re alive, your loved ones will receive a smaller death benefit when you die.

Does pre-existing conditions like cancer or diabetes mean you can’t get life insurance?

Not necessarily. It will be harder to find a policy -- especially one that’s affordable. However, life insurers often provide higher-cost policies to people with pre-existing conditions. You will also likely have a two-year contestability period before the policy takes effect. If you die in that period, your loved ones don’t get a death benefit.

Is group life insurance better than individual life insurance?

Group life insurance is often a low-cost or no-cost policy. These shouldn’t be seen as an alternative to an individual policy. Group life policies can expire and usually have limited benefits.

Employers often have group life insurance policies. However, when you leave the job, you’re no longer covered. Group life insurance is an affordable option, but it doesn’t have a big payout and ends when you leave your job.

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