This article was fact-checked and reviewed by Andrew Flueckiger, a licensed insurance agent and Certified Insurance Counselor. Content has been updated for 2020.
Shopping for life insurance isn’t something you do every day, and it can be tough to understand the lingo enough to find a policy that meets your needs. Finder’s life insurance research team spends thousands of hours sifting through policies and analyzing quotes from life insurance companies across the US. That’s a lot of research to help you find the best deal on the coverage you need to protect your loved ones.
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Life insurance is a financial safety net for your loved ones in the event of your passing. Think of life insurance as a contract between you and your insurance company. You pay a premium to maintain your coverage, and when you die, your insurer pays out your policy to your beneficiaries. This payment is known as a death benefit, and it can help your friends and family focus on healing and celebrating your life, rather than grieving while trying to figure out how to pay all the bills.
Watch our short video below to learn the basics of life insurance:
Beneficiary. The person, organization or entity you nominate to receive the proceeds of your life insurance policy when you die.
Cash value. The cash that accumulates over time in permanent life insurance policies, like whole life.
Claim. After a policyholder dies, it’s the beneficiary’s responsibility to let the insurer know that the payout is due. This is the process of “filing a claim.”
Coverage amount. Also known as “face value,” this is how much your policy is worth — such as $250,000, $500,000 or $1 million. In most cases, your beneficiaries will receive a death benefit equal to the coverage amount when you pass away.
Death benefit. The amount of money that is paid out to your beneficiary or beneficiaries when you die.
Quote. The estimated amount of money you’ll pay for coverage, as calculated by an insurance company.
Rating class. The risk category you qualify for according to your insurer’s underwriting standards. Common rating classes are Preferred Plus, Preferred and Standard.
Rider. An optional add-on that can bridge any gaps in your coverage. The options vary between insurers, but you’ll typically pay a fee to add riders to your policy.
Policyholder. The person who owns the policy.
Premium. The fee you pay to keep your policy in force.
Term. The length of time your term life policy is in force — for example, 10, 15 or 20 years.
Underwriting. The process by which an insurer determines how risky you are to insure. Underwriters assess your age, gender, job and lifestyle, as well as your health history and medical exam. They then use this data to assign you a rating class and set your premium.
No, the death benefit isn’t considered taxable income, with one exception: If your estate is worth higher than the IRS threshold, it will be subject to federal estate taxes. The life insurance payout will be counted as part of your estate and taxed accordingly.
Can I access the money before I die?
Maybe. There are two ways you can tap into your policy while you’re still alive:
Accelerated death benefit rider. If you’re diagnosed with a terminal illness, this rider pays out a portion of the death benefit.
Critical illness rider. If you’re diagnosed with a critical — but not terminal — illness, this rider kicks in to pay a lump sum. Heart disease, cancer, stroke and kidney failure are some of the most common covered illnesses.
Disability income rider. If you become totally disabled and can no longer work, this rider will pay a monthly cash benefit for a specific period of time.
Cash value in permanent policies
More on this in a minute, but these policies accumulate cash value over time. Once you’ve built up enough cash value, you can begin to borrow against your policy.
Life insurance plans are lumped into four main categories: term, permanent, no-medical exam and group life policies.
Term life insurance
Provides protection for a set period of time, like 10, 15 or 20 years.
Group life insurance
A type of term life insurance offered through the workplace as part of employee benefits.
Permanent life insurance
A life insurance policy and investment product rolled into one, these policies offer lifelong coverage and accumulate cash value over time. When you pay your premium, a portion will go towards the cash value of your policy, which earns interest as it grows.
Whole life insurance
The simplest permanent plan, whole life insurance earns a fixed rate of return set by your insurer.
Universal life insurance
The cash value is tied to a stock index, such as the S&P 500, and earns interest based on the current market rate.
Variable life insurance
The cash value of this policy is invested in a portfolio of stocks, bonds and mutual funds of your choice.
Variable universal life insurance
A hybrid policy that offers flexible premiums and the ability to invest your cash value in investments that match your risk tolerance.
No-medical exam policies
If you don’t want to take a medical exam for whatever reason, these are your policy options.
Simplified issue life insurance
This policy requires you to fill out a health questionnaire, and there are a few “knockout questions” that could deny you coverage.
Guaranteed issue life insurance
A “no questions asked” policy that skips both the health questionnaire and medical exam. Coverage is guaranteed.
Final expense life insurance
Also known as burial insurance, this policy is designed to cover end-of-life expenses and funeral costs.
Most insurers allow you to dress up your policy with riders. Besides the living benefits riders we talked about above, these are some of the most popular ones:
Term conversion rider. Gives you the option to convert your term life insurance policy to a permanent policy within a certain time frame.
Waiver of premium rider. Waives your premiums if you become unemployed or fully disabled and can’t work.
Child term rider. Pays out a death benefit if your child dies, and typically expires when your child gets married or turns 25.
Return of premium (ROP) rider. Reimburses you for any premium paid if you outlive your term life policy.
Guaranteed insurability rider. Lets you boost your coverage without completing another health questionnaire or medical exam.
Cost of living adjustment (COLA) rider. Increases your policy’s death benefit to keep up with inflation.
Who needs life insurance?
Here’s the golden rule. If you have loved ones who depend on you financially, you most likely need life insurance. Your policy can help to provide for them when you’re gone. These people have the greatest need for life insurance:
Parents with children or other dependents
Those with co-signed debt
Those with medical expenses
Wealthy individuals planning their estate
Stay-at-home parents and/or partners
Those who may be in need of future long-term care
Who buys life insurance?
According to LIMRA’s latest life insurance study, 57% of Americans own a policy. Of this number, 28% have an individual life insurance policy, and 18% have group life insurance — which is usually offered as an employee benefit. A smaller number of consumers — 11% — own both policy types.
Take our quiz: Do you need life insurance?
How do I get a life insurance policy?
1. Compare policies
Get quotes from a range of insurers to find a policy that suits your budget and needs. Once you’ve settled on a policy, choose your coverage amount and select riders.
2. Apply for coverage
Submit your personal and contact details, as well as information about your income and employment. You might have to fill out a health questionnaire or take a medical exam, too.
3. Pay your premium
Your insurer will charge a monthly or annual premium to keep your policy active. Try to make timely payments to avoid a policy lapse.
Can I get coverage if I have a medical condition?
A preexisting condition like heart disease or high cholesterol can complicate the process, but it doesn’t mean you’ll automatically be denied coverage. The key is to be completely upfront with your insurer.
To boost your chances of getting the strongest possible policy, follow these steps:
Jot down information on condition. Include the name of the disease or illness, as well as details about the medications you take and any treatments or surgeries you’ve had.
Request a letter from your doctor. If you have a preexisting condition working against you, your insurer will ask for an Attending Physician’s Statement (APS) from your doctor. They’ll know what to do.
Apply for a policy with multiple insurers. Every insurer has its own underwriting standards, and some are more lenient than others. To score the cheapest rate, get quotes from a bunch of insurers.
Take the medical exam. If you’ve taken on these tips, you have nothing to hide. The medical exam can help your insurer to better assess your risk level. If the results aren’t great, you can always apply for a no-medical exam policy — though brace yourself for higher premiums.
While rates can vary wildly, the average cost for life insurance is less than $50 a month. For example, a 20-year term life insurance policy worth $500,000 for someone between the ages of 25 and 40, and in good health, would average around $28 a month.
Your rate depends on a range of factors, like your age, gender, health, weight, occupation, lifestyle and whether you’re a smoker. The coverage amount, term length and type of policy you’re applying for come into play, too. Insurers weigh these factors differently, which is why it’s important to compare quotes from multiple companies.
How much coverage should I buy?
It really comes down to how much coverage you can afford. When you’re doing the math, factor in these three things:
Income. The golden rule is to buy a policy that would replace your income and cover your family’s cost of living for five to 10 years. To do this, multiply your salary by five or 10.
Assets. As you move through life, you’ll most likely acquire assets such as a house, car, savings account or 401(k). Your life insurance policy should protect these assets. Figure out their value and add that dollar figure to your coverage.
Financial obligations. Total all of your expenses now and those you can expect in the future — like childcare or college tuition.
How do I manage my life insurance policy?
There’s a little bit of life admin involved in buying and maintaining a life insurance policy. Here’s what you need to know.
Choosing and changing beneficiaries
Most people name their spouse or children as their beneficiaries, but you don’t have to. You can choose another family member, friend, business partner, charitable organization or a legal entity — like an estate or trust.
Things can get a little complicated if you live in a community property state or want to elect a minor.
You may name multiple beneficiaries, and indicate which percentage of the death benefit should go to each. You can update the list at any time.
Adjusting your coverage
Foresee needing more or less coverage in the future? Some policies allow you to increase or decrease your coverage:
Variable life, universal life and variable universal life. These permanent policies give you the freedom to change your coverage amount — just keep in mind that this will also affect the death benefit.
Decreasing term life insurance. With this type of term life insurance, the death benefit gradually decreases as you age. It’s ideal for those who know they’ll have less debt as time goes by.
Canceling your policy
You can cancel your life insurance whenever you want. But you’ll only receive a refund of any premiums you paid in these situations:
You cancelled during the “free look period.” When you buy a policy, your insurer is legally required to give you time to change your mind. This is the free look period, and it lasts 10 to 30 days depending on the state you live in.
You bought a return of premium rider. If you cancel your coverage, you’ll be reimbursed for the premiums you paid — minus any administrative fees.
How to compare life insurance policies
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:
Learn the limits of the provider’s insurance policies and what your loved ones will receive in the event of a claim. Some insurers allow you to buy life insurance at any amount, while others cap coverage for specific occupations and age groups.
Research whether age affects your ability to apply for a specific policy, and learn about any ages at which your policy stops covering you. Seniors looking for life insurance, for example, may find limited options among insurers.
Some insurers offer no medical exam insurance, which allows you to purchase coverage without a lot of medical underwriting. Many online insurers allow a short questionnaire to stand in for a medical exam, though this option often comes with higher rates.
Look at the range of features automatically included in your policy. If your policy isn’t as flexible as you’d like, ask about riders that can help you customize your policy to fit your life’s circumstances.
It’s often cheaper to buy insurance through one provider instead of buying policies from different companies. Depending on the insurer, you might be able to combine standalone disability income insurance and critical illness insurance policies with your overall policy.
If you work in high-risk industries or situations, make sure you’re not excluded from the provider’s coverage. Conditions on coverage can vary among insurers based on your occupation or lifestyle. You might even find a provider that specializes in your field, potentially offering more affordable rates.
Should I buy directly or through a broker?
You have options when shopping for a life insurance policy. You’ll find brokers that work with a range of companies to help you find the best prices in their network on the coverage you need, but they may not offer the personalized service you’ll find with a direct agent.
Both broker and agents work on behalf of providers to sell you a life insurance policy. It all comes down weighing each against what you’re looking for.
Buying life insurance from a broker
Not limited to one provider, offering access to a wide range of products for potentially greater choice.
Can flex their knowledge of the market to help you find coverage to suit your circumstances.
Can help you assess your situation to determine the type and amount of coverage you need.
Can offer overall advice regarding life insurance and annuities.
Depending on their expertise, may offer higher coverage levels and stronger features outside of your typical policy.
If you’ve smoked tobacco in the last 12 months, most insurers will classify you as a smoker. Some insurers are more lenient, and will allow a celebratory cigar once a month without assigning you a smoking status.
Your insurer is legally required to give you a grace period to make up the payment. It typically lasts 28 to 31 days, and your policy stays in force. If you fail to make a payment during the grace period, your insurer will cancel your coverage.
Agents are typically tied to one or more life insurance companies. They have expert knowledge of those insurers’ products, and can help you to complete your application. On the other hand, a broker works for you. They assess your situation and find the best possible policy for your needs.
While group life insurance is a solid employee benefit, it’s often capped at small amounts, like $100,000 — and this may leave you underinsured. Group policies aren’t portable either, which means you’ll lose your coverage if you change jobs.
As a stay-at-home parent, you probably do a lot of unpaid labor, like cooking, cleaning and chauffeuring the kids around. If you die, a life insurance policy can help your family hire someone else to take over those tasks.
It depends. If you have co-signed student loans, a mortgage or other debts that aren’t dissolved after you die, a life insurance policy can pay those outstanding balances. That way, your loved ones won’t be saddled with your debt if you die prematurely. It’s also a good idea to buy a policy if you want to cover the costs of your own funeral.
When the policyholder dies, it’s up to you to file a claim. You’ll need to fill out a claim form and submit a certified copy of the death certificate and any other supporting information to the insurance company. The insurer will then review the claim and pay out the policy once it’s approved.
Katia Iervasi is a writer from sunny Sydney, Australia. Her writing — and curiosity — has taken her around the world, and she now calls chaotic, creative New York home. With a journalistic eye for detail, she navigates insurance, mortgages and finance for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).
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