Though no one wants to think about what will happen to their loved ones after they die, it’s a necessary conversation to have. Whether you’re looking to provide financial protection for a spouse or help ensure that a child is able to finish college, a life insurance policy can provide you with peace of mind.
What Is Life Insurance?
Life insurance is a contract between you and a life insurance company. When you sign onto a life insurance policy, you agree to make monthly payments — your premium — to your insurance company. In exchange, your insurance company promises to pay out a lump sum of money — the death benefit — to the beneficiaries you specify. You can name anyone as your beneficiary, and you can split your death benefit between multiple beneficiaries if you choose. The conditions that must be met at the time of your death to ensure the company pays the death benefit vary depending on the type of policy you have.
How Does Life Insurance Work?
The first step to getting and using life insurance is to choose your death benefit. It’s possible to find insurance companies selling policies with death benefits as low as $50,000 and as high as $2 million. Think about your goals for your insurance and apply for a policy.
When you apply for a life insurance policy, your insurer will ask you a few basic questions about your health and lifestyle to calculate your premium. You may also need to undergo a medical examination depending on the insurance provider and the type of policy you choose.
There are two major types of life insurance policies.
- Term life: Term life insurance includes a set number of years (your policy term) that the policy will remain active. If you die during your policy’s term, your beneficiaries will receive your death benefit. If you outlive your policy, your insurance company will close the policy when the term is over. Your beneficiaries will not receive a death benefit from your term policy if you outlive it — but you may have the option to convert a term life insurance policy to a permanent life insurance policy.
- Permanent life insurance: With a permanent life insurance policy, your beneficiaries are guaranteed to receive your death benefit. As long as you continue to pay your premiums, a permanent life insurance policy will be with you for life. Permanent life insurance policies also include a cash value portion, which you’ll contribute to each time you pay your premium.
Your beneficiaries can use the death benefit for anything that they please. In most circumstances, your death benefit is also not considered to be taxable income for your beneficiaries, which means that they will not need to pay income or gift taxes on it. Be sure to take these factors into consideration when you choose your death benefit.
Can you Invest in Life Insurance?
If you have a form of permanent life insurance, your policy will accumulate a cash value. You can use this portion of your policy to invest through your insurance provider. This can help compound your returns on your investment, but it’s also riskier. Term life insurance policies do not include a cash value portion and thus cannot be used for investing purposes.
Types of Life Insurance
There are multiple types of both term life insurance and permanent life insurance. Take a look at a few of the most common coverage types you’re likely to see on your search for the right life insurance policy.
Term Life Insurance
- Level premium: With a level premium term life insurance policy, you’ll pay the same monthly premium every month throughout your policy. Level premium policies are the most common type of term life insurance, and they are the most straightforward type of policy as well.
- Yearly renewable term: With a yearly renewable term policy, you have the option to renew your coverage every year. Your coverage will last for a single year — when you renew your coverage, your premium will increase as you age. This type of term life insurance policy can be a good option if you’re young and only need coverage for a few years.
- Guaranteed issue: Guaranteed issue life insurance policies are the easiest way to sign onto coverage. These policies do not require medical exams, and you’ll usually only need to answer a few simple questions about your health to get your insurance policy. Though guaranteed issue policies can be a good option, your insurance provider will assume that you have an underlying health condition and extend less favorable rates to you.
- Decreasing term: Decreasing term life insurance policies have a death benefit that decreases over the course of the term. Most people who purchase decreasing term insurance do so to protect an underlying asset. For example, you may purchase a decreasing term policy to mirror the amortization of your mortgage. These policies are often very affordable, and your rates stay the same throughout the course of your term.
- Convertible: A convertible term life insurance policy is one that allows you to convert the policy to a whole life or a universal life insurance policy when you reach the end of your term. With a convertible policy, you won’t need to go through the health screening qualification process before signing onto coverage.
Permanent Life Insurance
- Whole life: Whole life insurance is the most basic type of permanent life insurance. These policies offer both a death benefit and a savings account component. Each time you pay your premium, your insurance provider will put a portion of the cost into a savings account, which will accumulate dividends that the company pays out to you.
- Universal life: Universal life insurance policies include a flexible death benefit and a cash value portion. You may be able to adjust your death benefit after your policy is in place if you are willing to submit to a new medical examination process. Over time, your cash value will accumulate interest, which you can withdraw or take out a loan against the balance. You might even have the option to lower your premium payments as you accumulate a large enough cash balance associated with your account.
- Variable life: This type of permanent insurance policy also contains a death benefit and a savings account that may grow in value over time. However, with a variable policy, you can use the savings account portion of your policy to invest in market securities like stocks, bonds and mutual funds. Investing through your life insurance policy may help your money grow faster — but it also comes with more risk.
- Variable universal life: Variable universal life insurance combines the features of both a variable policy and a universal policy. You have the option to adjust your premium and death benefit like you would through a universal life insurance policy. You also have the risks and rewards of investing through your policy.
These are just a few of the most common types of life insurance policies you’re likely to see when you explore your life insurance options. Consider speaking with an insurance agent to learn more about the specific policy that best suits your goals and your budget.
Compare Life Insurance Providers
Are you ready to get started exploring your insurance options? Consider beginning your search with one or more of the recommended providers below.
- securely through Ladder Life Insurance's websiteBest For:Adjustable coverage
Ladder Insurance Services, LLC (Cal. license # 0K22568; Ark. license # 3000140372) offers term life insurance policies: (i) in New York, on behalf of Allianz Life Insurance Company of New York, New York, NY (policy form # MN-26); and (ii) in all other states and the District of Columbia on behalf of Allianz Life Insurance Company of North America, Minneapolis, MN (policy form # ICC20P-AZ100 and # P-AZ100). Only Allianz Life Insurance Company of New York is authorized to issue life insurance in the state of New York. Insurance policy prices, coverages, features, terms, benefits, exclusions, limitations and available discounts vary among these insurers and are subject to qualifications. Each insurer is solely responsible for any claims and has financial responsibility for its own products.
- securely through Haven Life Insurance's websiteBest For:Under Age 64
Haven Term is a Term Life Insurance Policy (ICC21 Haven Term in certain states, including NC) issued by C.M. Life Insurance Company (C.M. Life), Enfield, CT 06082. In New York (DTC-NY) and California (DTC-CA), it is issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
Finding the Right Life Insurance Coverage
If you’re considering investing in a life insurance policy, it’s best to begin your search as early as possible. Signing onto an insurance policy at a younger age helps to ensure you are able to lock in your coverage at the most advantageous rate possible. Be sure to get multiple quotes from at least three competing insurance providers. Because each insurer uses its own unique underwriting process, it’s possible to find the exact same coverage from 10 insurance companies at 10 completely different price points.
Frequently Asked Questions
What is the benefit of a life insurance policy?
The primary benefit of having a life insurance policy is the policy’s death benefit, which is paid to your beneficiaries if your insurance policy is active at the time of your death. Depending on the type of policy you have, you may also be able to build interest or dividends on a cash value, which can be accessed while you are still alive.
How much does life insurance pay on average?
There is no average dollar amount that life insurance pays out because you choose your death benefit when you sign onto your policy. This means that you have complete control over the amount that your insurance will provide to your beneficiaries so long as your policy is active at the time of your death. Some common death benefit choices include $100,000, $250,000, $500,000 and $1 million.
Benzinga crafted a specific methodology to rank life insurance. To see a comprehensive breakdown of our methodology, please visit our Life Insurance Methodology page.