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Life insurance FAQs

Life insurance shouldn't be confusing. Find answers to the most frequently asked questions.

General questions

How can I determine whether I need life insurance?

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As a general rule, if you're the primary breadwinner of the house and there are people who depend on you for financial support, like a spouse, children, or aging parents, then you’re a good candidate for life insurance. Additionally, if you have debt that another person will have to assume, like a mortgage or student loan debts, it's a good opportunity to look into life insurance.

Learn more about if you need life insurance.

What kind of things does life insurance cover?

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Life insurance can be used to cover a variety of common expenses, like:

  • Co-signed debt including student loans
  • Mortgages
  • College expenses for the kids
  • Living expenses for your family
  • Stay-at-home labor expenses (cooking, cleaning, etc.)
  • Burial expenses
  • Loans from family members
  • Estate taxes that your heirs must pay for other assets

Learn more about how life insurance works.

What is a beneficiary?

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The beneficiary is the person or entity named as the recipient of your policy’s death benefit. It can be a family member, a person unrelated to you, or even a business or other organization. You choose the beneficiary on your own—you don’t need permission from the insurer or the beneficiary. You can also choose more than one beneficiary, and designate how you want the death benefit to be split among them.

Your insurer will automatically disburse the death benefit if you die, but it’s still a good idea to tell any beneficiary about the policy so he or she will be prepared to take action should a problem arise. For this same reason it’s also a good idea to provide the beneficiary with access to the contract.

Learn more about life insurance beneficiaries.

Does a beneficiary need to do anything to receive the death benefit?

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Technically a beneficiary does not have to do anything to receive your policy’s death benefit, but it’s a good idea to make sure he or she is aware that the policy exists in case there are any delays or complications on the insurer’s side.

The insurer will require proof of death and a copy of the contract in order to disburse the benefit.

Learn more about how life insurance beneficiaries claim the death benefit.

Is the life insurance my employer provides enough?

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Many employers offer life insurance as part of a benefits package. Usually, the amount is a multiple of your salary, up to a limit (usually one or two times your salary). Whether this is enough protection for your needs depends on your financial situation.

Life insurance is more expensive for those who are older or in poor health, so employer-offered life insurance can be a great way to obtain coverage if you can’t otherwise afford it.

Learn more about employer-sponsored life insurance.

Are my life insurance premiums tax deductible?

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The premiums you pay for your life insurance policy are not tax deductible.

What’s the difference between an agent and a broker?

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The difference between and agent and a broker is that an agent usually sells insurance for a single insurer, while a broker sells insurance for any number of insurers.

In some cases an agent may actually be employed by the insurance company, although there are also agents who are self-employed.

If you’re looking for details about a specific insurer’s products, an agent may be the best person to talk to. However, if you’re trying to comparison shop across multiple insurers, you may want to contact a broker.

Agents and brokers always provide their services for free, and earn commissions off of the policies they sell.

Learn more about life insurance agents and brokers.

Questions on Policy Types

What is term life insurance?

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Term is basic life insurance, the kind you’d probably think of if someone asked you to describe the concept. You pay a premium and in return the insurer guarantees to pay your beneficiary a lump sum of money if you die while the policy is in effect.

Term policies are sold for specific lengths of time, usually between 10 and 30 years. Once the term expires, you stop paying premiums and the policy is no longer in effect.

Pros

  • Term is the most affordable life insurance you can buy.
  • Term policies are easy to understand, so you don’t have to worry about hidden fees, exclusions, or risks.
  • You can cancel a term policy before it expires.

Cons

  • When the policy expires, so will your coverage; if you still want to be insured you’ll have to either shop for a new policy or convert the policy into a permanent version.

Learn more about term life insurance.

What is permanent life insurance?

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Permanent life insurance never expires, and it includes a “cash value” component that grows (or in some cases shrinks) over the life of the policy.

This cash value means you can do things like borrow against your policy or cancel the policy for part of the cash value after a period of time.

Pros

  • It can be useful as part of a highly customized personal finance or estate planning strategy (e.g., if you have a lot of money and other assets to work with).

Cons

  • It’s far more expensive than term insurance.
  • Because of the cost, people frequently buy less coverage than they actually need.
  • It’s more complicated to buy because there are lots of ways to customize the policy for your specific goals.
  • Depending on the type of permanent policy, you could see your death benefit shrink and/or premiums rise over time, or the cash value portion could decrease.
  • There are several types of permanent life insurance: whole, universal, variable, and variable universal.

Learn more about permanent life insurance.

What is whole life insurance?

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Whole life is a type of permanent life insurance with the following characteristics:

  • You pay a set premium amount.
  • The cash value component grows at a guaranteed (but low) set rate.

Learn more about whole life insurance.

What is universal life (UL) insurance?

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What is universal life (UL) insurance? Universal life insurance is a type of permanent life insurance with the following characteristics:

  • You can adjust the premium or the benefit amount.
  • The cash value component earns interest at a variable rate set by the insurer.
  • You can use the cash value component to pay or reduce your premiums.

Learn more about universal life insurance.

What is variable life insurance?

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Variable life insurance is a type of permanent life insurance with the following characteristics:

  • You pay a set premium amount.
  • You can invest the cash value portion of the policy among the insurance company’s portfolio of investments.
  • Because the cash value portion is invested, there is a risk that you can end up losing cash value over the life of the policy.

Learn more about variable life insurance.

What is variable universal (VUL) insurance?

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Variable universal life insurance is a type of permanent life insurance with the following characteristics:

  • Like universal life, you can adjust the premium or the benefit amount.
  • Like variable life, you can invest the cash value portion of the policy among the insurance company’s portfolio of investments.
  • Because the cash value portion is invested, there is a risk that you can end up losing cash value over the life of the policy.

Learn more about variable universal life insurance.

Questions on Shopping for a Policy

When is the best time to buy life insurance?

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The best time to buy life insurance is as soon as you need it—in other words, decide when to buy it strictly based on your needs. While it’s true that the younger you are, the less you pay for life insurance, you should only buy it once you’ve determined there’s a need for it (for example, if you’ve started a family).

Use our free [Personal Insurance Checkup to get a clear picture of what insurance you actually need right now and what you can skip.

How do I estimate how much life insurance to buy?

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There are several ways to determine how much life insurance you should buy, but we strongly recommend the “needs analysis” approach because it provides the most accurate estimate. You can use our Personal Insurance Checkup to get personalized life insurance guidance, including an estimate of your life insurance coverage needs.

Other options include the “lifespan” approach and the multiplier approach. We don’t recommend either one of these approaches because they use somewhat arbitrary numbers.

Learn more about how much life insurance you need.

What are some common pitfalls or red flags when shopping for life insurance?

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Here are some things to watch out for when shopping for life insurance.

  • Mixing your retirement savings with your life insurance. Whole (or permanent) life insurance policies are sometimes marketed as investment products, because they have a cash value that can grow over time. It usually makes better sense to keep your retirement savings and your life insurance planning separate.
  • Buying too little coverage because you’ve chosen an expensive product. Whole life insurance is far more expensive than term insurance, so you can’t buy as much coverage as you would with term.
  • Buying too much coverage because you’ve overestimated how long you’ll need coverage. Term life insurance is designed to cover you for a set number of years, usually in your middle years or younger and when you’re still in the “wealth-building” phase. Typically as you grow older you have fewer debts and more wealth, which means you won’t need as much life insurance. It’s important to accurately estimate your needs so you don’t buy more insurance than necessary.
  • Relying on the policy your employer provides without making sure it provides adequate coverage.
  • Failing to review your financial needs regularly to make sure you have the right amount of coverage.
  • Forgetting to name a beneficiary (or changing it when life circumstances change, e.g., a divorce.)
  • The insurer, agent or broker keeps trying to sell you a permanent (or whole) policy even after you've indicated you want a term policy.
  • The insurer doesn't provide its credit rating upon request.
  • Unnecessary riders attached to the policy that make it more expensive.

Who should I turn to for advice on buying life insurance?

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If you’re shopping for basic life insurance and you want an expert’s advice, you can contact an agent or broker. These experts are free and should be able to answer your questions and even help you find a good policy.

Brokers and some agents will compare products from a variety of insurers, but some agents only deal with a single insurer so be sure to ask first.

If you have a complicated financial situation, you might want to seek out a financial advisor. He or she can review all of your assets and help devise a custom approach that’s best for your needs.

Questions on Applying for Life Insurance

How does the application process work for life insurance?

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The application process to buy life insurance consists of several steps.

Step 1: Submit application paperwork

  • Complete a 2-page application with your basic information and employment status
  • Provide proof of income, for example your most recent tax return or a letter of employment
  • Sign a release for the insurer to review your health records
  • You will submit all of this to your broker or directly to the insurance company.

Step 2: Set up appointments for interview and paramedical exam After you’ve submitted your initial application documents, a representative of the insurance company will contact you through email or over the phone to set up two appointments at your convenience:

  • A phone interview
  • A short medical exam conducted at your home or place of work

Step 3: Complete the phone interview Your broker or agent should prepare you for this interview by telling you what sorts of questions to expect, but in general you’ll be asked about:

  • Your hobbies and lifestyle
  • Your health history
  • You should also have the name, address and phone number of your primary care physician on hand for this call.

Step 4: Complete the paramedical exam A paramedical technician will come to your home or workplace to measure your height, weight, blood pressure and pulse. You’ll also be asked to provide a blood sample and a urine sample as part of the exam. (Note that not all policies will require a paramedical exam.)

Step 5: An underwriter reviews your application At this point the insurer will review your application, phone interview, and medical exam results, as well as your credit history. You may be asked to provide additional information during this step. The insurer may also ask your doctor for additional health records.

Step 6: The application is approved Once the application is approved, the policy will be finalized and delivered to you. You’ll have to sign a delivery receipt and authorize the payment method to activate the policy.

Step 7: The policy goes into effect When the insurer receives your signed copy of the policy, it will notify you to request payment. It may also give you a binder, which is a certificate of proof that the policy is in effect while you wait for the official policy to arrive.

Once you receive your official policy, be sure to store it and a copy of your application alongside your other important documents, so that you’ll be able to reference it in the future.

Also be sure to let any beneficiaries know about the policy so that they’re aware of it if you die while it’s in effect.

Learn more about how to buy life insurance.

What happens if I misrepresent something on my application?

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If you provide incorrect information on your application, there are several things that can happen.

  • If the insurer finds out during the application process it can reject your application. This information may be reported to other insurers as well.
  • If the insurer approves your application but then finds out about the misrepresentation during the contestability period—usually the first 2 years of the policy—it can cancel the policy and return the premiums you’ve paid (minus any fees).
  • If the insurer finds out about the misrepresentation after the contestability period has ended, it can adjust your policy to match what it would have sold you originally had it known all the facts. This can take the form of a reduced death benefit, a higher premium, or both.

Questions on the Medical Exam

What is underwriting?

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Underwriting is the process by which an insurer determines the risk of insuring you. An underwriter will use actuarial tables and other risk calculation tools to calculate the price of the insurance policy so that it minimizes risk to the insurer while still remaining competitively priced.

Learn more about how life insurance underwriting works.

What is a paramedical exam?

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A paramedical exam is a short health exam that is frequently required as part of an application for life insurance. It’s performed at your home or place of work at your convenience.

During the exam, a paramedical technician will measure your height, weight, blood pressure and pulse. You’ll also be asked to provide a blood sample and a urine sample at this time. There are some simple steps you can take in the 24 hours before your exam to ensure optimal results—see the entry below on preparing for this exam.

Learn more about the life insurance medical exam.

How should I prepare for the paramedical exam?

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Here are some simple steps you can take to prepare for the medical exam to ensure the best results.

24 hours before the exam

  • Avoid caffeine, sugar, and alcohol.
  • Avoid over-the-counter drugs as they might interfere with your test results.

8 hours before the exam

  • Don’t eat anything else until you’ve completed the exam.

1 hour before the exam

  • Drink a glass of water to help ensure you’ll be able to provide a urine sample.

Questions on Life Insurance Companies

How reliable are life insurance companies?

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There are two types of reliability people look for in a life insurance company.

First, you want to know whether you can trust the insurer to honor your agreement. Life insurers have a strong record of paying promptly and as promised. A LIMRA study from 2012 found that around 90% of people who had already experienced a positive claims process expressed confidence in life insurance companies.

Second, you want peace of mind that your insurer will remain solvent over the life of your policy. There are several different businesses that now track the financial health of insurers and issue credit ratings. Although these ratings can differ slightly with each rating company, it’s a good way to quickly check for signs of trouble. (Specifically, if you ask an insurer for its rating and it fails to provide one or to direct you to one of these rating companies, you should take that as a sign of unreliability.)

Are all life insurance companies the same?

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All life insurance companies are not the same. They can differ in the level of customer service and in the variety of insurance products they sell.

Even when two insurers offer what appears to be the same basic policy, each one may have different underwriting guidelines that lead to different prices. You should always comparison shop when looking for a life insurance policy.

Learn more about the best life insurance companies.

Questions on the Death Benefit

What is a death benefit?

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The death benefit is the amount of money that a life insurance policy pays to the beneficiary upon the policyholder's death. It is usually untaxed and paid in a single lump sum.

How is the death benefit disbursed?

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The insurer will disburse a life insurance policy’s entire death benefit in one payment directly to the beneficiary.

In cases where there are multiple beneficiaries, the insurer will split the death benefit according to the instructions you’ve left in your contract, but otherwise still pay each recipient a lump sum.

Is the death benefit taxed?

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The death benefit is not usually taxed under normal circumstances. If you’re doing something less common like selling the policy to a third party, or distributing the death benefits in installments while the principal earns interest, there might be tax penalties for the beneficiary. There may also be estate taxes if the death benefit is included in an estate instead of paid directly to the beneficiary. Be sure to check with an accountant or financial adviser to make sure.

Learn more about the life insurance death benefit and taxation.

Read more

What is life insurance?

Life insurance shouldn't be confusing. Get started with the basics, guaranteed to be jargon-free.

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Term life vs whole life insurance

Most shoppers will need to decide between term and whole life insurance. Which one is right for you? Find out.

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The life insurance medical exam

A paramedical exam is used to help determine the cost of your life insurance policy. Here's what you can expect.

Learn more

Disclaimer: Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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