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ByTaylor Moore Finance & Insurance Writer

Taylor Moore is a finance writer for Reviews.com. Her work has been published in Chicago magazine, the Chicago Reader, and elsewhere.

What Life Insurance Covers

Life insurance is an insurance policy that provides a cash benefit to a beneficiary upon your death. It’s similar to other kinds of insurance, where you pay a premium to your provider and it, in return, provides a payout if something happens. While homeowners insurance provides a payout when you experience material damage to your home, a life insurance payout happens when you pass away. Because the circumstances surrounding this type of insurance are difficult to think about, many people don’t consider this end-of-life plan until it’s too late.

Kimberlee Leonard, insurance analyst with FitSmallBusiness.com, says, “It's hard to talk about life insurance, to talk about our death or the death of a loved one. It's uncomfortable, but I think it's a matter of looking at it as a standard component of your financial plan long term, and your family's financial plan long term.”

Learn more: Life Insurance FAQ

Who Life Insurance Is For

You may want to have life insurance if you have people that are financially dependent on you, “whether that's a young child, elderly parent, spouse, or just someone that benefits from your income,” says Jason P. Veirs, president and owner of independent insurance broker InsuranceExperts.com. Life insurance serves as financial protection for those who may not be able to generate the same level of income if their loved one passes away.

It’s also beneficial if you have a mortgage, student loans, or a tax debt. Life insurance can offset the burden of these debts for your loved ones in the event of your passing.

Learn more: Do I Need Life Insurance?

Types of Life Insurance Coverage

If the policyholder dies, the life insurance provider issues a death benefit in one installment to the family and beneficiaries. The death benefit can be used for end-of-life expenses (such as funeral costs), debts left behind by the policyholder, and income to go toward family expenses, like education and mortgage payments.

We also think it’s important that life insurance providers give you the option to add coverage to your plan (called “policy riders”). Though they make your plan more expensive, these optional clauses can add value while you’re alive, give extra coverage to your family members, expand the terms of the policy, and more. Some will make part of the “death benefit” payout available while you’re alive in order to cover the costs of a terminal illness or long-term care. Others can increase the death benefit if you die an accidental death.

Learn more: Life Insurance Riders, Explained

Types of Life Insurance Policies

Group life insurance

If you have employee-sponsored health care, you’ll want to check if your workplace also has group life insurance. Though the policy is often limited to accidental deaths, “it's the No. 1 inexpensive way to get as much insurance as you can, so max that out first and foremost,” Leonard says. Because it’s a group plan, you likely won’t be able to customize your coverage, so consider it a baseline and not the be-all and end-all. This is especially important to keep in mind considering those plans are contingent on your employment at the company.

Term life insurance

Term life insurance covers you for a established period of time (or “term”), usually between 10 and 30 years. Term life insurance is the best option for almost everybody. Even though it only insures you for the duration of the policy, it is the most affordable (think $10 to $30 per month) and meant to protect you during the most financially critical times of your life, like when you’re paying off a mortgage or providing for your children. It’s the most customizable, too. Once the term runs out (meaning, you have lived longer than the policy period), you have the option of renewing the policy, converting it to permanent insurance, or choosing to go without life insurance moving forward.

Whole life insurance

As a type of “permanent” life insurance, whole life insurance policies will insure you for your entire life. Unlike term insurance, whole life also includes a cash value account, where a portion of your premium payments gets deposited tax-free and can be used for future investments and loans. This type of insurance is a lot more expensive, though. It can cost as much as $100 to $300 per month, versus the $10 to $30 per month you’d pay for term insurance — so it's important to make sure that your premium is something you're comfortable paying for the rest of your life.

Universal life insurance

Universal life insurance is similar to whole life in that it’s a permanent insurance, which guarantees a death benefit payout and has a cash value account. However, it’s less predictable than whole life. With universal life insurance, your premiums might increase over time and your cash value growth isn’t guaranteed, because it’s subject to variable interest rates. On the flip side, universal life insurance's flexibility also allows you to adjust your premiums and death benefit over the life of your policy, and you may take out loans from your policy's cash value account.

Learn more: Term Life Insurance vs. Whole Life Insurance, Term Life Insurance FAQ, Whole Life Insurance FAQ

Choosing a Life Insurance Policy

We recommend term life insurance for almost everyone, as it’s the most affordable and flexible of the options. Though it provides only short-term protection, it is meant to cover you during the times where a loss of income would be most devastating for your family, like when your children are financially dependent.

Whole life insurance is best for those with large financial portfolios and extensive estate-planning needs. If you have a lot of wealth, whole life can be used as a tax shelter for your dependents, but the hefty premiums — paid for your whole life — may not be feasible for some individuals.

Shopping for a Life Insurance Policy

There are many factors to consider when shopping for a policy, but in general, you’ll want to gather quotes from life insurance providers that have strong financial ratings, a track record of good customer service, and affordable rates.

Regardless, we recommend comparing quotes from multiple providers to find a policy with the coverage you need at the most affordable price. Your rate will depend on your age, gender, medical history, occupation, hobbies, and other lifestyle factors. Each provider weighs these variables differently, which is why two providers may offer you different quotes for the same coverage.

When determining the length of a policy, Veirs recommends reviewing both your earnings and your expenses. Your children, if you have any, will be an important factor in this. “If you have three children, ages two to seven, you're probably not going to need a 40-year term, because the youngest would be 42 at the end. So maybe go with a 20- to 25-year term just to cover your bases and get them through college and off on their own." If you have a spouse or elderly parents who rely on your income, Veirs suggests a longer coverage period.

Though there are multiple methods of figuring out how much coverage you need, an easy way is to think about the number of years you’d want your income to be replaced. Leonard says, “If you're making $100,000 a year, and you want [your dependents] to have five years to get through you passing away too soon or unexpectedly, then you're looking at $500,000 in a death benefit to cover that.” Many insurers offer life insurance needs calculators, like this one from New York Life — and if you're still unsure, it's always worth speaking with an independent agent or financial adviser.

Learn more: How to Shop for Life Insurance, How to Choose the Right Life Insurance Policy, Top Life Insurance Companies and Ratings

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