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What does life insurance do, who needs it, and why is it important?
You might have an idea of what life insurance is. But if you were asked to define life insurance, could you do it? What if you needed to describe the different terms, provisions or types? What exactly is life insurance good for? How long does it last? Who needs it? It seems complicated, but the answers are fairly straightforward.
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. In this life insurance 101 guide, you’ll learn:
Life insurance is easy to understand once you know what questions you should be asking. If you understand the common components of an insurance policy, how to apply, the different types of policies and the costs involved, you’ll know how to get the right coverage for your family.
No matter what type of policy you buy, life insurance consists of these four components:
Policyholder The person who owns the life insurance policy. Typically, if the policyholder dies, the death benefit is paid out, but it’s possible to take out a policy on someone else.
Beneficiary The person, people or institution(s) that receive money if the policyholder dies. There can be more than one beneficiary named on the policy.
Premium The money paid monthly or annually to keep a policy active (or “in-force”). If you stop paying premiums, the policy lapses.
Death benefit The money paid out upon the event of the policyholder. Life insurance goes into effect as soon as you make your first premium payment, meaning you’re eligible for the death benefit as soon as the policy is in force.
Insurance companies always pay the death benefit, except in specific circumstances where they aren’t obligated to like:
The life insurance application usually takes four to eight weeks from start to finish, but you can complete the process in just seven steps. Here’s how it works:
1. Get free quotes. Comparing rates from different insurance companies allows you to make sure you’re getting the most affordable policy. You never have to pay for life insurance quotes. (You can compare quotes from over a dozen life insurance companies with Policygenius.)
2. Choose your policy. Take into account cost, customer service and the average application time.
3. Fill out an application. You can fill out your application online or call a licensed expert to get help. Either way, you’ll need to answer some basic income and health information.
4. Take a medical exam. As part of the underwriting process, you may need to take a medical exam that’s similar to a basic physical. The exam is free, and a technician will come to your home or workplace on your schedule.
5. Complete a phone interview. An insurance agent will ask you a few lifestyle and health questions.
6. Wait for approval. An underwriter will take all of the information collected to decide on a final premium rate, which should be similar to the quotes you received.
7. Sign your policy. After you sign your policy and send in your first premium payment, your policy will be in-force.
For more information, learn exactly what you need to do when applying for life insurance.
Not all life insurance policies are created equally. How long the policy lasts, the cost and extra provisions depends on the type of coverage. Broadly speaking, life insurance is divided into two different types: term and permanent.
Term life lasts for a predetermined period of time, known as the term. When the term is up, the policy expires. This is usually the most affordable type of life insurance, and lasts only as long as you need it to cover debts and provide for beneficiaries.
Learn more about term life insurance.
Permanent insurance doesn’t have an expiration date and lasts for as long as the policyholder pays the premiums. Permanent policies also have a cash value component that acts as a sort of investment vehicle that can be borrowed against. The cash value portion, along with fees, raises the price of permanent policies compared to term. Permanent life insurance policies include whole, variable, universal and variable universal life.
Learn more about the types of life insurance.
Most shoppers have to decide between term and the most popular type of permanent life insurance, whole. Term life is the right choice for a majority of people because it’s affordable and straightforward. However, whole life, with its cash value and permanent status, can be useful for people with complicated finances. A licensed expert can help you decide which is the best option for you.
Learn about the differences between term vs. whole life insurance.
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According to industry group LIMRA, the estimated cost for a $250,000 term life insurance policy for a non-smoking 30-year-old is around $160 a year. The actual cost of life insurance depends on a number of factors, including where you live, your age, your health and health history, your financial history and your hobbies. And, of course, the coverage amount, type and term length (if applicable) of the policy plays a role in setting rates, too.
Different insurance carriers weigh these factors differently, which is why it’s important to compare quotes from multiple companies to make sure you’re getting the most affordable rate.
Learn more about the cost of life insurance.
There are many benefits of life insurance that make it a necessary part of any financial plan. No matter how you use it as part of your safety net, you can count on the following.
The death benefit provided by a life insurance policy is a lump sum of money that’s tax-free. That means the whole amount goes to your beneficiaries – and they don’t have to plan their goals around receiving only a portion of the money thanks to taxes.
Learn about the instances when life insurance is taxable.
While the exact cost of life insurance varies, for the most part, it’s pretty affordable. Consider this: A healthy 30-year-old male can expect to pay under $40 a month for a $1,000,000 term life policy. That’s about half the cost of the average internet bill. Since it helps pay for college, a house, retirement, and more, that’s money well spent.
Term life insurance is straightforward, but the cash value of whole and other permanent types can act as a forced investment vehicle. You should talk to a financial adviser before deciding whether or not a permanent life insurance policy is the right path, but if you’ve already maxed out other investment options like an IRA, life insurance might work as an additional vehicle.
Financial planning is important, but if you’re the breadwinner and you die, it makes all of that planning moot. The meaning and importance of life insurance is the peace of mind it provides when it comes to:
Life insurance is a useful tool for most people, but that doesn’t mean everyone needs it. It’s often unnecessary if:
If you don’t fall into one of these scenarios, you should seriously consider life insurance. If you don’t have it, you risk leaving your loved ones financially vulnerable in a worst-case scenario – something that’s easily avoidable with life insurance. Learn more about when you should get life insurance.
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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Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
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