Life Insurance Shopping Guide Chapter 1: Understanding Life Insurance

An introduction to the life insurance basics you need to get started.

Colin Lalley 1600

Colin Lalley

Published July 19, 2019

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You’re reading Policygenius’ 4-part guide to shopping for life insurance.

Click here for Chapter 1: Understanding Life Insurance

Click here for Chapter 2: How Much Does Life Insurance Cost?

Click here for Chapter 3: How Do I Choose a Life Insurance Policy?

Click here for Chapter 4: Applying For Life Insurance

What is life insurance?

Life insurance provides a tax-free lump sum of money to your loved ones in the event of your death, allowing them to continue toward their financial goals. It’s a value asset that gives you peace of mind that they’ll be taken care of even when you aren’t around.

What type of life insurance should I buy?

Term life insurance is the right choice for most shoppers.

The number one question shoppers have about life insurance is “What kind do I buy?” For most people, that question comes down to two options: term life insurance and whole life insurance.

TermWhole
What is it?"Pure" Life InsuranceLife Insurance Plus Savings
PriceAround $20 -$30Around 8-12x term life
Fine PrintVery LittleQuite a lot
Best Fit ForProtecting families and investmentsComplex financial plans

Term life insurance

Often referred to as “pure” life insurance. It’s the type of policy most people think about when they imagine how life insurance works. You pay a premium in exchange for the promise that your life insurer will pay out a pre-set death benefit (also known as your coverage) to your survivors (or beneficiaries).

But term life insurance only lasts for a set period of time – the term. Once it’s up – ideally, when you no longer need the financial protection – the policy expires and you stop paying for it.

Whole life insurance

A type of permanent life insurance that lasts your entire life, as long as you continue paying premiums. Whole life insurance pays out a death benefit to beneficiaries, but it also has a forced-savings component called the cash value that can grow over time.

Whole life insurance is sometimes useful as part of a highly customized personal finance or estate planning strategy. However, it’s often prohibitively expensive. A whole life policy can cost 6 to 10 times more than a comparable term policy.

How long should my term life insurance last?

Most people will want their policy to last until they pay off their mortgage, but for others it could be something different, like your children graduating college.

quote

Choose a policy that will last as long as your longest financial obligation – usually your mortgage.

Most term life insurance companies provide terms in five-year increments — i.e., 10-year term, 15-year term, and so on, up to 30 years. Your financial obligation probably doesn’t fit exactly into a standard term length, so your best bet is to round up. If your mortgage lasts for another 22 years, for example, pick a 25-year term.

Genius Tip

If your financial obligation ends before your term life insurance expires, you can cancel your policy — no need to pay for extra years of coverage you don’t need.

What happens if you buy a policy with a term that’s too short? You have two options: Let the policy expire and leave yourself open to a coverage gap, or you try to purchase another life insurance policy. With the latter, you’re basically forcing Future You to buy another policy in twenty years at much higher rates, so it’s important to carefully consider the term while shopping.

Life insurance lingo

Life insurance language seems to have come from another planet. Who can understand it? Well, this non-Martian life insurance top terms should help.

  • Death benefit — The amount of cash paid out to your beneficiaries when you die.

  • Premium — The amount you pay monthly or annually to keep your policy in effect.

  • Term — The period your life insurance policy lasts. Permanent life insurance doesn’t have a term and lasts your whole life.

  • Beneficiary — The person or persons, or some entity like a business, charity, or trust, that receives the death benefit after you die.

  • Policy — The document that you receive from your life insurance company explaining the details of your coverage.

  • Coverage — The amount of the death benefit that gets paid out.

Takeaway: Understanding life insurance checklist

  • Understand the difference between term and whole life insurance - it could save you a lot of money
  • Get a term length as long as your longest financial obligation
  • Know the terminology you'll encounter so you understand how to choose the right policy for you

Learning the basics of life insurance is the first step to understanding what you need and how to get it. Once you have this foundation in place, the rest of the process becomes much easier.

Continue to Chapter 2: How Much Does Life Insurance Cost?