Life insurance: it’s a term we’ve all heard, but it can be a pretty confusing topic. Sure Alex Trebek seems like a nice guy in those commercials, but where to start? In this article, we’ll succinctly answer questions like “what is life insurance?”, “what is the best type of life insurance for me?”, “how much coverage do I need?”, and “how do i pick an insurance provider?” among others. Read on to learn the basics of life insurance and be on your way to protecting your family. 

What is life insurance?

Life insurance is an insurance policy that pays the beneficiary a predetermined amount of money upon your death. 

The beneficiary- or recipient of the payout-  can be anyone you choose, but is usually a family member like a spouse or child.

Your monthly premium is the amount you pay each month for the coverage and is determined by a number of factors including your age, health, risk factors, and coverage amount.

The amount of coverage (or payout) you have varies widely and is something you can determine based on your needs and what you can afford. 

In short, you select an amount you want your family to receive upon your death, pay your policy premium each month (don’t miss a month, or you may lapse in coverage!), and rest assured knowing your family will have the money they need to cover the mortgage, repair the car, get braces, pay for college, and more.

Types of Life Insurance

Ok, now that we understand what life insurance is, let’s look at the different types that are available. Life insurance policies fall under two categories: term life insurance and whole life insurance (often referred to as whole life insurance).

Term Life Insurance covers a set amount of time (usually 10, 20, or 30 years), and does not build cash value. If you die within that “term,” the insurance company will pay your beneficiaries. When the term expires, you can either buy a new policy or reassess the kind of insurance you need.

Permanent Life insurance offers more benefits- namely cash value that grows over time and you can borrow against- but it often costs significantly more than Term Life Insurance. Whole Life Insurance is the most common form of permanent life insurance, but other kinds are called universal, variable, and variable universal life insurance. 

Life Insurance Rates

The cost of life insurance varies dramatically based on factors like age, health, risk (do you skydive, etc), if you’re a smoker, and how much coverage you’re looking for. In general, younger people have lower premiums, as they’re less likely to die, and thus it’s less like the insurance company would have to pay out. Across the board, women tend to have lower premiums 

Who needs life insurance? 

Determining if you need life insurance is an important consideration. Having life insurance is a good idea for anyone who has financial dependents, including people with children, homeowners, and business owners.

For most people, term life insurance is a better choice, as it costs less money per month than permanent life insurance. But for people who have specific life situations – maybe the parent of a special needs child or specific kinds of investors- may prefer permanent life insurance. 

Below is a list of the people who need life insurance, why they need it/how it could help, and which kind of insurance is likely best for them. Not only is the list not exhaustive, but it’s not meant to serve as official, legal guidance for choosing insurance types. Please contact your insurance professional for guidance specific to your scenario.

Breadwinner- As the primary earner for a household, life insurance would help to replace the income lost upon your death so that your family can still pay routine expenses. So long as it doesn’t lapse, term insurance is more affordable and can cover you during working years.

Business Owner– While the choice of  term vs permanent life insurance will vary depending on your needs, a life insurance policy could help pay off business debts, help your family pay estate taxes associated with your death, or provide cash for a buy-sell agreement so a partner could buy out your portion of the business. 

Divorced Parent– While you’re required to make payment, a term life insurance policy could cover those payments.

High Net-Worth Individual– Even through someone with a lot of money may not think they need life insurance, a policy payout could help cover estate or inheritance taxes. If concerns about estate taxes are a driving force in your decision to get life insurance, permanent/whole life insurance may be the better choice.

Homeowners Who Carry a Mortgage– A term life insurance policy that matches the years left in your mortgage could help cover those payments so the family doesn’t have to move or lose the house. 

Investors Who’ve Maxed Out Other Retirement Plans– Insurance plans that build cash value- permanent/whole life insurance policies- can be tapped to provide an additional source of retirement savings. 

Parent of a Special-Needs Child– Ensure your child will always have financial support after your death with a permanent life insurance policy that will payout regardless of when you die. 

People Concerned with End-of-Life/Funeral Costs– There are specific kinds of permanent life insurance, such as final expense insurance, that will payout whenever you die.

Someone with Co-Signed Debt– A term life insurance policy can be times to coincide to end when your debt ends, so that way you don’t leave a friend/business partner with debt, but also don’t pay too much. 

Someone Who Wants to Leave an Inheritance– If you’re not wealthy, an insurance payout can provide a financial cushion to those you leave behind. Permanent/whole life insurance policies will pay money for an inheritance no matter when you die. 

Stay-At-Home Parent– Term life insurance can be timed to provide funds to pay for childcare, etc for a parent who dies that provides those services for free. 

4 Simple Steps for Buying Life Insurance

While the choice between term life insurance and permanent life insurance will be different for each person

Life insurance isn’t an everyday purchase, so choosing the correct policy is both important and doable… so long as you know what you’re looking for.

We’ve outlined the 4 steps to buying life insurance to help you determine how to get the life insurance coverage and life insurance quotes you need. 

Decide How Much Life Insurance Coverage You Need

The amount of coverage you need depends on a number of factors, including number and age of children or other financial dependents, your current income, and what you’re looking to provide- and for how long- after your death. For instance, if you’re the sole breadwinner with several small children and have a relatively high annual income, you’ll likely want more coverage than if you own your house outright (no mortgage) and your child has graduated college. The amount of coverage will significantly impact the price of your monthly premium, so whole it’s important to make sure you have adequate coverage to support your family should you die, you also don’t want to overpay.

A debt/income replacement calculator tool can help you determine how much life insurance you need before getting quotes. Here’s one to help you get started. 

Assess Viability of Life Insurance Companies

Purchasing life insurance is an important decision that will affect your family for years to come. While elements like the cost of monthly premiums are important deciding factors, equally- if not more important- is the long-term viability of the company. You don’t want to choose a company that isn’t going to be in business 15, 20, 25+ years down the road when your family needs the payout. 

While no one can predict the future (who could have predicted Lehman Bros and Bear Stearns going under?), historical performance is often a strong indicator of future success. There are both large, long-established life insurance providers, as well as newer boutique firms that provide strong services. Many professionals recommend avoiding providers with an A.M Best of rating of B or lower.

Collect info to answer questions

When applying for life insurance, you’ll find there are many questions and much info is required. To make the process smoother, it’s recommended that you have all of your important records in one place. In addition to basic contact info, you’ll likely need your social security number, current and past medical records, and your family health history. Some insurers may require you to undergo a medical evaluation, as well as investigate your medical history, driving record, and if you participate in hazardous hobbies. 

You’ll also need to have beneficiary info like their address, birth dates, and social security numbers. 

If you’ve had any criminal convictions or driving violations like a suspended driver’s license- particularly within the past few years- you may have to answer additional questions. 

Compare life insurance quotes

To ensure you’re getting the best price on life insurance, it’s important to compare all of your quotes. Premiums and coverage amounts can vary widely across providers, so be sure to compare. Here’s a tool to begin the comparison process.

There are a lot of choices out there for life insurance coverage. We’ve spent 15+ hours comparing different providers, and our favorite is Bestow. We like them best because you can get a real, no-obligation quote in about 90 seconds (you don’t even have to share your name to get a quote).

If you like what you see, simply answer a few questions about your lifestyle and health, and get a decision in less than 5 minutes. And with Bestow, you don’t have to get a physical… or even leave the house, so applying for coverage is a breeze.

They offer plans that start at just $16/mo, with coverage up to $1,500,000. Click here to get your free quote now.

If Possible, Apply When Healthy

Life expectancy is one of the biggest contributing factors insurance companies use when determining rates. If there’s anything about your health or behavior that makes an insurance company think you may die sooner, your rates could be substantially higher, or you may even be denied coverage.

To get the best rates possible, apply when you’re young and healthy. The longer you wait, the more expensive it will be, simply because of your age. And if you develop health problems, it could be even more expensive- or you could be denied coverage. 

But if you do have a pre-existing medical condition, there are insurance companies that will cover you.