Frequently Asked Questions
How Does Life Insurance Work?
Life insurance is just like any other kind of insurance. You pay a premium to your provider, and in return, the provider promises to pay a much larger sum if something happens to you. In the case of life insurance, that lump sum is called a “death benefit” and is generally paid out when the insured passes away. In certain scenarios, the death benefit can also be used to cover costs associated with disability or illness during the insured’s life.
Do I Need Life Insurance?
You probably need life insurance if anyone depends on you financially (like children or an elderly parent), if you have a mortgage or other big outstanding loan, or if you have complex estate-planning needs. Life insurance is versatile and can set up a financial backup plan for these scenarios and more. You may not need life insurance if your debts are squared away and no one else relies on your income for their livelihood.
Learn more: Do I Need Life Insurance?
What Does Life Insurance Cover?
In its most basic form, life insurance offers a one-time death benefit for the policyholder’s family and beneficiaries. It can be used for post-life expenses, financial obligations the insured left behind, or supplemental income for surviving family members.
Your policy’s death benefit covers:
- End-of-life expenses and funeral costs
- Outstanding debts and business obligations
- Estate taxes
- Mortgage payments or housing costs
- Living expenses for surviving family members
- Children’s education
- And more
Most companies also offer add-ons, or “riders,” that expand what your life insurance policy will cover. Each life insurance company has a unique selection — so if your needs go beyond a basic death benefit, we recommend contacting an agent at each company you’re considering to see what they can offer you.
Riders can cover:
- Insurance for a spouse and/or children
- Medical bills if the insured is diagnosed with a serious illness
- Disability income
- Accidental death
- Increased cost of living from inflation
- And more
Learn more: riders
What Is Term Life Insurance?
Term life insurance offers coverage for a temporary period or “term,” usually between 10 and 30 years. It only pays a death benefit if the insured person passes away during that time. Term life insurance is best for most people, as it covers you during life’s most critical financial stages and tends to be affordable — often between $10 and $30 per month.
Learn more: Term Life Insurance FAQ
What Is Whole Life Insurance?
Whole life is a type of “permanent” life insurance, meaning the coverage lasts for the insured person’s entire life. In other words, the death benefit payout is guaranteed (as long as you pay premiums diligently throughout life). Whole life insurance also includes a cash value account, which builds over time through deposits taken out of your premium payment and offers an additional financial safety net for the insured and their family. Whole life costs a lot more than term, with premiums looking more like $100 to $300 per month rather than $10 to $20.
What is Universal Life Insurance?
Universal life insurance, like whole life, is a type of permanent coverage. It guarantees a death benefit payment for people who keep up with their premiums and includes a cash value account that can be Ways You Can Use Cash Value Life Insurance later in life. The main differences between universal and whole life insurance are:
- Whole life insurance premiums are level-set throughout the policy, while premiums for universal life insurance might change over time
- Cash value growth for whole life insurance is guaranteed, whereas cash value growth for universal life can be subject to variable interest rates
We generally recommend whole life insurance due to the predictability of premiums and interest rates. However, we do recommend a version of universal coverage known as “guaranteed universal life” (GUL) for seniors, as it offers guaranteed coverage at a more flexible (and often cheaper) rate than whole life.
What Type of Life Insurance Should I Buy?
The majority of people will be best-served by a term life insurance policy. Term life covers you during the most critical years — say, while you have a mortgage out or while you’re financing your kids’ education — and is generally very affordable. Remember, term life insurance only pays out if you pass away during the covered term.
Permanent life insurance guarantees a death benefit payout, no matter when the insured passes away. It also includes a cash value account that can be borrowed from later in life. But there’s a trade-off: Both types of permanent insurance (whole life and universal life) are more expensive than term.
Like we said, most people will find that an affordable term life policy suits their coverage needs. If you are leaning toward permanent insurance, we recommend speaking with a financial professional who can evaluate your portfolio and help you understand your options.
Learn more: Term Life Insurance vs. Whole Life Insurance
How Much Does Life Insurance Cost?
Life insurance cost depends on the type of life insurance you choose, among other things. Term life insurance is typically low-cost, between $10 and $30 per month. In our evaluation, the cheapest term life insurance companies hovered between $8 and $10 per month for healthy 30-year-old and between $10 and $15 per month for a healthy 40-year-old. Whole life insurance is more expensive. It can can cost up to a few hundred dollars per month even for a healthy individual, depending on the size of the policy.
Learn more: cheapest term life insurance companies
How Are Life Insurance Rates Determined?
The type of life insurance you choose (term, whole, or universal) will determine the starting point for your premium. However, life insurance rates also depend on personal factors that affect your life expectancy. These factors include, but aren’t limited to:
- Medical history
- Family medical history
- Use of tobacco, alcohol, and other substances
- Hobbies and “extreme” adventure activities
- Size of your death benefit
What Types of Death Are Not Covered by Life Insurance?
There are certain scenarios where a life insurance company will not pay the death benefit on someone’s life insurance policy after they pass away. These situations include, but are not limited to:
- If the company realizes the insured person lied or misrepresented themselves on their life insurance application
- Homicide caused by one of the beneficiaries of the insured’s policy
- If the insured dies while participating in a criminal act
- HIV/AIDS and other sexually transmitted infections
- Suicide, often within one to two years of the coverage taking effect. (If you or someone you know is having thoughts of suicide, contact the National Suicide Prevention Lifeline at 1-800-273-8255.)
Other scenarios might be excluded from coverage. Read your policy’s fine print and talk to your agent to understand what is and isn’t covered under your life insurance.