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Life insurance FAQs
The most common questions about life insurance, answered.
Updated . What changed?
When you strip away the jargon, life insurance is a simple concept. It’s a way to protect your family financially when you’re gone. Get answers to the most frequently asked questions about life insurance, including how much it costs and who needs it the most.
Basic life insurance questions
What’s the purpose of life insurance?
Life insurance offers a financial safety net for your loved ones when you die. It’s designed to replace your income and help your family to cover their living expenses without having to change their lifestyles or move assets around.
How does life insurance work?
Think of life insurance as a contract between you and your insurance company. You pay premiums to maintain your coverage, and if you die while the policy is in force, your insurer pays out a sum of money to your beneficiaries.
This tax-free payout is known as the death benefit, and your beneficiaries will need to file a claim with your insurance company to receive it.
What does life insurance cover?
The payout from your policy can be used to cover a range of everyday expenses and future purchases.
Your beneficiaries can use the money however they like. Some of the most common ways to spend the cash include:
- Mortgage or rent payments
- Basic living expenses — like groceries, utility bills and health insurance
- Outstanding debts — like student loans and credit cards
- Funeral costs and other end-of-life expenses
- Child care or long-term care for aging parents
- School or college tuition
Do I need life insurance?
If you have loved ones who rely on you financially — and you don’t have the savings to self-insure — you probably need life insurance. That way, your policy will kick in to provide for your financial dependents if you die prematurely.
These groups of people often have the greatest need for life insurance:
- Business owners
- Parents with children or older dependents
- People with cosigned debt
- Stay-at-home parents or partners
- Wealthy individuals whose families will have to pay inheritance or estate taxes
Is life insurance necessary for a single person?
It depends. If you have assets to protect or cosigned debt — like a mortgage or student loans — that would fall to your parents or siblings if you died prematurely, it may be worth taking out a policy as a single person. And similarly, if you’re the primary caretaker of an elderly, ill or disabled person, a policy can ensure they’re taken care of when you’re gone.
When should I buy life insurance?
The short answer is: As soon as you need it. Life insurance gets more expensive as you age, so it’s a good idea to lock in low rates while you’re young.
Plus, the underwriting process for traditional policies can take anywhere from three to eight weeks. If you want to secure coverage, apply now or opt for a no-medical exam policy.
Can I get life insurance policies through my employer?
Maybe. Many employers offer life insurance as part of their workplace benefits, and often subsidize the premiums.
Group life insurance policies are typically capped at low amounts — like $100,000 — and can’t be customized with riders of your choosing.
Can I take a life insurance policy out on someone else?
Yes — but you’ll need to do two things:
- Demonstrate an “insurable interest.” If you can prove that you’ll suffer financially when that person dies, your insurer will be more willing to issue a policy — especially if it’s on a family member whose debts and final expenses you’d inherit.
- Have them sign off on the policy. You can’t buy life insurance for someone without their consent or knowledge. That person will need to approve the policy before the coverage goes into effect.
Can I buy life insurance for my children?
Yes. If you want to buy life insurance for your children, there are a couple of ways to go about it:
- Purchase a child’s life insurance policy. Most major insurers sell whole life policies for children, and your child can take over the policy and change the beneficiaries when they’re older.
- Add a child rider to your own term life insurance policy. This rider can cover multiple children for the same price, and it usually expires when your children turn 25 or get married.
How is life insurance paid out?
As long as you keep up with your premiums, your insurer will pay the death benefit when you die.
The death benefit is typically paid out to your beneficiaries in a lump sum — but you can ask your insurer to pay it in installments or annuities instead.
If you have living benefits riders, you may be able to access some money from your policy while you’re still alive. For example, an accelerated death benefit rider pays a portion of the death benefit if you’re diagnosed with a terminal illness.
What happens if I die without a life insurance beneficiary?
In that case, your insurer will pay the death benefit to your estate — but it might be subject to probate.
Who can I name as my life insurance beneficiary?
Anyone you like. Most people name their spouse and/or children as their beneficiaries, but you’re also free to nominate a different family member, friend, business partner, charity or legal entity — like an estate or trust.
You can choose multiple beneficiaries, and divide the death benefit as you wish.
How do I claim the life insurance death benefit?
As a beneficiary, it’s your responsibility to file a claim with the policyholder’s life insurance company. You can usually do this online, over the phone or by mail.
You’ll need to submit a certified copy of the death certificate as well as supporting information — such as a coroner’s or police report.
Are life insurance payouts taxable?
There’s one exception. If your estate is valued at $11.58 million — the IRS threshold for 2020 — or more, it may be subject to federal estate taxes . The payout from your policy will be counted as part of your estate and taxed accordingly.
Questions about life insurance policies
What are the different types of life insurance policies?
There are a few life insurance policies on the market:
- Term life insurance. The simplest and cheapest policy, term life insurance provides coverage for a set number of years — like 10, 15 or 20. If you die during your “term,” your beneficiaries will receive a payout.
- Permanent life insurance. Whole, universal and variable life policies offer lifelong coverage and build cash value over time. That cash value earns interest as it grows and once you’ve accumulated enough, you can start taking out loans against your policy.
- Group life insurance. A term life insurance policy offered by many employers.
- No-medical exam policies. Simplified issue policies require you to fill out a health questionnaire, while guaranteed issue policies skip both the questionnaire and medical exam.
- Final expense life insurance. Also known as burial insurance, this policy is meant to cover funeral costs and end-of-life expenses. It’s open to seniors, and you won’t need to take a medical exam.
What’s the best type of life insurance policy?
The best life insurance policy for you comes down to your budget and needs.
For most people, term life insurance is sufficient. It’s inexpensive, easy to understand and designed to protect you for the years you need coverage the most.
Can I have multiple life insurance policies?
Yes. Some people buy multiple policies with different term lengths and coverage amounts to match their needs. This strategy is known as laddering, and it’s a good way to make sure you have the exact coverage you need at each stage of your life.
What are the most common life insurance riders?
Rider options vary between insurers, but these are a few of the most popular add-ons:
- Accelerated death benefit rider. Pays out a portion of the death benefit if you’re diagnosed with a terminal illness.
- Term conversion rider. Allows you to convert your term life insurance policy to a permanent policy within a certain time frame.
- Waiver of premium rider. Pauses your premiums if you become fully disabled and can’t work.
- Cost of living adjustment (COLA) rider. Boosts your policy’s death benefit to keep up with inflation.
How much life insurance do I need?
Ideally, you want to leave your beneficiaries with enough money to maintain their lifestyles when you’re gone.
To work out how much life insurance you need, crunch these numbers:
- Income. Aim to buy a policy that would replace your income and cover your family’s cost of living for five to 10 years. To do the math, multiply your salary by five or 10.
- Assets. Total the dollar value of any assets — like your house, car or 401(k) — and add that to your coverage amount.
- Financial obligations. Factor in any expenses you have now and may have in the future — such as childcare or college tuition.
How much does life insurance cost?
Life insurance rates depend on a range of factors, like your age, gender, health, weight, occupation, lifestyle, smoking status and the type of coverage you choose.
As for the average cost of life insurance, a healthy 35-year-old with a $500,000, 20-year term life insurance policy can expect to pay a little over $28 a month.
Can I take out a loan against my policy?
If you’ve built up enough cash value in your permanent policy, you can take out a loan. But know that it can take 10 to 15 years to accumulate the cash value you need to begin borrowing against your policy.
Term life insurance policies have no cash value, so you can’t take out loans against them.
What happens if my life insurance policy expires?
When your life insurance coverage expires, you can purchase a new policy — and you can expect to pay higher rates now that you’re older.
If you no longer need life insurance, you don’t have to do anything.
Do life insurance premiums change?
With most policies, the premiums are locked in. This means that you’ll pay the same amount to maintain your coverage for the length of your policy, or your whole life (if you have a permanent policy).
There are a couple of exceptions to this. If you have an annual renewable term (ART) life policy, you’re essentially taking out a new policy each year, so your premiums will go up when you renew your coverage. And if you have a universal, variable or variable universal life policy, you have the flexibility to adjust your premiums to suit your situation.
Questions about buying life insurance
How do I buy life insurance?
You can buy a life insurance policy directly from the insurer, or through an agent or broker. Most insurers offer online quotes, which makes it easy to research your options.
Whichever path you choose, take the time to compare a few insurance companies to get the best possible policy at the lowest price.
How do I find a reputable life insurance company?
When you’re researching life insurance companies, pay close attention to these two factors:
- Financial strength ratings. An insurer’s financial strength ratings points to its ability to pay claims in the foreseeable future. Go for a company with an AM Best rating of A (Excellent) or higher.
- Customer reputation. To learn how the insurer treats its policyholders, check out its reviews and ratings on the Better Business Bureau (BBB), J.D. Power, TrustPilot and the National Association of Insurance Commissioners (NAIC).
Do I have to take a life insurance medical exam?
No. If you’d prefer not to take a medical exam, you can opt for a policy with simplified underwriting — like simplified issue, guaranteed issue or instant-approval term life insurance.
But since the insurer doesn’t have a complete picture of the person it’s covering, you’ll pay a higher premium. If you’re healthy, you can save hundreds or even thousands of dollars over the life of your policy by undergoing a medical exam.
What’s the difference between a life insurance agent and broker?
Life insurance agents are typically tied to one or more life insurance companies. They have expert knowledge of those insurers’ products, and can help you with your application.
On the other hand, a life insurance broker works for you — and they usually partner with a longer list of companies. A broker will assess your needs and financial situation, and find the best possible policy for your needs.
How do life insurance agents make money?
Most life insurance agents work on commission, and they usually make more money selling permanent life insurance policies.
However, the amount they earn comes down to a range of factors, such as the size of their client base, the number of companies they partner with and whether they’re licensed to sell other financial products.
Get life insurance quotes
While the industry can be riddled with jargon, life insurance is a simple concept. You pay a premium to maintain your coverage, and your insurer pays out a sum of money to your beneficiaries when you die.
If you’re ready to buy a policy, compare life insurance companies to find one that suits your family’s needs and budget.
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