Life insurance is a financial tool that allows people to provide for their loved ones in the event of their death. Whether it’s meant to replace a sudden loss of income, preemptively pay off debts, or supplement an inheritance, there are multiple policy types and options so that you can find the right policy for your family’s needs.
Life insurance can be a difficult topic to think about, but we’ll walk you through everything you need to know to get started, from how it works to how to know what coverage option may be best for you.
Ready to get started? Check out our hand-picked life insurance companies to start comparing policies and quotes today.
How Does Life Insurance Work?
Life insurance is a contract between an insurer (the life insurance company you choose) and a policyholder that states:
- Who the policyholder is: The person who owns (and pays for) the life insurance policy.
- Who the insured policyholder is: the person who, in the event of their death, triggers the payout of the death benefit. Typically, the policyholder is also the insured policyholder, but a policyholder can also choose to insure a person other than themself.
- Who the beneficiary is: which person(s) or entities receive all of part of the death benefit.
- What the term length is: how long the life insurance policy lasts (typically 10, 20, or 30 years for term life insurance).
- What the death benefit is: the amount of money the insurer awards to beneficiaries after the death of the insured policyholder.
- What the premium costs: how much the policyholder pays to the insurer to continue the life insurance policy.
As the policyholder, once you’ve agreed on a contract with a life insurance company, you’ll make monthly payments (called premiums) for the term length. (If you’re purchasing “permanent” life insurance, the term length is your whole life.)
In exchange for paying a monthly premium, the life insurance company agrees to pay out a death benefit in the event that you (or the insured policyholder) dies during the term limit. This payout–typically valued at about 10x your annual salary–is divided between the beneficiaries you named in your contract.
It’s important to stay on top of your monthly premium payments; if you miss one or stop paying altogether, the contract is voided, no matter how many years later it’s been.
Types of Life Insurance
Life insurance is designed to help people with different needs and wants. Life insurance companies offer different plans and coverage options so that no matter your age, background, or goals, you’ll be able to find the right policy.
When purchasing life insurance, the first major decision you’ll want to make is whether to buy term life insurance or permanent life insurance.
Term Life Insurance
Term life insurance provides affordable coverage for a set period of time, making it a good fit if you’re looking to replace lost income, support temporary dependents (e.g. young children), or pay off a large debt (e.g. mortgage).
Term life insurance works by agreeing on a life insurance policy for a predetermined period of time (the “term”). Typically, there are coverage options for 10, 15, 20, or 30 years. As long as the policyholder pays premiums, if the insured policyholder dies during the term limit, the insurer will pay out a death benefit to beneficiaries.
Term life insurance policyholders benefit from:
- Low Premiums: Term life insurance is inexpensive, especially when compared to permanent life insurance. For example, if a 30-year old male purchased a 30-year term policy with $500,000 in coverage, his annual premiums would be about 92% cheaper than the premiums he’d pay for whole life insurance.
If you’d rather your family be financially covered for your entire life, no matter how old you become, permanent life insurance might be the better life insurance product.
Permanent Life Insurance
Permanent life insurance provides financial coverage for an insured policyholder’s entire life, making it a smart investment if you have lifelong dependents or want to accumulate a trust that is protected against taxes and creditors.
Unlike term life insurance, which only lasts as long as the agreed term of the contract, permanent life insurance lasts for the entire lifetime of the policyholder. This means that, as long as you stay up to date with the premium payments, your beneficiaries are pretty much guaranteed to receive the death benefit.
Permanent life insurance policies can be further broken down into subdivided policy types, but the most common is called Whole Life Insurance. In whole life insurance, a portion of a policyholder’s premium payments is invested, resulting in cash value. Policyholders can dip into this cash value and use it any way they like, but, at the time of their death, any remaining cash value does not typically go to beneficiaries.
Permanent/Whole life insurance policyholders benefit from:
- A Guaranteed Payout: As long as you pay your premiums on time, your benefactors are guaranteed to receive a payout one day. If you have lifelong dependents (e.g. children with disabilities) or want to provide a tax-free trust that is protected from creditors, permanent life insurance may be worth the higher premium pricing.
- Cash-Value Investments: If you’re the policyholder of a whole life insurance contract, you can use the ever-accumulating cash-value portion of your policy for retirement, medical care, or personal use.
No matter which coverage option you choose, both permanent and term life insurance can offer your family a financial safety net. We've gathered the top term life insurance companies out there, so if you’re ready to start comparing quotes, you have a one-stop place to look.
Who Needs Life Insurance?
To put it simply, anyone who has financial dependents should consider buying a life insurance policy.
Although it’s an uncomfortable topic, the key question to ask yourself is: “What kind of financial support do I need (or want) to provide my loved ones after I pass?” It’s the question we need to consider both when our death is expected as well as when it’s not.
Life insurance is intended as a safety net, both as a replacement for any income you use to support your loved ones currently, as well as to more broadly give them a better financial future. You may want to take out a life insurance policy, if, for example:
- You are the breadwinner for your family, especially if you have young children.
- You are the primary caretaker of elderly parents or grandparents.
- You have unpaid student loans that are co-signed by a parent or loved one.
- Your name is on the mortgage or lease of the home where your loved ones reside.
- You have teenage or adult children who are dependent upon you to afford higher education.
A life insurance payout can be used for any number of things: from paying off existing debts, helping provide for your family, or even to pay off funeral expenses.No matter your reason, life insurance is a savvy financial decision for almost any adult.
Pricing and Coverage
The cost of a life insurance policy depends on a few factors, including your personal information and what kind of policy you’d like to buy.
When insurance companies issue a life insurance policy, they assess the likelihood they’ll need to pay out a death benefit. They look at your personal details, like your age, gender, occupation, and medical history. If you’re young, in good health, and have a low-risk job, you’ll likely see lower premiums. If (like many of us), this doesn’t exactly describe your situation, the quoted premiums may be higher, but you can still sign up for life insurance.
The other major variable that affects how much premiums cost is the policy itself. One way of tinkering with your life insurance quote is to alter the coverage amount (the death benefit) and/or the term length, as these can greatly change your quoted pricing. Generally, higher coverage amounts or longer terms mean costlier premiums; lower coverage or shorter terms mean lower premiums.
How Much Coverage Do You Need?
The rule of thumb is that your death benefit should be 10x your annual salary. So, a 35-year-old contractor who makes $80,000 a year should aim for about $800,0000 in coverage.
The “10x Rule” might not be right for everyone; luckily, insurers recognize this. Insurers will often feature customizable quote tools and calculators on their websites, helping soon-to-be policyholders find the right coverage for their situation. If you’re interested in life insurance, we recommend you start by getting customized quotes from the insurers featured on our site.
The most accurate way to learn life insurance pricing for your unique scenario is to request quotes directly from insurers. Once you have a few quotes in hand, you can easily compare important policy details like premium prices, death benefit amounts, and term limits to see which insurer gives you the best deal.
For a leg up on the research process, start your quote process from our site. We list top-rated life insurance companies, meaning you can narrow down your list of insurers much faster.