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Life insurance types
When deciding how to narrow down your life insurance needs, start by choosing from its two main types: term life and whole life. Term life covers you for a specified period of five to 30 years or more, depending on the provider. After your coverage expires, you can typically renew or convert your policy to another term. Whole life insurance is a type of permanent policy, providing lifelong coverage and often a cash value component and dividends supported by an investment account.
Term life insurance
Easily the most practical and affordable life insurance option, term life insurance offers coverage for a predetermined period of time.
Whole life insurance
Whole life insurance provides lifelong coverage at a fixed rate, while building in cash value.
Universal life insurance
Universal life insurance offers both lifelong coverage and an investment component that tracks the major indexes.
Variable life insurance
This investment focused life insurance policy is for experienced investors looking to grow and use the cash value component of their policy later in life, tax deferred.
Joint life insurance
Joint life insurance is a single policy, term or whole, that aims to meet the needs of two people, usually married.
Disability insurance
This type of insurance provides a necessary income should you become afflicted with a debilitating injury or illness and are unable to work.
Every type of life insurance, explained
When is life insurance paid out?
Most life insurance providers pay out claims within 60 days, with most states allowing your insurer up to 30 days to investigate your claim, if necessary. In most cases, your insurer pays your life insurance policy in a lump sum to your beneficiaries after you die.
A beneficiary or representative of your estate starts the claims process with your insurer after your death, submitting required forms along with a copy of the death certificate. Insurers may delay payouts if the policyholder’s death is ruled a homicide or suicide. Also, deaths that happen in the first two years after signing up for life insurance coverage typically are subject to something called the two-year contestability clause. This clause allows your insurer the right to more thoroughly investigate your claim to confirm you didn’t provide false or fraudulent information to get a life insurance policy.
Can I receive my life insurance payout before I die?
You might be able to, but it depends on whether you customized your policy at signup with an accelerated benefit rider. These riders allow you to receive a percentage of your policy’s payout if you unexpectedly fall ill or suffer a disability. Depending on your policy’s terms, you can receive your accelerated benefit in periodic installments or as a lump sum to cover the costs of a critical or chronic illness, including long-term care.
What can a life insurance payout be used for?
Everyday living expenses
Mortgage repayments
Other outstanding debts
Education expenses
What to look for in a life insurance policy
To find a comprehensive life insurance policy at the best rates, look into how coverage amounts affect your premiums, the flexibility of your policy options and additional riders or features specific to the providers you’re interested in.
To simplify the process of comparing different policies, ask yourself:
Life insurance policy options
While term and permanent life insurance are the basics, you’ll find variations that allow for flexibility in how much you pay in premiums, how you can accumulate cash value, whether you can borrow against your policy and more. Knowing what these common variations provide can help you customize a policy that meets you and your family’s anticipated needs.
| Term life | Whole life | Universal life | Variable life | Variable universal life | |
|---|---|---|---|---|---|
| Length of term | 1 to 30 years | Life | Life | Life | Life |
| Cost of premium | Level premiums | Level premiums | Premiums can vary at the policyholder’s discretion, subject to federal tax laws | Level premiums | Premiums can vary at the policyholder’s discretion, subject to federal tax laws |
| Guaranteed death benefit |  | | | | |
| Guaranteed cash value |  | | May be exhausted to pay premiums, safeguarded from risk | | |
| How your money appreciates or depreciates | N/A | Set rate of interest | Variable rate of interest | Pooled accounts managed by investors | Pooled accounts managed by investors |
| What you should know | You can’t lose coverage, and you receive no premium refund at the end of the term | Not as flexible as other life insurance options | Flexible policy options and premiums | High-priced policy with no or minimal cash appreciation | High-priced policy with no or minimal cash appreciation |
How much coverage should I get?
Given the general unpredictability of life, there’s no one universal answer for how much coverage you should buy. Experts will tell you to start with a multiple of your annual income — up to 10 times your salary. Generally, you want to determine an amount that will cover immediate and ongoing costs after you die, so that your family and other dependents can support their current way of life.
4 ways to work out how much coverage you need
When determining how much coverage is enough to protect your family, consider your debts, living expenses and lifestyle. Also plan for how your loved ones will pay for your funeral, burial and related expenses.
1. What types of debt will you leave behind?
Think about how much of your salary goes to pay down debt and how much you pay monthly or annually toward:
- Outstanding mortgage payments.
- Rented properties.
- Personal debt like personal loans, car loans or credit card balances.
2. How much do you already have for your family to fall back on?
Think about the number of years you might need to cover your family’s living expenses and whether savings or assets can offset those costs after your death, including:
- Accumulated savings.
- Assets that your family can sell.
- Investments like property or stock.
- Employer-sponsored retirement plans or a 401(k).
3. What are your family’s ongoing living expenses?
Factor into your life insurance coverage everyday and even irregular expenses, like:
- Transportation costs, including car maintenance and gas.
- Property and income taxes.
- Food, clothing and utilities.
- Future education and childcare costs.
- Car, health and homeowners insurance.
- Entertainment and vacations.
4. How long will your family need coverage?
At some point, your family will be able to rely on Social Security benefits and other investments. But until then, think about:
- Your age.
- The ages of your partner and children.
- The earning capacity of your partner today and in the future.
- Anticipated funeral expenses.
What affects my life insurance premiums?
To calculate your policy’s premiums, life insurance providers engage a complicated review of your age, health and lifestyle called underwriting. They often run these details through proprietary algorithms and analytical tools to determine the level of risk in taking you on as a policyholder.
How a life insurance provider rates you within each category varies, but most consider:
- Your age. Age is the No. 1 factor that determines your premiums. Generally, the younger you are, the less of a risk you present to the insurer — and the lower premiums you’ll pay.
- Your gender. Women generally live longer than men. Because this means a policy will likely be longer, they tend to have lower premiums than men.
- Your health history. If you have a history of medical conditions, an insurer might consider you a risk for future, more serious issues, bumping up your premium accordingly. If you can prove to the insurer that you’re managing any existing condition, it might help you lock in a lower rate.
- Your occupation and lifestyle. If you work in a dangerous field or embrace life like a daredevil, potential insurers may consider you a person with high potential for death. Because most insurers will assume an inevitable policy payout, your premium will undoubtedly be high.
- Your relationship with alcohol and nicotine. Drinking and smoking are risks to your health, and you could end up paying double the life insurance premium for those with less risky habits.
- Your family’s medical history. If you come from a line of relatives with serous health issues, especially hereditary conditions, insurers might conclude that you will too, resulting in higher premiums.
- Your driving record. Today, many insurers consider your actions behind the wheel when determining costs. If you’ve racked up driving violations or serious convictions, you might pay higher rates.
