Key takeaways:

  • Life insurance can play a vital part of a financial strategy to protect your loved ones.
  • Three types of life insurance are term life, permanent life and final expense insurance.
  • Age, gender, and health status are three influences of life insurance costs.
  • Beneficiaries receive a life insurance death benefit after the policyholder dies as long as it’s within the policy’s term and the individual made the life insurance payments.
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What is life insurance?

Life insurance helps your loved ones financially when you die. A policy provides coverage to help replace income, pay for final expenses, pay mortgages and cover other debts.

You make premium payments during the life of the policy with the understanding that your beneficiaries will receive a death benefit when you die. An insurance company typically pays the death benefit as a lump sum.

You can also add riders to a life insurance policy that provides benefits while you're still alive, such as critical illness and long-term care riders.

How does life insurance work?

When you die, your beneficiaries receive a death benefit. The size of the death benefit depends on the policy.

"The most important benefit of life insurance is the financial protection and peace of mind it provides families," says Brian Bayerle, senior actuary at the American Council of Life Insurers.

Beneficiaries need to notify the life insurer when their loved one passes. If you're not sure of the insurer, check the person's checks and credit card bills to see if there were any payments to a life insurance company.

Life insurance companies typically pay a death benefit to beneficiaries as a lump sum.

Who needs life insurance?

Anyone who is the primary breadwinner in a family -- or who simply contributes income that is crucial to the well-being of loved ones -- should consider purchasing life insurance.

Also, even those who don’t bring in a salary may want life insurance. For instance, a parent who cares for children but doesn’t have an income. If that parent dies, money will likely be needed for childcare.

"As people prepare for the future, they should consider opportunities to take risk off the table," says Aaron Ball, senior vice president and head of insurance solutions, service, and marketing at New York Life. "Life insurance is one way to do that."

Life insurance also can make sense for people who want to:

  • Leave money behind to pay for the deceased's funeral expenses
  • Pay a mortgage and children’s future education
  • Provide a way to pay off the deceased's debts after he or she is gone
  • Build a financial legacy for loved ones or provide money for favorite charities
  • Protect business partners from financial harm resulting from one partner's death

How much does life insurance cost?

Many different factors influence the cost you will pay for life insurance. For example, your age and health status play a large role in the cost of your premiums. Unlike other types of insurance, a person's ZIP code doesn't influence life insurance quotes.

The type of policy you buy also matters. Term insurance tends to be less expensive than permanent life insurance policies like whole life. The amount of coverage you need, the length of the policy, even your gender can impact costs.

Following is a look at some average annual costs for a $500,000, 10-year term life insurance policy. You can see how age and a person’s health status decided by the life insurer affect costs.

Female30 years old40 years old50 years old
Preferred Plus health status$258$356$718
Preferred health status$286$397$798
Regular plus health status$316$440$887
Regular health status$339$479$966
Male30 years old40 years old50 years old
Preferred Plus health status$308$421$906
Preferred health status$342$471$1,014
Regular plus health status$380$527$1,138
Regular health status$411$576$1,252

Source: CompuLife, July 2021

How to get life insurance

There are many ways to get life insurance. You can meet with an independent life insurance agent to discuss your options or you can search on your own for the best life insurance rates.

While some people are confident shopping for a policy on their own, a little help can go a long way.

"It's important to seek the help of a trusted financial professional to ensure you're adequately covered and can make the most of your policy," Ball says.

How much life insurance do I need?

Determining how much insurance you need is vital to properly protect your loved ones. You want to figure out your debts, such as a mortgage, your future debts, such as a child’s college education, your funeral and burial costs, and any other things that your loved ones would need to pay off.

"A life insurance agent or other financial professionals can help people determine what level of protection is right for them and their families based on their financial responsibilities, sources of income and savings," Bayerle says.

If you prefer more of a DIY approach -- or simply want another option -- go to the Insure.com life insurance calculator, plug in a few numbers and figure out your life insurance needs.

Types of life insurance

There are several types of policies and why you want a policy may vary. The life insurance policy best for you depends on what you need and what you want out of a policy. Let's take a look at three types of policies.

Term life insurance

Term life insurance covers you for a period of time. If the policyholder dies during the term, the life insurance company pays out a death benefit to the beneficiaries named in the policy.

"Term insurance provides protection for a defined period of time -- from one year to 10, 20 or even 30 years -- and pays benefits only if the policyholder dies during that period," Bayerle says.

The advantage of term insurance coverage is that it can protect your loved ones at a reasonable price. These policies are generally more affordable than permanent life.

However, you can outlive your term life insurance policy and no cash value or benefit will remain. That means your loved ones won't receive money if you live longer than your policy.

Permanent life insurance

Permanent life insurance doesn’t expire after a given period -- unlike term life insurance.

"Permanent insurance provides lifelong protection as long as premiums are paid," Bayerle says.

One type of permanent life insurance is whole life insurance. This type of policy includes a consistent premium and a "cash value" component that is separate from the death benefit. As the cash value grows -- tax-deferred -- the policyholder can tap into it to pay expenses during his or her lifetime.

With all permanent coverage, the cash value is different from the face amount. The face amount is the money that will be paid to beneficiaries, while the policyholder can tap into the cash value while he or she is still alive. However, many experts recommend against using this cash unless necessary.

Permanent life insurance policies tend to cost more than term life insurance. There are a variety of permanent life policies available, including universal life insurance and variable life insurance coverage. The type of permanent life insurance policy right for you depends on whether you want to take on more risk and want to make investment choices.

Final expense insurance

Final expense insurance is a form of whole life insurance coverage that allows you to leave behind a benefit so loved ones can pay your last expenses. These can range from funeral costs and final expenses connected to the legal costs of wrapping up your affairs.

Final expense policies tend to be considerably cheaper than other types of life insurance policies. However, they also offer a much smaller benefit than other types of life insurance. In most cases, people purchase final expense insurance from life insurance companies. But in some states, funeral homes also can sell them.

Final expense insurance is usually a simplified issue or guaranteed issue policy, which means you don’t need to undergo a medical exam to get a life policy.

Age and life insurance

It probably comes as no surprise that the older you get, the more expensive life insurance becomes. The risk that the insurer has to pay out increases as you age, so the insurance company charges higher premiums to account for that risk.

In fact, costs can increase by up to 10% a year as you get older, and up to 12% a year once you are in your 50s and beyond, according to AIG Direct.

The Insurance Information Institute notes that with traditional permanent life coverage, the premium cost remains "level" throughout the policy. However, to achieve this, your insurer charges a higher cost than needed to pay claims in the early years. It will then invest that money and use the returns to help pay the higher costs of insuring people when they are older.

Term vs. permanent life insurance

Term life insurance covers you for a certain period, such as 10, 15, 20 or 30 years.

Buyers typically choose a term life policy to help during their peak earning years. A term life policy can cover them until their mortgages or other debts -- such as a child's college education -- are paid off. 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 insurance is less expensive than permanent life coverage. The average annual cost for a 20-year, $250,000 term life policy for a 30-year-old female nonsmoker in regular health is $314. A man the same age and with the same health status is $368 on average.

Permanent life policies cover you for life as long as you make payments. It doesn't matter if you pass away in a year or 50 years. 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.

Benefits and tips to get life insurance quotes online

Life insurance comparison shopping is crucial to your ability to find the right policy at a great rate. Gathering life insurance quotes can help you zero in on your best options. Here's a look at buying online life insurance compared to buying offline life insurance:

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

Frequently Asked Questions

Is life insurance worth it?

Term life insurance can be a key part of an investment strategy along with retirement, savings and an emergency fund.

Having a term life policy during the years of a mortgage could provide income replacement and 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 help make mortgage payments.

Do I need life insurance?

Life insurance can be an essential piece in your investment strategy. It depends on your other savings.

Life coverage 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 get a policy. During that time, companies won't pay out 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 money. 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 life insurance with no medical exam?

Many life insurance companies offer guaranteed issue or simplified issue policies, which don’t require a medical exam.

  • 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 answer a handful of medical questions.

Standard life insurance policies may not be available to everyone. In fact, these life products may be the only option for people with health issues. Life insurance companies charge more for these policies since they're taking on more risk, so keep that in mind when you get a quote.

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 permanent life policies allow you to add riders. These riders add supplemental coverage to the policy.

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 payments if you ever become critically ill, seriously injured or disabled.

Riders provide flexibility, but they can add costs to your policy.

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

Chronic conditions don’t necessarily mean you won’t find life insurance, but it may be harder to get affordable life insurance.

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 won't get a death benefit.

Is group life insurance better than individual life insurance?

Group life insurance is often cheap life insurance -- a low-cost or even 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 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.

Even if you have group life insurance through your employer, it’s a good idea to get individual life insurance coverage, so you and your loved ones are adequately protected.

How long do you have to have a life insurance policy before it pays out?

Typically, a life insurance policy has a waiting period before it kicks in. For example, many policies have a two-year waiting period -- or even longer -- before your beneficiaries are eligible for full benefits. If you die during that time, your beneficiary likely would receive only the amount of premiums paid up to that time.

In addition, when you initially apply for your policy, you may have to wait several weeks for underwriting to be complete before your policy goes into effect.

There are exceptions to these rules, however -- such as with guaranteed issue life insurance -- and each life insurance policy has different rules. Consult with your agent to find out when your policy will go into effect.

What is not covered by life insurance?

In most cases, your beneficiaries will receive money after you die. But some policies may have exceptions that will prevent loved ones from collecting on the policy. For example, a policy may not pay out if:

  • You die during a war or as part of military service
  • You die from suicide or even terminal illness within a couple of years of the policy issue date
  • You die in an airplane accident

It's important to note that every policy is different, so make sure you understand your policy terms.

What happens if I can't pay my policy premiums?

Your life insurance policy lapses if you have term life insurance and you can’t pay the premiums. At that point, you no longer have life insurance coverage.

Those who have permanent insurance but can’t pay their premium can cash out their policy. Although you lose life insurance coverage in that case, you’re still entitled to keep the cash value you have built up. However, if the cash value exceeds what you have paid in premiums, you may owe taxes on the amount.

You also may have what is known as a "reduced paid-up" option. This essentially means that if you stop paying premiums, you have the option of a reduced death benefit without any cash savings. In some cases, you also might be allowed to convert your permanent policy to a term life policy. This will depend on how much cash savings you have accumulated in the policy.

Some insurers may allow you to reinstate a policy within five years of it lapsing. However, you may need to undergo a physical exam and pay back all the premiums from the years when you let the policy lapse, plus interest. This can be worth considering if your annual premiums remain lower than what you would find in a new policy.

What is a beneficiary?

A life insurance beneficiary is a person or entity you name to receive the death benefit from your life insurance policy. Typically, this is a family member or other loved one or multiple people. However, you can also name charities, the trustee of a trust you have established or your estate.

When naming beneficiaries, it’s common to have both primary and contingent beneficiaries. The primary beneficiary is first in line to get the death benefit. If that person dies or can’t be found, the secondary beneficiary is entitled to the money.

If neither a primary nor secondary beneficiary can be located, the death benefit will go to your estate.

It’s important to make your wishes as clear as possible when naming beneficiaries and to identify your beneficiaries with the details, such as their Social Security numbers. Also, keep your beneficiaries up to date. Events like marriage, divorce, or the birth or adoption of a child can change your beneficiary wishes.

Does a beneficiary need to do anything to receive the death benefit?

Beneficiaries need to contact the life insurance company about the death, so the insurer can collect the needed documents and make the death benefit payment. A beneficiary may be asked to fill out the insurer's claim form and submit it to the insurer, along with a certified copy of the policyholder's death certificate.

Unlike some aspects of an estate, a life insurance policy isn’t included in the probate process. Instead, it’s a contract between the insurer and the person who purchased the policy.

That means that when you die, the death benefit from your life insurance policy goes directly to the beneficiaries you named in the policy.

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