What Does Life Insurance Cover?
A life insurance policy is an agreement between an insurance company and a policyholder whereby the insurer agrees to pay a certain amount to one or more designated beneficiaries upon the policyholder’s death in exchange for premiums paid during the policyholder’s lifetime. The top life insurance providers have strong financial positions, little complaints from clients, high client happiness, a variety of policy options, riders that are included and accessible, and simple application processes.
Important lessons learned
A life insurance policy is a legally-binding agreement that guarantees the policyholder a death benefit in the event of the covered person’s passing.
The policyholder of a life insurance policy must pay an initial premium and/or ongoing premiums in order for the policy to stay in effect.
The face value of the policy, or death benefit, will be paid to the designated beneficiaries upon the insured person’s passing.
Policies for term life insurance expire after a predetermined number of years. Until the insured individual passes away, ceases making premium payments, or surrenders the policy, permanent life insurance plans are still in effect.
The quality of a life insurance policy is contingent upon the financial stability of the issuing life insurance company. If the issuer is unable to make payments, state guaranty funds may.
Life Assurance
Life Insurance Types
There are numerous varieties of life insurance available to suit a wide range of requirements and tastes. The decision of whether to choose permanent or temporary life insurance is a crucial one that must be carefully considered based on the individual seeking coverage’s short- or long-term needs.
Term life insurance
Term life insurance is intended to expire after a predetermined number of years. When you purchase the policy, you select the term. Terms like 10, 20, or 30 years are typical. The greatest term life insurance plans strike a balance between cost and stability of the policy throughout time.
Term life insurance that is renewable and has coverage that decreases at a specified pace during the course of the policy is known as decreasing term life insurance.
Policyholders can convert a term policy into permanent insurance with convertible term life insurance.
A quote for the year the policy is bought is provided by renewable term life insurance. Term insurance that is initially the least expensive frequently has annual premium increases.
Once the term is finished, you can renew the contract with many term life insurance policies annually. This is one method of extending your life insurance policy, but each year the renewal costs might increase significantly because they are dependent on your current age. Converting your term life insurance policy to a permanent policy is a preferable option if you want permanent coverage. If this is crucial to you, look for a convertible term policy as not all term life policies offer this choice.
Life Insurance that never expires
Although permanent life insurance is more costly than term life insurance, it remains in effect for the entirety of the policyholder’s life unless they cease making premium payments or cancel the policy. Certain policies permit automatic premium loans in the event that a premium payment is past due.23
One kind of permanent life insurance is whole life insurance, which covers you for the duration of your life. It has a feature called cash value, which functions similarly to a savings account. The policyholder of cash-value life insurance can use the cash value for a variety of things, including loans and policy premium payments.
Another kind of permanent life insurance that has an interest-bearing cash value component is universal life (UL) insurance. The premiums for Universal Life are adjustable. The premiums can be structured with a level death benefit or an escalating death benefit, unlike term and whole life, and they can be changed over time.
One kind of universal life insurance that allows the policyholder to earn a fixed or equity-indexed rate of return on the cash value component is called index-indexed universal life (IUL).
The cash value of a variable universal life (VUL) policy can be invested by the policyholder in a different account that is readily available. It can be constructed with a level death benefit or an escalating death benefit, and it also offers adjustable premiums.
Top-Rated Businesses for Comparison
Some of the top life insurance providers on our list are included below, so you may wish to start your insurance search with them.
Policies Available for Company AM Best Rating, Coverage Capacity, and Maximum Issue Age
Compare quotes for the best overall nationwide rate on BestMoney ~A+ ~Over $5 million ~85 ~Term, entire, UL, IUL, VUL, and ultimate expense
Comparing quotes for “protective best for term” on BestMoney ~A+ ~over $5 million ~85 Term, entire, UL, IUL, and VUL
Compare quotes for MassMutual’s Best Convertible Term Life on BestMoney ~A++ ~Over $5 million ~90 Term, entire, UL, and VUL
Best-of-Premium Term Mutual of Omaha Compare Quotes on BestMoney A+ Over $5 million 85 Term, UL, IUL, ultimate expense
Compare quotes from Guardian Great Traditional Insurer on BestMoney ~A++ ~Over $5 million ~90 Term, full, UL, and VUL
Compare quotes from USAA Best for Military on BestMoney ~A++ ~Over $5 million ~85 Term, entire, UL
Compare quotes for New York Life Best Whole Life on BestMoney ~A++ ~Over $5 million ~90 Term, whole, UL, VUL
Permanent vs. Term Life Insurance
Although term life insurance and permanent life insurance are different in a few key areas, term life insurance typically best suits the needs of most consumers seeking reasonably priced life insurance. Term life insurance has a limited lifespan and provides a death benefit in the event that the policyholder passes away before the term expires. In contrast, permanent life insurance remains in force as long as the policyholder continues to make premium payments. Another important distinction is premiums; since term life does not require the development of a financial value, it is typically far less costly than permanent life.
Prior to submitting an application for life insurance, you should assess your financial status and calculate the amount needed to cover the need for which you are getting a policy or to maintain your beneficiaries’ standard of living. Think about how long you’ll need coverage as well.
For instance, you would want enough insurance to cover your custodial responsibilities until your children are grown and able to support themselves if you are the primary caregiver and have children who are 2 and 4 years old.
You may look at the price of employing commercial child care and cleaning services, or hiring a nanny and housekeeper, and then add extra cash for schooling. When calculating life insurance, don’t forget to account for your spouse’s outstanding mortgage and retirement expenses, particularly if they are a stay-at-home parent or earn much less. The death benefit you might want to purchase, if you can afford it, is equal to the sum of these costs over the course of the following 16 or so years plus an additional amount for inflation.
A kind of permanent life insurance with a minimal death payout is burial or final expense insurance. It is the recipients’ choice how to use the death benefit, regardless of the names.
What Determines the Costs and Premiums of Your Life Insurance?
The price of life insurance premiums might vary depending on a number of factors. You might not be able to control some factors, but you can control other requirements to perhaps reduce the cost before—or even after—applying. The wisest course of action is often to purchase life insurance as soon as you need it, as your age and health are the primary determinants of cost.
You can ask to be evaluated for a change in risk class after being approved for an insurance policy, provided that your health has improved and you’ve made beneficial lifestyle adjustments. Your rates will remain the same even if it turns out that your health has deteriorated since the original underwriting. Your premiums may go down if it is determined that you are in better health. Additionally, you might be able to purchase more coverage for less money than you paid for it first.
Factors Influencing the Costs and Premiums of Life Insurance
A Guide to Purchasing Life Insurance
First, ascertain the amount you require.
Consider the costs that would need to be paid in the event of your passing. Think about bills such as mortgages, school loans, and other obligations, in addition to burial costs. Furthermore, if your partner or other loved ones require cash flow and are unable to offer it on their own, income replacement plays a significant role.
To determine the lump payment that can cover all prospective charges, there are useful tools available online.
Step 2: Get Your Application Ready
Applications for life insurance typically call for beneficiary information as well as personal and family medical history. You can be required to have a medical examination and provide information about any prior medical issues, moving infractions, DUIs, and risky hobbies like skydiving or motor racing. The majority of life insurance applications require the following essential components:
Age: The largest indicator of risk for the insurance firm is life expectancy, making it the most significant element.
Gender: Women often pay lesser rates than men of the same age since they live longer on average.
Smoking: Smokers are more likely to have a variety of health problems that could shorten their lives and raise their risk-based insurance rates.
Health: Screening for diseases such as cancer, diabetes, and heart disease as well as associated medical metrics that may suggest risk is part of medical checkups for the majority of policies.
Lifestyle: Risky lives can result in significantly higher premium costs.
Family medical history: You are far more likely to develop certain disorders if there is proof of a serious illness in your immediate family.
Driving record: An insurance premium might go up significantly if there is a history of moving offenses or drunk driving.
Before a policy is created, standard types of identification like your driver’s license, Social Security card, or U.S. passport will also be required.
Step 3: Evaluate Insurance Quotes
Once you’ve gathered all the information you’ll need, you can use your research to obtain several life insurance quotes from various companies. It’s vital to put in the effort to locate the greatest possible mix of policy, company rating, and premium cost because prices might vary significantly between companies. Finding the greatest life insurance coverage for your circumstances might save you a significant amount of money, as premiums are something you will probably pay every month for decades.
We can help you expedite your investigation with our list of top life insurance providers. It is a list of the businesses that, in our investigation of about 100 carriers, we have determined to be the finest for various needs.
Life Insurance Benefits
The advantages of owning life insurance are numerous. The most significant benefits and features provided by life insurance policies are listed below.
The main purpose of life insurance is to compensate beneficiaries who might face financial difficulties in the event of the insured’s death. The tax benefits of life insurance, such as the tax-deferred growth of capital value, tax-free dividends, and tax-free death payouts, might, nonetheless, provide affluent people extra tactical options.
Steer clear of taxes
Although the death benefit of a life insurance policy is typically tax-free, rich people occasionally purchase permanent life insurance through a trust since it may be liable to inheritance taxes. By preserving the estate’s value for their heirs, the trust helps them avoid paying estate taxes.
Tax evasion is illegal; tax avoidance, on the other hand, is a law-abiding method to minimize one’s tax liability.
Who Requires Life Insurance?
After an insured policyholder passes away, life insurance helps surviving dependents or other beneficiaries financially. These are a few instances of individuals who might require life insurance:
parents of small children. Financial hardship may arise from the loss of a parent’s income or ability to provide care. Life insurance can guarantee that the children will have access to the necessary funds until they are able to support themselves.
parents whose grownup children have special needs. Life insurance helps ensure that a child’s requirements are taken care of after their parents die away if they are dependent on care for the rest of their lives and will never be independent. A fiduciary will oversee a special needs trust for the benefit of the adult child, and the death benefit may be used to support it.5
adults who jointly own real estate. Whether you’re married or not, purchasing life insurance could be wise if the passing of one adult would leave the other unable to pay for the property’s taxes, maintenance, and loan payments. An engaged couple purchasing their first home together through a shared mortgage would be one example.
Seniors who wish to leave money to their care-giving adult children. Many adult children give up job hours to take care of a needy aging parent. Direct financial support may also be a part of this assistance. When a parent dies, life insurance can assist in covering the adult child’s expenses.
Young adults whose parents cosigned a loan for them or took on private student loan debt. Although life insurance is rarely necessary for young adults without dependents, a kid may wish to get enough life insurance to cover any debt their parent may leave behind.
Young people or children who wish to lock in discounted pricing. Your insurance premiums will be cheaper the younger and healthier you are. If a twentysomething adult expects to have children in the future, they may purchase insurance even though they are single.
spouses who stay at home. Life insurance is a good idea for spouses who stay at home because of their substantial economic worth from their domestic job. Salary.com estimates that in 2018, the economic value of a stay-at-home parent would have been $162,581 per year.
Rich families who anticipate having to pay estate taxes. Life insurance can supply the money needed to pay taxes and preserve the estate’s entire value.
families unable to pay for funeral costs and burial. Money to commemorate a loved one’s demise might be obtained through a modest life insurance policy.
companies that employ important personnel. If the passing of a vital employee—such as the CEO—would put the company in serious financial jeopardy, the company might have an insurable interest that would enable it to buy the employee’s life insurance.
retired couples. Pensioners have the option to take their entire pension and utilize a portion of the funds to get life insurance for their spouse, rather than having to choose between a payout that provides a spousal benefit and one that does not. Pension maximization is the term for this tactic.
those who already have medical issues. like smoking, diabetes, or cancer. But be aware that certain insurers might refuse to cover these people or might demand exorbitant premiums.
For the insured and the insurer, every policy is different. It’s critical to read your policy documentation to find out what risks are covered, how much your beneficiaries will receive, and when.
Pre-purchasing actions for life insurance
Examine company reviews and research policy options.
Given that life insurance plans are a significant financial commitment and expenditure, and because your heirs could not get a death benefit for many decades, it’s imperative that you conduct adequate due research to ensure the firm you choose has a strong track record and strong finances. Investopedia has ranked the top businesses in several categories after evaluating scores of companies that provide all kinds of insurance.
Think About How Much You Need in a Death Benefit
If you die while the policy is still in effect, life insurance can be a wise financial tool to protect your loved ones and help you hedge your bets. There are, however, some circumstances where it makes less sense, such as when you overbuy or insure individuals whose income doesn’t need to be replaced. Thus, it’s crucial to take the following into account.
What costs would not be covered in your absence? Perhaps it’s not necessary if you and your spouse are childless and your spouse earns a large salary. It is still important to think about how your death would affect your spouse and how much money they would need to grieve without having to worry about going back to work before they are ready. Nonetheless, both spouses might require separate life insurance coverage if their income is required to support a preferred lifestyle or pay obligations.
Understand Why You’re Purchasing Life Insurance
When purchasing a life insurance policy for a family member, it’s crucial to inquire about the purpose of the policy. Elderly people and children don’t actually have any significant income to replace, but in the event of their passing, burial costs might need to be paid. A parent may choose to purchase a moderate-sized policy for their child when they are young in order to safeguard their future insurability in addition to paying for funeral costs. By doing this, the parent may guarantee that their offspring will be able to support their future family financially. Only 25% of the current policy amount on the parents’ own lives may be invested in life insurance for their offspring.
Is it possible to make a higher long-term return on investments with the money paid in premiums for permanent insurance during the course of a policy? Consistent saving and investing, such as self-insurance, may make more sense as a buffer against uncertainty in some situations, such as when a sizable income does not need to be replaced or when policy investment returns on cash value are unduly conservative.
The Operation of Life Insurance
The death benefit and the premium are the two primary parts of a life insurance policy. These are the two components of term life insurance; however, policies for whole or permanent life also include a cash value component.
- Death benefit. The amount of money the insurance company promises to the beneficiaries listed in the policy upon the insured’s death is known as the death benefit or face value. For example, a parent may be the insured and their children the beneficiaries. Based on the projected future needs of the beneficiaries, the insured will select the desired death benefit amount. Based on the insurance company’s underwriting standards on age, health, and any hazardous activities in which the proposed insured participates, the insurance company will decide if there is an insurable interest and whether the proposed insured qualifies for the coverage.6
- Superior. The money the policyholder pays for insurance is known as the premium. If the policyholder pays the required premiums, the insurer will have to pay the death benefit upon the insured’s death. The premiums are decided in part by the likelihood that the insurer will have to pay the death benefit under the policy, which is based on the insured’s life expectancy. The insured’s age, gender, medical history, occupation, and high-risk hobbies are among the factors that affect life expectancy.6 A portion of the payment also covers the insurance company’s running costs. insurance with higher death benefits, higher risk individuals, and permanent insurance with cash value accumulation have higher premiums.
- Value in cash. Permanent life insurance has two uses for its financial value. The policyholder may utilize it as a savings account for the insured’s whole life, with the money building up tax-deferred. Withdrawal limits vary among policies based on the intended use of the funds. For instance, the policyholder might borrow money against the cash value of the policy and be required to pay interest on the principal amount borrowed. In addition, the policyholder may utilize the cash value to cover other costs or buy more insurance. When the insured person passes away, the insurance company keeps the monetary value as a living benefit. Remaining loans against the cash value will lower the death benefit under the policy.
In most cases, the insured and the policy owner are the same, but occasionally they might not be. For instance, a company may purchase key person insurance for a vital employee, like the CEO, or an insured individual may sell their own policy to a third party in exchange for money in a life settlement.
Riders on Life Insurance and Policy Modifications
Policyholders can tailor their policies to meet their needs by choosing from a variety of options offered by insurance firms. The most popular method for policyholders to alter or amend their plans is through riders. There are lots of riders, but the supplier determines what is available. The policyholder usually has to pay an extra premium for every rider or a cost to use the rider; however, some policies include select riders as part of the regular premium.
In the unlikely event that the insured passes away accidently, the accidental death benefit rider offers further life insurance coverage.
In the event that the insured becomes incapacitated and unable to work, the waiver of premium rider releases the policyholder from paying premiums.
In the event that a major illness or accident prevents the policyholder from working for several months or longer, the disability income rider provides a monthly income.
The accelerated death benefit rider enables the insured to receive all or a portion of the death benefit upon diagnosis of a terminal disease.
An accelerated death benefit known as a long-term care rider can be used to cover the cost of assisted living, nursing homes, or in-home care when the insured needs assistance with daily living activities like eating, cleaning, or taking a shower.
With a guaranteed insurability rider, the policyholder can get more insurance down the road without having to undergo a medical examination.
Borrowing Money. The majority of permanent life insurance policies build up cash value that the policyholder can use as collateral. In a technical sense, you are taking out a loan from the insurance provider and pledging your financial value as security. The policyholder’s credit score is not taken into consideration, in contrast to other loan kinds. The policyholder’s cash value account retains the loan interest, and the repayment terms are negotiable. However, if you don’t repay policy loans, the policy’s death benefit may be reduced.
Paying for Retirement. An investment component or cash value policy might serve as a source of retirement income. Only those who have exhausted all other tax-advantaged savings and investing options may find this plan worthwhile because to its potential for high costs and reduced death benefit. Another method life insurance can help finance retirement is through the pension maximizing strategy already mentioned.
It’s a good idea to review your life insurance requirements every year or following major life events like marriage, divorce, having a kid or adopting one, or making a large purchase like a home. It might be necessary for you to modify the beneficiaries listed in the insurance, add more coverage, or even take less coverage.
How to Be Eligible for Life Insurance
Every application for life insurance is assessed individually by insurers, and with hundreds of providers, practically everyone can find a reasonably priced plan that at least partially satisfies their criteria. According to the Insurance Information Institute, there were 841 life insurance and annuity businesses in the US in 2018.7
In addition, a lot of life insurance providers offer a wide range of policy sizes and forms, and others focus on fulfilling particular needs, such policies for clients with long-term medical issues. Brokers that specialize in life insurance and are familiar with the offerings of various firms also exist. Candidates can locate the insurance they require by working for free with a broker. This means that if one looks hard enough and is prepared to pay a high enough premium or accept a death benefit that may not be perfect, practically anyone may obtain some kind of life insurance policy.
Because the insurance market is larger than most customers assume, obtaining life insurance may be feasible and reasonable even if prior applications were turned down or quotes were too high. Insurance is not only for the well-off and healthy.
It is generally easier to qualify for life insurance if you are younger and in better health than if you are older and in worse health. Certain lifestyle decisions, like smoking or participating in risky activities like skydiving, might also make it more difficult to qualify for certain programs or result in higher rates.
Who Requires Life Insurance?
If you must provide security for your spouse, kids, or other family members in the event of your death, you should get life insurance. Depending on the policy amount, life insurance death payments might assist beneficiaries with mortgage repayment, education expenses, or retirement savings. A cash value component that increases over time is another element of permanent life insurance.
What Determines Your Premiums for Life Insurance?
Age (lower cost of life insurance)
Gender (females are typically less costly)
Smoking (because it raises insurance costs)
Health (a bad health record might increase premiums)
Lifestyle (risky pursuits may result in higher premiums)
Family medical history (long-term disease in a family may result in premium increases)
Driving history (lower premiums for good drivers)
What Advantages Do Life Insurance Offer?
Withdrawals are tax-free. Because life insurance death payments are not regarded as income for beneficiaries, they are paid as a lump sum and are not taxable by the federal government.
Dependents are not responsible for living expenditures. The majority of policy calculators suggest multiplying your gross income by seven or ten years, which should be sufficient to pay for important expenses like college tuition and a mortgage, without requiring the surviving spouse or children to take out loans.
Final costs are able to be paid for. Term or permanent life insurance plans, as well as burial policies, can help prevent the high cost of funerals.
Retirement savings can be enhanced by policies. In addition to death benefits, permanent life insurance policies including whole, universal, and variable life insurance can also provide cash value, which can supplement other retirement investments.
How Do You Get Life Insurance Eligibility?
You have to fill out an application in order to be eligible for life insurance. But practically everyone can purchase life insurance. However, depending on your age, health, and lifestyle, the price or premium amount may differ significantly. Certain life insurance policies don’t need medical information, but they usually have far higher premiums and need a waiting period before the death benefit becomes payable.
How Do You Get Life Insurance?
The way life insurance operates is that premiums are paid in exchange for a death benefit. Term life insurance is a common kind of life insurance that has a finite duration, such 10 or 20 years. In addition to having a death benefit, permanent life insurance also lasts for the policyholder’s lifetime as long as payments are paid.