What is life insurance?
Life insurance is a contract between a person (policyowner) and an insurance company. If the insured person dies during the coverage period, the company will pay out a previously determined sum of money (death benefit) to whomever the person chooses (beneficiaries).
When buying life insurance, you have three main choices: term life insurance, whole life insurance, or universal life insurance.
» Learn more: What’s Life Insurance and Who Needs It?
What does life insurance cover?
Life insurance covers a set amount of the on-going income your family would lose if you were to die. The payout they would receive can be used to cover a number of financial obligations from day-to-day expenses like food and childcare to larger sources of debt like a mortgage. It can also be used to contribute to or take care of future costs like college tuition for a child or retirement for a spouse.
Why is life insurance important?
Life insurance is important to ensure your loved ones are financially protected and not held solely responsible for personal and long-term debts as well as on-going expenses. The death benefit from a life insurance policy can help make it easier for families to focus on recovering emotionally from the death of a loved one and not have to worry about how they’re going to pay the bills.
Life insurance can also be important for a business owner. Small business owners work hard for the success of their companies. Life insurance on themselves and other key people can ensure the continuation of the business even if a death occurs.
Who needs life insurance?
If you have anyone that depends on your income now, life insurance is incredibly important for protecting their financial future and way of life. There are a number of situations and types of people that need life insurance to protect those who would be negatively impacted from the loss of income.
Types of individuals and reasons for coverage:
- Single people: Private student loans or co-signed debt like a car loan.
- Spouses: Expenses or bills that need two incomes like a mortgage or credit cards.
- Parents: Everyday needs like food and clothes as well as future costs like college tuition.
- Retirees: Any outstanding debts like medical bills as well as final expenses.
- Small business owners: Business loans backed by family assets or to buyout shares.
Learn more: Does Everyone Need Life Insurance?
Can you take out a life insurance policy on someone else?
The short answer, not without them knowing. There are two main things you need before you can buy life insurance on someone else: insurable interest and consent.
Having insurable interest means that the other person’s life has a direct impact on your finances. For example, spouses share expenses and debt, so they have insurable interest on one another.
The person you want to buy life insurance on also needs to know you plan to do so and give their permission. Life insurance companies gain proof of consent through signatures, phone calls, and if needed, a medical exam.
Learn more: Can I Buy Life Insurance on Someone Else?
What kinds of life insurance are there?
Life insurance can be broadly categorized into two different types: term life insurance and permanent life insurance. Within these categories there are different variations with features that are beneficial to specific needs and situations.
Term life insurance is temporary and provides coverage on the life of the policyholder during the set term length. If the insured were to die during this specific time period, the insurance company pays the death benefit to the beneficiaries. Because of its temporary nature, term life insurance is very affordable.
Types of Term Life Insurance
- Level Term Life Insurance
- Decreasing Term Life Insurance
- Annual Renewable Term Life Insurance
- Return of Premium Term Life Insurance
Permanent life insurance provides coverage for the entire life of the policyholder. The insurance company pays the death benefit to the beneficiaries when the insured dies. Because permanent life insurance is forever and has other features like a savings component that builds cash value, it’s 10-15 times more expensive than term life insurance.
Types of Permanent Life Insurance
- Whole Life Insurance
- Universal Life Insurance
- Guaranteed Universal Life Insurance
- Indexed Universal Life Insurance
- Guaranteed Whole Life Insurance
Learn more: What Are the Different Types of Life Insurance Policies?
How much does life insurance cost?
There isn’t an easy answer as to how much life insurance costs. It depends on a number of factors like gender, age, health, medical history, job, hobbies and more. There’s also the amount and length of coverage as well as the type.
There are several different types of life insurance available including term life, whole life, and universal life insurance. A permanent life insurance policy will cost 10-15 times more than a term life insurance policy.
In general, however, life insurance is much more affordable than people think. Americans overestimate life insurance premiums by 3-5 times the actual cost. You can easily get free life insurance quotes to get an idea of how much your life insurance would cost.
» Learn more: How Much Does Life Insurance Cost?
What is term life insurance?
Term life insurance is a type of life insurance that lasts for a specific period of time called a term.
If the insured individual dies within that specific period of time, the life insurance carrier pays a death benefit to the beneficiaries. Term life insurance is the most affordable way to provide financial security for your loved ones and is the best fit for most families.
Learn more: What Is Term Life Insurance and How Does it Work?
How to buy term life insurance:
Step 1: Compare quotes and choose a policy
See prices and compare policies from top-rated life insurance companies all at once and choose the one that fits best.
Step 2: Complete an online application
Applying takes 5 minutes. You’ll need to provide the basics to verify who you are as well as employment, lifestyle, and health information.
Step 3: Phone verification and medical exam*
You’ll need to have a phone interview with the insurance company to verify your information and if needed, complete a free medical exam.
Step 4: Accept or reject your approved offer
After the insurance company has finished their review and approved coverage, they’ll send a formal offer, which you can accept or reject.
*There are accelerated underwriting and no medical exam policy options that may streamline these steps.
Learn more: Why You Should Buy Life Insurance
How long should your life insurance term be?
The length of your term life insurance policy depends on the unique needs of your personal situation. Term life insurance can last anywhere from 5 to 40 years, depending on your age.
Term life insurance is meant to financially protect your beneficiaries from your untimely death. The death benefit replaces a set amount of the income you provided so your family can take care of your end-of-life expenses and keep paying the bills.
For the typical family, the length of the term life insurance policy will ideally last until your largest source of debt is paid off or until your loved ones are financially independent.
You also have the option to buy more than one life insurance policy to cover different financial obligations that may have different commitment timelines. This strategy is called laddering life insurance.
Learn more: How Long Should My Life Insurance Last?
Is life insurance affordable?
Life insurance is more affordable than most people think. In general, Americans overestimate the cost of life insurance by 3-5 times the actual price.
The cost of life insurance depends on a number of factors like age, gender, type, and amount of coverage, as well as your individual risk. Basically, the younger and healthier you are, the more affordable it is. As for types of life insurance, permanent life insurance is 10-15 times more expensive than term life insurance.
You can get life insurance quotes, compare policies, and even apply to see your final approved price without committing to anything. All life insurance policies also have a free-look period. This is typically a 30-day period after the policy is activated. It allows you to review everything and cancel it for a refund if you decide you no longer want the policy.
Is life insurance taxable?
In 99% of cases, life insurance beneficiaries will receive the full payout tax-free as a lump sum. Only in very few situations will a death benefit payout be taxed.
To understand the ins and outs as well as common tax mistakes here’s a more in-depth look into How Life Insurance Is Taxed.
How much life insurance do I need?
Deciding how much life insurance you need will depend on your current finances, financial goals, and family situation. The right amount is different for everyone. The main purpose of life insurance is to replace your income, so your loved ones don’t suffer financially.
For the amount of coverage, experts recommend 10-15 times your annual income. If that doesn’t fit in your budget, buy what you can afford. A little life insurance is better than nothing at all.
For the length of coverage, 20 years is most common. Ideally, pick a term that will last until your largest source of debt is paid off or until your loved ones are financially independent.
Calculate your life insurance needs here: Life Insurance Calculator
Inside look: Debunking life insurance myths
Ready for the truth? We’re here to finally set the story straight on these life insurance myths.
