The bottom line:
What is life insurance?
Life insurance is meant to help your loved ones have enough money when you die. You pay premiums and, in return, your loved ones receive a benefit when your life ends. That death benefit can help replace your income, pay the mortgage or finance education. It can help make sure your family doesn’t lose the life you’ve built with them.
Life insurance fits alongside health, long-term care and disability insurance. Together, these protections help reduce the financial burden of injury, illness and death.
Why do people buy life insurance?
Per LIMRA, the most common reasons Americans buy life insurance are to pay for funeral expenses, replace lost income and transfer wealth. Maybe one of those categories fits why you’re looking to buy life insurance. No matter the reason, it’s good to start by understanding the fundamentals of how life insurance works and how it protects your family.
When you sign up for life insurance, you
It’s pretty common in the U.S. to have life insurance. About half of Americans reported having it in the
People commonly buy life insurance to:
Transfer the risk of financial loss
Like many financial products, life insurance is about helping hedge risk. There’s a risk that an accident, disease or injury could end your life unexpectedly. It’s important to consider who would suffer if that happens. What would replace your lost income? Would your family have enough money to thrive?
For some people, there would be enough money in the bank to provide for loved ones. For others, there wouldn’t be nearly enough cash to make up for years of lost income or other support. With life insurance, your insurer agrees to help your family support financial losses.
Protect family members who depend on them for income
The main purpose of life insurance is to provide a death benefit to loved ones. When you die, your income goes away. But your family’s financial needs remain. Life insurance helps protect the people who depend on you financially by providing a death benefit. As long as you make premium payments and your contract retains value while you were alive, your beneficiaries will get a payout when you die.
Life insurance payouts can be used to help cover ongoing expenses such as:
- Mortgage payments
- Living expenses
- Credit card bills
Pay for funeral expenses and after-death expenses
Another big reason Americans buy life insurance is to pay for a funeral. Funeral costs can add up quickly. The median cost of a traditional funeral was $7,848 in 2021,
A death benefit can be used to help cover after-death expenses such as:
- Funeral expenses
- Charitable contribution or memorial fund
- Time away from work to grieve
How to choose a life insurance policy
Look for a policy from a reputable organization that can help you reach your goals. Life insurance is a mid- to long-term commitment. So you'll want to consider an organization that should be steadfast through the life of your contract. If it’s important to you, you may also choose an organization that aligns with your values.
No matter who you buy life insurance from, you’ll want to make sure that you have the right amount of coverage for the right length of time. The death benefit you select should cover the needs of your dependents. Not sure how much they might need? We have you covered with a calculator below. You’ll also want to remember that life insurance is customized. So age, gender, profession, number of dependents, health, hobbies and more will influence what's available to you and how much it costs.
5 steps for choosing a life insurance policy
1. Calculate how much coverage you’ll need—get a picture of how much life insurance to consider buying with a
2. Evaluate your options—did you know there are multiple types of life insurance? Choose between term or permanent coverage.
3. Talk with your family or spouse—if you want tips for starting a
4. Comparison shop and pick a policy—it can sometimes be difficult to see differences in price, quality and reputation as you comparison shop. Enlist the help of a financial advisor if you could benefit from help understanding the options.
5. Put a yearly protection checkup on your calendar—make an audit of your insurance policies part of your year-end financial review. Add it to your calendar to help you remember.
Types of life insurance
There are two main types of life insurance: term and permanent. The main differences between them are cost, length of contract and extra features like cash value. A third type of life insurance called “blended” combines the two types of policies.
Term life insurance
Term life insurance is also known as "pure life insurance" because its sole purpose is to provide a death benefit to your dependents when you die.
Permanent life insurance
As long as premiums are paid and the contract retains its value,
High-income earners often use a permanent policy when putting together a complex end-of-life financial strategy. Adults with someone who will always be financially dependent on them, like a child with special needs, also find this policy useful. If you're worried about the ability to get insurance later on, permanent coverage may be a good option.
Most common types of permanent life insurance:
1. Whole life insurance
Whole life insurance is the most common type of permanent life insurance,
2. Universal life insurance
Note that reducing your contributions can decrease the cash value of your life insurance. It can also reduce the death benefit available to your beneficiaries. It may also make it take longer to meet your life insurance contract goals. So be mindful when slowing down contributions. And talk with a financial professional before altering planned contributions.
Furthermore, your life insurance contract can become a
3. Variable universal life insurance
Note that using premium payment flexibility to reduce your contributions can decrease the cash value of your life insurance (like with universal life insurance). It can also reduce the death benefit available to your beneficiaries. Reducing premium payments may also make it take longer to meet your life insurance contract goals. So be mindful when slowing down contributions. And talk with a financial advisor before altering planned contributions.
Furthermore, your life insurance contract can become a modified endowment contract (MEC) if you make large, additional premium payments. Having a MEC affects how you are taxed. Note that there are limits to how much you can pay into your life insurance contract.
4. Blended life insurance
This type of policy combines the benefits of term and permanent life insurance. At the start of the coverage period, it provides benefits similar to term coverage. It can help cover things like college, a mortgage and funeral expenses if you pass away. Then, later on, this type of policy starts to act more like whole life insurance. Cash value that you can access while you’re alive becomes available.
Do you need more life insurance if you have some through work?
If you have life insurance through work, it may not be enough, depending on your life stage. Your employer may not provide enough coverage to replace your lost income over a multi-year period, in addition to other family needs. Use this
How much does life insurance cost?
Unfortunately, there isn’t a one-size-fits-all answer to the question of what life insurance costs. A process called underwriting will determine your insurability. Your age, sex, profession, number of dependents, health, hobbies and more can all influence how much you pay.
The good news is that life insurance may cost less than you think.
Life insurance prices are determined by factors such as:
- Type of coverage—term life insurance is generally more affordable than permanent coverage. That’s because it’s for a set period of time versus your whole life. It also lacks cash value.
- Size of death benefit—large death benefits typically cost more than small death benefits. If you want a bigger payout when you die, then you’ll probably have to pay more.
- Your gender—men may pay slightly more than women for a similar life insurance policy. That’s because the average life expectancy of a man is shorter than that of a woman. (
According to a 2021 report from the U.S. Centers,men live to age 77.8 on average and women live to age 80.5 on average.)
- Age, health and hobbies—the younger and healthier you are, the less you can usually expect to pay. While the more dangerous your job or hobbies are, the more you can expect to pay.
When buying a
Connect with a financial advisor to get a cost estimate for life insurance, after finishing your initial research online. They can assist with comparing costs and value across insurers. You also have the option to use an online cost comparison tool. In the end, you're looking for a quality policy at an affordable rate.
How can you get the most affordable rate on life insurance?
The time to think about getting an affordable rate on life insurance is before signing up. Prices are customized by many factors including age, gender, profession, number of dependents, health, hobbies and whether your parents or siblings have a history of serious medical conditions. You can’t influence all of these, but there are a few things you can pay attention to. If you already bought a policy, it may still be possible to reduce premiums by reducing your death benefit.
Buy early, if it makes sense
Generally, the younger and healthier you are, the less money you pay for life insurance. As you grow older, the potential risk your life insurance provider takes on can grow in size. So you might see costs go up with age and worsening health. For many policies, you can "lock-in" a rate when you buy. So buying young for a policy that lasts 30 years, for example, may add up to a lot of savings long term.
Review essential expenses
Your current income and lifestyle impact your estimated life insurance needs. If you have a mortgage and pay for childcare—you may need more life insurance than someone with grown children who has paid off their home. The more bills you have each month, the more coverage you typically need to help your family maintain their current lifestyle when you are gone.
Be prepared for your medical exam
If your policy requires a medical exam, be sure to get a good night of sleep before your appointment. Take your medicines as prescribed and follow your doctor’s instructions about fasting before bloodwork, caffeine intake and foods or activities that might cause inaccurate lab results.
And quit using tobacco. Tobacco users generally pay more.
The type of policy you choose and the organization you choose to buy it from will have can have a big impact on how much you pay. There are hundreds of organizations in the U.S. that offer life insurance. By comparing differences in price, quality and reputation—you're more likely to save in the long term. Instead, buy a quality policy at an affordable price.
Reduce your death benefit
If you’re struggling to pay the premiums on a policy you already have, consider reducing your death benefit. It's important to choose a premium (and its corresponding death benefit) that’s affordable from the start. But if life changes and you need to pay less, ask your insurer if they’ll let you reduce the death benefit.
When should you think about buying life insurance?
If you have people who depend on you, then life insurance is worth considering. Here are some common times and life events to buy life insurance:
- Early in life—lock in potentially lower premiums while you’re young.
- Getting married or having a child—these milestones often mean your financial responsibilities have grown to include others. If you support a child or partner, then life insurance can help protect your family’s future income.
- Change in employment—many people have life insurance through their employer. So if you lose a job, you may lose your life insurance as well. Coverage levels can vary from job to job. As you start a new one, it’s important to make sure you have enough protection.
- Supporting a parent—if you already have life insurance, check your coverage level. You may need more to match your shifting responsibilities.
- Divorce or single parenting—money can be tight when supporting a family alone. If any room can be made in the monthly budget for the basic protections of a term life policy, it’s a worthwhile safety net to consider having for your family.
- Later in life—leave a planned gift to support a cause that matters to you.
- Annual financial review—if you haven’t already, add life insurance to your list of policies to reexamine yearly—alongside your car and health insurance. You can meet with a financial professional to audit your life insurance policy. Ask questions like: Is my coverage level still appropriate? What does my current policy allow?
How do life insurance payouts work?
When life insurance pays out, the
If you had permanent life insurance, the size of the death benefit could be reduced by any
It's also good to remember that death benefits are usually received
Connect with a professional
Ready to learn more about your coverage needs? Connect with a