What’s Life Insurance?
Life insurance is an agreement between a life insurance company and the person who owns the policy. It promises that the insurance company will give a certain amount of money to the person or people listed as beneficiaries when the insured individual passes away. This happens in return for the regular payments, called premiums, made by the policyholder throughout their life.
Important Points to Remember:
- Life insurance is a legal agreement that gives money to the person who owns the policy when the insured person passes away.
To keep a life insurance policy valid, the person who owns it must either pay a lump sum at the beginning or make regular payments over time.
If the insured person dies, the people named in the policy (beneficiaries) get the amount specified in the policy, known as the face value or death benefit.
Term life insurance policies end after a set number of years, while permanent life insurance policies stay active until the insured person passes away, stops paying premiums, or gives up the policy.
The reliability of a life insurance policy depends on the financial stability of the company issuing it. In case the company can’t pay, state guaranty funds may step in to cover claims.”
(Types Of) Life Insurance Options You Can go for
There are various kinds of life insurance to suit different needs and preferences. When deciding on insurance for someone, it’s important to consider whether temporary or permanent life insurance is the better choice based on their short- or long-term needs.
(How Long Does Life Insurance Last ?) Term Life Insurance
Term life insurance is made to cover you for a specific period, and it stops after that time. You get to pick how long you want the coverage – options are usually 10, 20, or 30 years. The top term life insurance plans find a good mix of being affordable and financially strong in the long run
Dropping term life insurance: is a type of renewable term life coverage where the protection amount decreases at a set rate throughout the policy’s duration.
Convertible term life insurance : enables policyholders to change a term policy into permanent insurance.
Renewable term life insurance: offers a yearly quote when the policy is bought. Premiums go up each year and are typically the most affordable type of term insurance initially.
Most term life insurance plans offer the option to renew each year after the initial term ends. While this extends your coverage, keep in mind that renewal rates are determined by your current age, so premiums can increase significantly each year. For a more stable and permanent coverage, consider converting your term life insurance into a permanent policy. Not all term life policies offer this option, so be sure to choose a convertible term policy if it’s important to you.
What is Permanent Life Insurance
Permanent life insurance remains active for the person’s Permanet life unless they stop paying premiums or give up the policy. In some cases, the policy may automatically take out a loan to cover overdue premiums. It’s pricier compared to term life insurance.
Whole life insurance: is a permanent type of life insurance that builds up a cash value to provide coverage for the entire life of the insured person. The cash value can be used for various purposes, such as taking out loans, getting cash, or paying policy premiums.
Universal life (UL) insurance: is another permanent life insurance option with a cash value component that earns interest. It offers flexibility in premium payments, allowing adjustments over time. Unlike term and whole life, it allows for a choice between a level death benefit or an increasing death benefit.
Indexed universal life (IUL): is a variation of universal life insurance that enables the policyholder to earn a fixed or equity-indexed rate of return on the cash value.
Variable universal life (VUL): insurance provides the policyholder the opportunity to invest the policy’s cash value in a separate account. It also offers flexible premiums and the choice between a level or increasing death benefit.
Top Insurance Companies for Comparison
When looking for insurance, you may start by checking our list of the best life insurance companies, some of which are detailed below.
| Company | AM Best Rating | Coverage Capacity | Maximum Issue Age | Policies Offered |
|---|---|---|---|---|
| Nationwide | A+ | Over $5 million | 85 | Term, whole, UL, IUL, VUL, final expense |
| Protective | A+ | Over $5 million | 85 | Term, whole, UL, IUL, VUL |
| MassMutual | A++ | Over $5 million | 90 | Term, whole, UL, VUL |
| Mutual of Omaha | A+ | Over $5 million | 85 | Term, UL, IUL, final expense |
| Guardian | A++ | Over $5 million | 90 | Term, whole, UL, VUL |
| USAA | A++ | Over $5 million | 85 | Term, whole, UL |
| New York Life | A++ | N/A | N/A | Whole life |
Differences Between Term and Permanent Life Insurance
Term life insurance and Permanent life insurance have various distinctions, but for many seeking affordable coverage, term life insurance is often the preferred choice. Term life insurance provides coverage for a specific time and pays a death benefit if the policyholder passes away during that time.
Permanent life insurance remains active as long as the policyholder keeps paying the premium. Another important contrast is in the premiums—term life is typically more budget-friendly than permanent life since it doesn’t include building a cash value.
Before getting life insurance, take a close look at your finances. Figure out the amount of money needed to support your beneficiaries or fulfill the specific purpose for buying the policy. Also, think about how long you’ll need the coverage.
For instance, if you’re the main caregiver with 2- and 4-year-old children, you’d want sufficient insurance to handle your caregiving duties until your kids are grown and can financially support themselves.
You could look into the expenses of hiring a nanny and a housekeeper or using professional child care and cleaning services. Additionally, consider budgeting for education costs. When calculating your life insurance needs, don’t forget to account for any remaining mortgage payments and your spouse’s retirement needs, especially if your spouse earns less or is a stay-at-home parent. Sum up these costs for the next 16 years or so, adjust for inflation, and that’s the recommended death benefit you might want to purchase—if it fits within your budget.
Additional Tips
- Burial or final expense insurance is a form of permanent life insurance with a modest death benefit. Despite its names, recipients have the flexibility to use the death benefit as they see fit.
What Factors Affect the Price of Your Life Insurance Premiums?
Several factors can impact the expense of life insurance premiums. While some elements may be beyond your control, there are factors you can manage to potentially reduce costs both before and after applying. Your age and health are the most crucial aspects that determine the cost, making it advisable to purchase life insurance as soon as needed.
Once you’re approved for an insurance policy, if your health improves or you make positive lifestyle changes, you can request a reconsideration of your risk class. Even if your health declines, your premiums won’t increase. If your health improves, your premiums may decrease. Additionally, you might have the opportunity to purchase additional coverage at a lower rate than your initial purchase.
Guide to Buying Life Insurance
Step 1: Figure Out How Much You Require
Consider the costs that would need to be taken care of if something happens to you. This includes things like the mortgage, college fees, other debts, and even funeral costs. Also, think about replacing income, especially if your spouse or loved ones may need financial support and can’t manage it independently.
You can find useful online tools to help calculate the total amount needed to cover potential expenses.
Step 2: Complete Your Application
Life insurance applications typically ask for details about your personal and family medical history, as well as beneficiary information. You might undergo a medical exam and must disclose any preexisting health conditions, past moving violations, DUIs, or risky hobbies like racing or skydiving. Key elements in most life insurance applications include:
Age: This matters the most because life expectancy is a major factor for the insurance company.
Gender: Women usually get lower rates due to statistically longer life expectancy.
Smoking: Smoking poses health risks, leading to higher risk-based premiums.
Health: Medical exams check for conditions like heart disease, diabetes, and cancer, assessing risk.
Lifestyle: Risky habits can increase premiums.
Family medical history: If your family has a history of major diseases, your risk may be higher.
Driving record: Violations or DUIs can significantly raise insurance costs.
You’ll also need standard identification, such as your Social Security card, driver’s license, or U.S. passport, before getting a policy.
Step 3: Compare Quotes for Policies
Once you have all your required details, you can collect life insurance quotes from various providers using your research. Prices can vary significantly between companies, so it’s crucial to invest the time in finding the right mix of policy, company reputation, and premium cost. Since you’ll probably be paying for life insurance on a monthly basis for many years, finding the best policy for your needs can save you a significant amount of money.
Important:
- We’ve compiled a list of top life insurance companies to help kickstart your research. This lineup highlights companies that we’ve identified as the best for various needs, drawn from our examination of nearly 100 carriers.
Advantages of Life Insurance
Having life insurance comes with various benefits. Here are some key features and protections that life insurance policies offer.
For many, life insurance is a way to ensure financial support for beneficiaries facing difficulties after the policyholder’s death. Yet, for those with wealth, life insurance brings tax advantages like tax-deferred growth of cash value, tax-free dividends, and tax-free death benefits, creating additional strategic opportunities.
Minimizing Taxes
The payout from a life insurance policy is typically not subject to taxes.
Some affluent individuals may purchase permanent life insurance through a trust to cover estate taxes. This tactic aims to protect the estate’s value for their beneficiaries.
Avoiding taxes is a legal method to reduce tax obligations and should not be mistaken for tax evasion, which is unlawful.
Who Should Consider Life Insurance?
Life insurance offers financial assistance to dependents or beneficiaries when the insured policyholder passes away. Here are examples of individuals who might find life insurance beneficial:
- Parents with Minor Children: If a parent dies, their income loss could create financial difficulties. Life insurance ensures that children have the financial support they need until they become self-sufficient.
- Parents with Special-Needs Adult Children: For children requiring lifelong care, life insurance can guarantee their needs are met after their parents’ passing. The death benefit can fund a special needs trust managed for the adult child’s benefit.
- Adults Sharing Property: Whether married or not, if one adult’s death would impact the other’s ability to afford property-related expenses, life insurance may be necessary. For instance, engaged couples with a joint mortgage may benefit from it.
- Seniors Supporting Caregiving Adult Children: Adult children providing care for elderly parents may sacrifice work time. Life insurance can reimburse the child’s costs when the parent passes away.
- Young Adults with Parental Debt Responsibilities: If parents have private student loan debt or co-signed loans, young adults might need life insurance to cover the debt after their parents’ death.
- Children or Young Adults Planning for the Future: Locking in low insurance rates is advantageous for the young and healthy. Even without dependents, a 20-something might purchase a policy with future dependents in mind.
- Stay-at-Home Spouses: Life insurance is valuable for stay-at-home spouses due to the economic value of their home-based work, as indicated by Salary.com.
- Wealthy Families Facing Estate Taxes: Life insurance can cover estate taxes, preserving the estate’s full value for wealthy families.
- Families Struggling with Burial Expenses: A small life insurance policy can help cover burial and funeral costs.
- Businesses with Key Employees: Companies facing severe financial consequences from the death of a key employee may benefit from purchasing life insurance on that employee.
Married Pensioners Considering Pension Maximization: Instead of choosing a pension payout, pensioners can opt for a full pension and use some funds to buy life insurance for their spouse.
Individuals with Preexisting Conditions: Those with conditions like cancer, diabetes, or smokers may seek life insurance, though coverage may be denied or come with high rates from some insurers.
Things to Think About Before Getting Life Insurance
Explore Policy Choices and Check Company Ratings
Since life insurance is a significant long-term commitment, it’s crucial to thoroughly research your options. Make sure the company you pick has a reliable track record and financial stability because your heirs might not receive the death benefit for many years. Wikiguide has assessed numerous insurance companies across various categories to help you find the best one for your needs.
Think About the Necessary Death Benefit
Life insurance can be a smart financial move to safeguard your loved ones in case of your death during the policy. However, it’s crucial to be sensible about it—avoid getting too much coverage or insuring someone whose income doesn’t need replacement. Consider the following:
Identify the expenses that wouldn’t be covered if you passed away. If your spouse has a substantial income and no children are in the picture, it might not be necessary. Still, it’s vital to think about how your potential death could impact your spouse and calculate the financial support they’d need to cope without rushing back to work. If both spouses’ incomes are vital for maintaining a preferred lifestyle or meeting financial commitments, separate life insurance coverage for each may be necessary.
Understanding Your Purpose in Buying Life Insurance
When considering purchasing a policy for a family member, it’s crucial to ask yourself: What is the goal of this insurance? Children and seniors may not have substantial income to replace, but it might be necessary to cover burial expenses in case of their passing.
Besides covering funeral costs, parents may also choose to secure their child’s future insurability by getting a moderate-sized policy while they are young. This ensures the child can financially protect their own future family. Parents can only buy life insurance for their children up to 25% of the in-force policy on their lives.
Is it worth exploring whether investing the premium money for permanent insurance could yield a better return over time? In some situations, considering consistent saving and investing, such as self-insuring, might be a more sensible approach as a hedge against uncertainty. This is especially true if there isn’t a significant need to replace income or if the policy’s investment returns on cash value are overly conservative.
Understanding How Life Insurance Operates
A life insurance plan consists of two primary parts: a death benefit and a premium. While term life insurance includes these elements, permanent or whole life insurance policies also incorporate a cash value component.
Life Insurance Payout: The death benefit, also known as the face value, is the sum of money that the insurance company promises to pay to the beneficiaries named in the policy when the person covered by the insurance passes away.
This person could be a parent, and the beneficiaries might be their children. The insured person decides on the death benefit amount considering the anticipated future needs of the beneficiaries. The insurance company assesses whether there’s a valid reason to insure and checks if the person seeking coverage meets the company’s criteria, including age, health, and participation in any risky activities.
(Premium) Payment: Payments are the funds the policyholder gives for insurance coverage. If the policyholder meets the required payments, the insurer has to provide the death benefit when the insured person passes away. The amount of payments is influenced, in part, by how probable it is for the insurer to pay the policy’s death benefit based on the insured’s life expectancy. Elements affecting life expectancy include the insured person’s age, gender, medical history, work-related risks, and engaging in high-risk hobbies.
A portion of the payment also covers the insurance company’s operational costs. Payments tend to be higher for policies with larger death benefits, individuals at higher risk, and permanent policies that build up cash value.
Cash Value: The cash value in permanent life insurance serves dual purposes. It acts as a savings account available to the policyholder throughout the insured’s life, with the cash accumulating on a tax-deferred basis. Withdrawals may be subject to restrictions based on the intended use of the money. For instance, a policyholder could take a loan against the cash value, incurring interest on the loan principal. Alternatively, the cash value can be used to cover premiums or buy additional insurance. Importantly, the cash value is a living benefit retained by the insurance company upon the insured’s death. Any outstanding loans against the cash value will decrease the policy’s death benefit.
Life Insurance Add-ons and Adjustments to Policies
Several insurance companies provide policyholders with the flexibility to tailor their policies to suit their requirements. Riders serve as the prevalent method through which policyholders can alter or adjust their plans. The variety of riders available may vary depending on the insurance provider. Generally, the policyholder will need to pay an extra premium for each rider or a fee to activate the rider, although some policies may include specific riders in their standard premium.
The accidental death benefit rider gives extra life insurance coverage if the insured’s death is accidental.
The waiver of premium rider stops the policyholder from making premium payments if the insured is disabled and unable to work.
The disability income rider provides a monthly income if the policyholder can’t work for an extended period due to a serious illness or injury.
If diagnosed with a terminal illness, the accelerated death benefit rider allows the insured to receive a portion or all of the death benefit.
The long-term care rider, a form of accelerated death benefit, can cover nursing-home, assisted-living, or in-home care when the insured needs assistance with daily activities like bathing and eating.
A guaranteed insurability rider allows the policyholder to purchase more insurance later on without a medical review.
Taking a Loan: Many types of permanent life insurance build up cash value that the policyholder can borrow against. Essentially, you borrow money from the insurance company, using your cash value as collateral. Unlike other loans, your credit score doesn’t matter. Repayment terms are flexible, and the interest from the loan goes back into your cash value account. However, it’s important to note that policy loans can decrease the death benefit of the policy.
Funding Your Retirement: Life insurance policies with a cash value or investment feature can serve as a potential income source during retirement. However, it’s essential to be aware that this option may involve elevated fees and a reduced death benefit. As a result, it might be a suitable choice primarily for those who have already maximized contributions to other tax-advantaged savings and investment accounts. Additionally, the pension maximization strategy, mentioned earlier, is another method through which life insurance can contribute to funding retirement.
Qualifying for Life Insurance
Life insurance companies assess each applicant individually, and with a wide array of insurers available, nearly everyone can find a reasonably priced policy that suits their needs to some extent. In 2018, there were 841 life insurance and annuity companies in the United States, as reported by the Insurance Information Institute.
Moreover, many life insurance companies offer various types and sizes of policies, with some specializing in addressing specific needs like policies for individuals with chronic health conditions. Additionally, there are brokers who specialize in life insurance and have knowledge of offerings from different companies. Applicants can collaborate with a broker at no cost to identify the insurance that fits their requirements. This means that with sufficient effort and a willingness to pay a higher price or accept a less-than-ideal death benefit, almost anyone can secure some form of life insurance.
Contrary to common misconceptions, insurance is not exclusively for the healthy and wealthy. The insurance industry is more diverse than many people realize, making it possible and affordable for individuals to obtain life insurance even if previous applications were denied or quotes seemed unaffordable.
In general, the younger and healthier you are, the easier it is to qualify for life insurance, while the older and less healthy you are, the more challenging it becomes. Certain lifestyle choices, such as tobacco use or engaging in risky activities like skydiving, can also make qualification harder or result in higher rates.
Who Should Have Life Insurance?
If you want to ensure financial protection for your spouse, children, or other family members in case of your demise, having life insurance is important. The death benefits from life insurance policies, based on the coverage amount, can assist beneficiaries in paying off a mortgage, handling college tuition, or contributing to retirement savings. Permanent life insurance also includes a cash value component that grows over time.
What are the Factors Influencing Your Life Insurance Costs?
Your age affects life insurance costs (younger is cheaper), and being female tends to result in lower premiums. Smoking raises premiums, while good health generally keeps them lower. Engaging in risky activities can increase premiums, and a family history of chronic illness may also raise costs. Having a good driving record can lead to savings on premiums.
What Are the Advantages of Life Insurance?
- Tax-Free Payouts: The death benefits from life insurance are paid as a lump sum and are not subject to federal income tax, providing tax-free financial support to beneficiaries.
- Relief from Living Expenses: Calculators often suggest a coverage amount equivalent to seven to 10 years of gross income. This coverage can alleviate concerns about major expenses like mortgages and college tuition, eliminating the need for surviving spouses or children to take out loans.
- Coverage for Final Expenses: Funeral costs can be substantial, but they can be covered by a burial policy or standard term or permanent life insurance policies, preventing financial strain on loved ones.
- Supplement for Retirement Savings: Permanent life policies, including whole, universal, and variable life insurance, not only offer death benefits but also accumulate cash value. This cash value can serve as a supplement to other retirement savings, enhancing financial security in retirement.
How Can You Get Approved for Life Insurance?
To be eligible for life insurance, you must complete an application. Fortunately, life insurance is accessible to nearly everyone. Nevertheless, the price or premium amount may differ significantly depending on factors such as your age, health, and lifestyle. Certain types of life insurance plans may not necessitate medical details but typically come with higher premiums and include an initial waiting period before the death benefit becomes accessible.
How Life Insurance Works
Life insurance operates by offering a death benefit in return for regular premium payments. Term life insurance, a commonly chosen type, remains effective for a specified period, like 10 or 20 years. On the other hand, permanent life insurance includes a death benefit and remains in force for the policyholder’s entire life, as long as premiums are kept up to date.
Additional Reviews of Life Insurance Companies
Insurance Companies:
- AAA Life Insurance
- AARP Life Insurance
- AFLAC Life Insurance
- AIG Life Insurance
- Allstate Life Insurance
- American Fidelity Life
- American Income Life
- Ameritas Life Insurance
- Assurity Life Insurance
- Bankers Life Insurance
- Banner Life Insurance
- Bestow Life Insurance
- Brighthouse Life Insurance
- Colonial Penn Life Insurance
- Continental Life Insurance
- CUNA Mutual Life
- Ethos Life Insurance
- Family First Life Insurance
- Fidelity Life Insurance
- Foresters Life Insurance
- Freedom Life Insurance
- GEICO Life Insurance
- Genworth Life Insurance
- Gerber Life Insurance
- Globe Life
- Guardian Life Insurance
- Jackson National Life
- John Hancock Life
- Kemper Life Insurance
- Ladder Life Insurance
- Liberty Mutual Life
- Lincoln Heritage Life
- Lumico Life Insurance
- Manhattan Life Insurance
- Mass Mutual Life Insurance
- Max Life Insurance
- MetLife Life Insurance
- Midland National Life
- Mutual of Omaha Life
- National Life Group
- Nationwide Life Insurance
- Navy Federal Life Insurance
- NEA Life Insurance Company
- New York Life
- North American Life
- Northwestern Mutual Life
- Oxford Life Insurance Company
- Pacific Life Insurance
- Primerica Life Insurance
- Protective Life Insurance
- Prudential Life Insurance
- Securian Life Insurance
- SelectQuote Life Insurance
- State Farm Life Insurance
- Texas Life Insurance
- Transamerica Life Insurance
- TruStage Life Insurance
- Unum Life Insurance
- USAA Life Insurance
- VA Life Insurance
- Zander Life Insurance