Life Insurance 101: The Basics
Here’s a scary statistic: 106 million adults in the United States lack the life insurance coverage they need, according to the Insurance Information Institute.
That makes sense. Life insurance can be a confusing (or even intimidating) topic. After all, do you even need it? How much do you really need? Are the premiums going to be cost-prohibitive?
However, understanding life insurance and how it works can be essential in providing financial security for you and your loved ones. Most of us can benefit from having a policy in place. And premiums aren’t nearly as expensive as you might think (especially if you compare rates).
But life insurance does operate differently than other insurance products you’re used to. Let’s demystify it:
What Is Life Insurance?
At its most basic, life insurance is a type of financial protection that pays out a sum of money to your named beneficiaries in the event of your death.
Unlike auto insurance, which may pay out multiple times throughout your policy, life insurance is more like a contract. You pay premiums each month. In exchange, your provider guarantees to pay a lump sum of money (aka a death benefit) to your beneficiaries after you’re gone.
That lump sum can be used for nearly anything, depending on your policy's terms and coverage amounts. For example:
- Mortgage payments
- Auto loan payments
- Debt repayment
- Childcare costs
- Funeral expenses
Many people opt for life insurance simply for the peace of mind they get, knowing their beneficiaries will have the financial support they need.
Types of Life Insurance
You'll choose between several types when shopping for a life insurance policy.
Term Life Insurance
Term life insurance last for a set number of years, then ends. While you can choose the length, most policies range from 10 to 30 years. Because there is a start and end date, term life insurance often offers more affordable monthly premiums.
Insurance companies offer different types of term life policies depending on your needs:
- Decreasing term: Policyholders can renew annually after their initial term. However, coverage decreases over the life of the policy.
- Convertible term: Can be converted to whole life insurance after the initial term.
- Renewable term: Can be renewed once a year, but premiums increase annually after the initial term.
Permanent Life Insurance
Permanent life insurance remains in place for the rest of your life — or until you cancel the policy or stop paying the premiums. This flexibility also means permanent life insurance is typically more expensive than term life.
Insurance companies also offer different types of permanent life policies:
- Universal life: Provides both a death benefit and an interest-earning cash value component. The cash value can pay premiums, increase the death benefit or be withdrawn or borrowed from the policy.
- Variable universal life: Combines the flexibility of universal life insurance with investment options allowing policyholders to potentially earn higher returns than traditional universal life policies, but with more risk involved.
- Indexed universal life: Earns interest based on the performance of a stock market index, such as the S&P 500, while still providing a death benefit and cash value accumulation. If the index performs well, the policy's cash value will increase to a cap or participation rate.
- Whole life insurance: Provides lifelong coverage with level premiums and a guaranteed death benefit while building cash value you can borrow against.
What Impacts Premiums?
Beyond the death benefit, premiums are one of the most significant factors when choosing a life insurance policy. Since you’ll pay monthly premiums for the duration of your policy, you’ll want to compare policies to ensure you can comfortably afford it.
Several factors determine your premium. Some of these — like your age and gender — you can’t change. Typically, the older you are, the more expensive starting a life insurance policy is.
Other factors you may have some control over, such as:
- Smoking: Smokers tend to pay higher premiums.
- Driving records: You may get a discount with a clean driving record.
- Family medical history: Some potential genetic conditions can increase premiums.
- Lifestyle choices: Risky jobs or hobbies (like skydiving or stock car racing) can raise premiums.
You’ll likely need to answer questions about your lifestyle when applying for a policy. The insurance company may also request a medical exam to determine your risk. However, if you take steps to improve your health (or change your lifestyle), you may be able to request a reassessment.
How Do I Choose a Provider?
Before signing up for a policy, you’ll want to choose the right coverage amount, policy type and insurance company.
Choose a policy type
Consider the type of policy and coverage that meets your needs, whether term life, whole life or a different kind of policy.
Research insurance companies’ financial stability
A life insurance policy is only valuable if the insurance provider can still pay the benefit when your family needs it. Research and compare several insurance companies' financial ratings and stability to ensure they can pay out claims when needed.
Read the terms
Not all life insurance is created equal. When comparing providers and offers, review the policy features, benefits and costs of different policies, including any riders or additional coverage options that may be available.
Check customer reviews
You don’t have to spend much time researching life insurance companies or getting individual quotes. We can quickly help you request quotes for several types of life insurance policies through our Insurance Comparison Tool. Just fill out some basic information, and you’ll be on your way to finding the right policy for your needs.