Life insurance is something that everyone should consider purchasing at some point in their lives. The earlier a policyholder can start their cover, the better the cover will be!
Life insurance is a type of financial protection that reaps many significant rewards in the otherwise awful situation of coping with a loved one's death.
In the case of death, a solid life insurance policy will provide a monetary sum - or a “death benefit” - to the policyholder’s beneficiary or chosen family member.
This will guarantee financial security for the future. There are several types of life insurance policies available that can also be used to cover major expenses including debts, funeral costs, and even medical bills.
But there’s a lot more to life insurance than this. There are lots of things to consider when it comes to getting a life insurance policy.
This life insurance 101 ultimate guide will give you all the necessary information about the basics of life insurance; specifically, how it works, the types of coverage available, why you need it, and how to go about choosing a plan that’s right for you.
How to Buy Life Insurance
- Determine your needs
- Comparison shop for life insurance (we recommended using Policygenius)
- Review ratings and reviews of provider
- Choose the right life insurance policy
- Read your policy guidelines
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What is Life Insurance & How Does It Work?
Life insurance is a contract that you enter into with an insurance company to provide you with adequate and relevant coverage, based upon your payment of all premiums.
It works by providing a death benefit to your specified beneficiary, usually either a trusted person, charity, trust, or business, in the circumstances of your death.
After you have passed away, your beneficiary will file a claim with the insurance company so they can submit proof of your passing such as a death certificate.
They can directly contact the insurance company to speak to a claims representative who will instruct them on their next steps, guiding them through the process as they move forward.
However, if there is a licensed and trusted insurance agent working with the family, they can be contacted and drafted in to help complete all the necessary paperwork if your beneficiary is struggling.
Once all of the relevant paperwork has been obtained and completed, the beneficiary will then receive the payout of death benefits. The life insurance payout works slightly differently if the beneficiary is a child.
In this case, a custodian of the policy will need to file the claim. This individual could be someone that you have named to manage all of the finances of the situation in case you passed away while the child is still a legal minor.
In the rare circumstance where you do not name anyone as a beneficiary, the court will appoint someone.
3 Main Types of Life Insurance
When considering getting life insurance, there are 3 different types of life insurance that you can choose. Below I will provide a quick summary of each of them to help you make the best decision for your current situation.
Whole Life (or Permanent)
Often called permanent life insurance, whole life insurance will pay out a death benefit after you pass away — even if you manage to live to be 100 years old!
In traditional whole life insurance, the premium is fixed so you pay the same rate throughout the entire duration of the policy. This means that the overall cost per $1,000 of benefit will see an increase as the insured person goes through their life.
It will then grow to be quite a high number if the insured individual lives to be 80 years old and above. The insurance company could choose to charge a premium with an annual increase, but that would make it difficult for the majority of individuals to be able to afford life insurance at an advanced age.
An insurance company can keep the premium level by charging a rate that is, in the early years, much higher than what is fully needed to pay claims, investing that money, and then using it to supplement the level premium to help pay the cost of life insurance for older people.
Term life insurance is pretty self-explanatory. It covers you for a specific period or term and grants temporary financial protection. At the end of this period, your level, fixed, and the affordable premium is over and so ends your coverage.
In even simpler terms, this type of insurance pays a “death benefit” to your selected beneficiary only if you pass away during the active term of a policy - anywhere from one to 30 years.
This applies up until the age of 95. If you die after the term period, your beneficiary will not receive any death benefits. In most cases at the end of the term, the life insurance company will allow you to continue the same coverage but at a greatly increased cost.
Unlike whole life, term insurance has no cash value or savings component. It is pure insurance offered for a period at an affordable price which makes it a very popular option for those who need a particular amount of coverage to replace their income if they die.
This is a new kind of insurance policy that is a form of joint life insurance. These types of policies cover multiple people under one policy, paying out a benefit only when both policyholders have passed away.
Generally speaking, survivorship policies are always expensive. This is because insurance companies must plan to payout for two individual permanent policies instead of one.
Second-to-die policies may be more affordable than first-to-die policies, but, as with any life insurance, the actual policy cost varies on several factors, including age, health, lifestyle, type of insurance, and the insurance provider.
The beneficiaries of this type of insurance policy don't have to be the couple's children or relatives. This policy type can also be used to simplify the transfer of assets to a non-relative, such as a friend or business associate.
For that matter, the beneficiary doesn't even have to be a person – the payout can be used to leave a legacy for a favorite charity or religious organization or as funding for a family trust.
That's why these types of policies are often used for estate planning strategies.
Term Insurance vs. Whole Life Insurance
These are two of the oldest and most popular varieties of life insurance available today. Term insurance only lasts for a set number of years. After this period, it expires - and doesn’t accrue additional cash value.
It also cannot be used as a tax-planning or wealth-building strategy. However, it is much easier to understand than permanent policies and is usually also a much more budget-friendly form of life insurance.
Whole life insurance is a type of permanent life insurance that will last you throughout your life, provided you can pay all of the policy's premiums.
You pay the same monthly rate throughout the policy which puts you in a better financial position than a short-term policy. It also accumulates some cash value that can then be withdrawn or borrowed while you are still alive.
Some key points to remember are:
- The Length of the Policy: Term coverage protects you only for a limited number of years, while whole life insurance can provide lifelong protection if you make sure to pay all your fees.
- Cash Value: Whole-life premiums can be more costly. They are often five to 15 times more expensive than simple term policies with the same type of death benefit. This means whole life premiums are not the greatest option for the budget-conscious consumer.
- Premium: All death benefits from either of these policy types are granted income-tax-free. The cash value inside of whole life insurance tends to receive favorable tax treatment when compared to term insurance.
How Are Life Insurance Policies Issued?
Policies are usually split into the following categories: fully underwritten, simplified issue, or guaranteed issue. Fully underwritten policies require you to take a medical exam and also complete specific lab work to set it up.
If your results indicate that you’re in good health, you’re very likely to get a lower rate premium - after you have been put into a specific category.
If you opt for simplified issue insurance you can be approved after answering a handful of simple health questions. require you to simply answer some health-based questions as you are completing your insurance application.
These are on the more expensive side as the insurance company doesn’t have much concrete proof regarding the overall state of your health.
These plans are primarily designed for older applicants or those with serious health problems who may not qualify for policies that require a medical exam.
Guaranteed issue insurance policies are geared toward individuals with health conditions that can prevent them from being able to obtain various forms of life insurance.
With this type of insurance, you are also granted the option to increase the payout amount later on in your life.
How Much Does Life Insurance Cost?
All insurance providers will have different monthly or annual costs because their policies are unique to their company. However, there are average figures.
The average cost of life insurance is around $27 to $30 per month for a 40-year-old individual purchasing a 20-year-long, $500,000 term life policy.
This is the most common term length and overall amount sold. Companies offering life insurance will generally use age as an immediate way of determining a premium.
These rates will then increase as you age because of a greater risk of health complications, and a decrease in your overall life expectancy.
What you do need to know is that life insurance rates can vary dramatically among insurers, policy types, and applicants. And the type of cover you are offered will depend entirely on several health and lifestyle factors.
7 Factors That Determine Your Insurance Premium
Below you will learn about the 7 key factors that will determine how much you will actually have to pay for your life insurance policy.
This has a lot to do with mortality. Women will usually get a lower overall premium rate because of a longer life expectancy across a wide range of age groups.
So, if you are a woman looking for life insurance, your premium will probably be much lower than a man in the same age group as you.
2. Health issues & history
The policy application features a whole range of questions about your current health and lifestyle. The application will ask for basic information such as your name, address, and employer.
It will also ask for the following personal information:
- Date of birth
- Particular lifestyle habits
- Health histories of your immediate family members
- Financial information, including your annual income and net worth
You must answer honestly as you risk having your life insurance claim denied if you falsify or don’t disclose relevant (and extremely vital) information.
You also risk your beneficiary’s claim to the death benefit being denied. Your answers will enable your insurance provider to determine the current state of your health - both physical and mental - to ensure you are completely covered in all situations.
This is why it’s crucial to make sure the questions you answer on your application are all correct.
3. Medical exam & lab work
Insurance companies will usually arrange for you to go through a series of medical tests and exams so that they can evaluate your current health situation.
This will be carried out by a licensed healthcare professional and will typically take place in a clinic chosen by the insurance company, an office, or even at your home.
Some of these medical tests and exams might include:
- Ask about your medical history
- Find out more information about the medical history of your immediate family
- Take your blood pressure
- Listen to your heartbeat
- Check your height and weight
- Draw a blood sample
- Get a urine sample
- Ask about lifestyle habits that could affect your health (e.g. exercise, smoking, or drinking)
Based on your medical test results insurance companies decide on the premium amount. If you are deemed to be medically fit then this will help to lower the premium amount that you must pay.
4. Family medical history
There isn’t much you can do about your genes, unfortunately. But you must learn your family medical history and note down any serious medical conditions such as cancer or a stroke.
You may be predisposed to these ailments, which will lead to a higher insurance rate. An insurance carrier will be interested to know of any conditions that your siblings or parents may have experienced during their lives, especially if they were a contributor responsible for premature death.
Some providers will put more emphasis on the health of your family than others but it will all have some sort of impact on your premium.
4. Marital status
Marriage is one of the qualifying life events that give you the chance to make amendments to your insurance plan. Or, you could simply add your spouse to your plan.
The majority of insurance companies will require these changes to be made within two months of your wedding. If you somehow miss this deadline, you will have to wait for the next open-enrollment period to come around before you can make changes to your plan.
Contacting insurance companies to amend a policy might not seem like the most romantic activity for a newlywed couple to enjoy. However, it could end up freeing some cash that can be used to pay off the honeymoon.
Statistics suggest that married couples file fewer claims and behave more cautiously than other groups of people. Because of this, lower insurance premiums may be offered by auto insurers and homeowners.
Your location plays a large role in determining your insurance premium rate. This is because regional mortality rates may be completely different depending on the area.
If this difference is large enough, it could even begin to impact the life insurance rates for that particular area. As a result, regional rates are reflected directly in the life cover premium.
If your residential area faces floods or tsunamis regularly or is in a high seismic zone, your life cover premium will likely be much higher!
Due to the adverse impacts that smoking has on your health, any insurance company will need to know if you smoke, how much, and how often.
This is because smokers are more prone to have a larger amount of ongoing issues with their health and a much shorter lifespan than a non-smoker, making them a bigger insurance risk.
As a result, life insurance for smokers comes with higher premiums. Top tip, don’t lie about it! If you’re planning to get life insurance, you should think about tracking each alcoholic drink that you have for a week or two so you have a realistic understanding of just how much you consume.
It can be quite simple to either over or underestimate how much you drink. Not being truthful - or providing an inaccurate report of your habits - could result in higher insurance premiums, or may even void your policy.
If you have any risky hobbies that put you at direct risk of obtaining a physical injury, you must inform your life insurance company!
Not every activity will increase your premium, so it’s always best to be upfront if you enjoy skydiving or horseback riding regularly - or whatever brings you joy. Your insurance company needs to have a full picture of your life.
When you need to disclose your profession, and you know your role comes with lots of risks, be truthful!
Why Do I Need Life Insurance?
Some individuals may not think that they will ever need to purchase a life insurance policy. If you think that you don't need one, then you might want to see all of the reasons why it may help you out in an emergency situation
Covering funeral expenses
The cost of living is not cheap by any means. But neither is the cost of dying. Over 80% of Americans get a life insurance policy just to cover funeral expenses.
Even the simplest funeral could cost thousands of dollars. As of 2021, the average cost of an adult funeral including viewing and a burial is $7,848, while the average cost for viewing and cremation is $6,970.
However, it’s important to note that these prices are subject to change depending on individual circumstances and inflation within the industry.
It’s always nice to know that you won’t be forgotten after you die. Having a solid life insurance policy is a great way of making sure that you leave a legacy for your family or loved ones, even if you aren’t there to lend a helping hand yourself.
With a life insurance policy in place, you can guarantee that your family’s financial needs are met after you die. It can ease the burden they may be forced to face when paying bills, removing debt, and also keeping a solid roof over their head.
Life insurance companies will only pay out after you have died. This means they will not provide an income for you if you were simply unable to make an income because of disability or illness.
If you were to die and leave behind your spouse and young children, it can be significantly more difficult to make ends meet without your earned income.
That’s where life insurance policy money comes in very handy. Leaving a significant life insurance policy will help your spouse to maintain the standard of living you had set for your children, which makes sure that they get the best life possible.
Life Insurance with Pre-Existing Health Issues
After reading the information in this article, you should now know about the relevance of being honest during your policy application so that the insurance provider can get a full sense of your physical fitness and overall health and wellbeing.
But if you have pre-existing health issues, the whole process of applying for life insurance can be daunting! Quite frankly, it might even feel like an impossible task.
Thankfully, there’s always a way around this situation if it occurs - and you can purchase life insurance even with a pre-existing condition.
Though this is great, your coverage will still be limited considerably more than that of a healthier individual. You might also have to pay a higher monthly premium.
In this case, you should take a careful look at the contract term, and what it covers, and then match it with your individual needs.
How to Evaluate Insurance Providers
Regardless of the policy that you get, you must make sure that you are purchasing coverage from an experienced insurer that is very financially strong.
One of the prime benefits of having life insurance is that it works to provide certainty and clarity for your loved ones in a world that is anything but.
When you begin the process of selecting a life insurance provider, there are a few things you must consider. These are:
The financial stability of the provider
You will want to feel comfortable knowing that your beneficiaries will receive the full payout upon your death. This is why it’s extremely important to look at the financial stability of the provider before you consider committing to a premium for a set period.
There are a couple of vital factors that will help you to determine the overall strength and stability of the insurance company's finances. These are:
- Net income: this is the total earnings of the company.
- Policyholder surplus: this is essentially a financial stepping stone that actively protects the policyholders of a company in the event of catastrophic or unexpected losses. It refers to the amount of money that remains after the liabilities are subtracted from an insurer’s assets.
- Combined ratio: this is calculated by adding the expense and loss ratio. It is used to examine whether the insurance company is earning more revenue from its customer’s premiums relative to all of the claims that it has to eventually payout.
The relevance of their offerings to you - business or personal insurance
Running a business isn’t always plain sailing, and there’s always lots at stake for any business owner in terms of financial security, livelihood, and even professional relationships.
By having a backup plan, you can safeguard the financial state of your business. This is why business life insurance comes in very handy to help you protect your assets.
There are many types of small business insurance available. Not only does a tailored policy offer financial certainty for the company in the case of your death or the development of a critical illness, but it can also cover employees so that they are protected in these circumstances, too.
With personal life insurance, you pay a monthly premium to your insurance company regardless of whether you need to use medical services that month.
This means that it’s important to think about cost when you are looking for personal insurance to make sure the offering is completely relevant to your lifestyle.
Overall, you will want to be paying for something that only serves to benefit you in a personal capacity.
The comfort and confidence you have in the representative
Life insurance can be quite a complex thing to purchase. There’s no doubt that you will want to feel confident in the legacy you are leaving behind after setting up a life insurance policy.
However, trying to figure out the best policy to suit your every need can be quite difficult. If you’re feeling a little lost in the process then you might want to seek the advice of an experienced insurance representative.
Not only can they guide you through the process, ensuring each step is completed with all the necessary information, but they can also work to customize your policy.
Taking the extra steps to research and eventually partner with a provider who has lots of stability, experience, and the general capacity to help you make such important decisions will keep your loved ones or your business protected when it’s needed the most.
There is a lot of information to learn and digest regarding life insurance. But being especially clued up on the process will enable you to set up a premium with a reputable company that offers everything you could need.
After all, life insurance is an essential part of protecting your assets after you die and is also a key way of safeguarding your family’s financial future.
But though the whole process might seem a bit complicated, it doesn’t have to be! As long as you are careful about choosing the right policy by vetting your insurance provider, selecting a policy term that suits you, and choosing the relevant cover, you’ll be all set in no time at all.
Policygenius provides free quotes tailored to your needs with support from licensed agents, helping you get insurance coverage fast so you can get on with life.
Life insurance provides a death benefit to a beneficiary after you die. This can strengthen the financial security and reduce the financial burden thrust onto your chosen beneficiary.
Notably, it can be used to cover the cost of monthly bills and expenses. Even if you aren’t the main source of income for your family, you likely cover the costs of essential items and utilities.
Setting up insurance will allow your family to maintain their lifestyle after you’ve passed on. However, life insurance also covers the cost of settling affairs, including:
- Debt settlements
- Estate planning
- Funeral fees
- College tuition
- Child or dependent care
- A mortgage
- Medical expenses and long-term care
It’s always important to learn what is covered by life insurance (for both the policyholder and any beneficiaries), but it’s just as vital to discover what isn’t covered.
Here are a few notable items that aren’t covered by a life insurance policy:
- Expired policies (as soon as your term ends, your policy is no longer active)
- Exclusions (especially if you’re considered to be an “at-risk policyholder”)
- Criminal Activity
An insurance rider is a guaranteed provision of an insurance policy that works to amend or add particular benefits to the terms of a generic policy.
This provides additional tailored coverage to meet all the policyholder’s needs. You can opt to add a rider to your policy if you want the added benefit of being covered for critical illnesses and lots more throughout your life.
The only downside to insurance riders is that they come at an extra cost on top of the overall insurance premiums that an insured party already has to pay.
It is safe to buy life insurance online. However, you must make sure that you are purchasing cover from the authentic website of the insurance provider rather than using a third-party website to keep your personal data safe and to ensure you aren’t being scammed out of money.
Not only is the whole process extremely convenient to you, but you are also gifted with additional benefits such as less documentation, lower premiums, and much more transparency.
I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.