Types of Life Insurance

There are two primary types of life insurance: term and permanent life:

• Term life insurance provides protection for a certain period. Term life is usually the cheapest life insurance option and it has no cash value.
• Permanent life insurance—such as whole life insurance or universal life insurance—can provide lifetime coverage. Most types of permanent life insurance include the ability to accumulate cash value which can be accessed while you’re still living.

Attributes	Term life insurance	Permanent life insurance
Cost	Least expensive	More expensive
Policy length	Specific number of years, such as 20 or 30 years, but often possible to renew	Usually for life
Cash value	No	Usually, yes
Guaranteed death benefit	Yes	Usually but not always, depending on policy type

Term Life Insurance

In addition to being the most affordable type of life insurance, term life insurance is generally the most popular type of life insurance sold.

Term life insurance provides coverage for a certain amount of time and the premium payments stay the same amount for the duration of the policy. Typical choices are policy lengths are 10, 15, 20, 25 or 30 years.

If you pass away within the term of your policy, your beneficiaries can make a claim and receive the death benefit money, tax-free.

Once the term of the policy expires, you may be able to renew the coverage in increments of one year, known as guaranteed renewability. But each year of renewal will be at a higher rate.

Permanent Life Insurance

Permanent life insurance provides lifelong coverage. It’s more expensive than term life because it:

• Can last for the duration of your life.
• Usually builds cash value.
• Has internal policy costs, which could potentially be high.

The cash value component accumulates on a tax-deferred basis over the life of the policy. It acts as a savings portion of the policy. Typically, you can borrow against the policy’s cash value or make a withdrawal. If you decide to end the policy, you can get the cash value minus any surrender charge.

In some policies the cash value may build slowly over many years, so don’t count on having access to a lot of cash value right away. Your policy illustration will show the projected cash value.

There are several varieties of permanent life insurance:

• Whole life insurance offers a fixed death benefit and cash value component that grows at a guaranteed rate of return. Many whole life insurance policies pay out dividends that can be used to reduce premium payments or can add to your cash value.
• Universal life insurance often offers more flexibility than a whole life insurance policy. You may be able to alter your premium payments and death benefit, within certain limits. With a universal life insurance policy, the cash value will build depending on the policy type. For example, an indexed universal life insurance policy will have cash value tied to an index such as the S&P 500. A variable universal life policy will typically have investment subaccounts that you can choose and manage.
• Burial insurance is a small whole life policy with a small death benefit, often between $5,000 and $25,000. Burial insurance is designed to cover only funeral costs and final expenses.
• Survivorship life insurance or “second to die life insurance” insures two people under one policy, usually a married couple. When both spouses have passed away, the policy pays out the death benefit to the beneficiaries. Usually, survivorship life insurance is part of a larger financial plan to fund a trust or pay federal estate taxes.

Life Insurance Payout Options

There are several options for life insurance payments. The options your benefiairies receive will depend on the insurance company and type of policy. Here are some of the most common.

• Lump sum payout. Beneficiaries receive the entire death benefit at once.
• Retained asset account payout. Beneficiaries leave the payout with the insurance company in an account that earns interest and can access the account when needed.
• Life income payout. The payout is converted to an annuity and beneficiaries receive lifetime payments.
• Life income with period certain payout. The payout is converted to an annuity and beneficiaries receive payments for the specified period.
• Specific income payout. This payout option allows beneficiaries to receive the payout in installments for a specific period of time and number of payments.

How to Choose the Right Life Insurance Policy Type

With all of the life insurance options available, it may seem complicated to choose the right one.  Start by deciding between term life and permanent life insurance.

Consider a term life insurance policy if you need life insurance for a specific amount of time. For instance, you may want life insurance to cover your working years as possible “income replacement” for your family if you pass away.

Term life insurance is also a good choice if your budget is limited. Since term life insurance provides protection for a specific amount of time, and it’s not a cash value life insurance policy, the rates will be lower than permanent life insurance.

As you enter different stages of life, your life insurance needs may change. Many term life insurance policies are convertible to a permanent policy. The options will depend on your policy and insurer. Term life conversion allows you to switch to a permanent policy without re-applying or taking a life insurance medical exam.

On the other hand, a permanent life insurance policy will last for the duration of your life. If building cash value is important to you, look at permanent life insurance options. But if you’re purchasing a permanent policy only to capitalize on the cash value accumulation, depending on the policy, you’re better off putting your money into a savings or investment vehicle, so you’re not paying for the life insurance and charges within a permanent policy.

And cash value isn’t typically intended for beneficiaries. Upon death, any cash value generally reverts back to the life insurance company. Your beneficiaries get the policy’s death benefit, not the death benefit plus cash value. That said, some policy types will offer the death benefit plus cash value, but for a higher price.

How Much Does Life Insurance Cost?

Term life insurance costs an average of $203 a year for a 30-year-old woman with a 20-year, $500,000 term life insurance policy, according to our analysis of life insurance companies. The same policy for a 30-year-old male is $244 a year.

The cost of life insurance varies significantly depending on several different factors. One of the biggest cost factors will be the type of life insurance you buy. For example, a term life insurance policy is significantly less expensive than a whole life insurance policy for the same amount of coverage.

Here are some of the most common factors affecting life insurance rates:

• Age. The younger you are when you buy a policy the less you’ll pay. That’s because your chance of death is smaller.
• Sex. Females have a life expectancy that is nearly five years longer than males, according to the National Center for Health Statistics. This means that men generally pay more for life insurance than women (except in Montana where insurers must provide gender-neutral life insurance rates).
• Health. Your health has a major impact on your life insurance rates. The insurer will evaluate your past and current medical conditions in order to calculate your life expectancy.
• Lifestyle. Your driving history (such as a DUI conviction), criminal record, and dangerous occupations and hobbies (such as scuba diving) can all result in higher life insurance rates.

How to Choose a Life Insurance Coverage Amount

A good rule of thumb for estimating how much coverage you need is to:

1. Add up all the expenses you want to cover, such as income replacement for your work, a mortgage and children’s college expenses.
2. From that, subtract the amounts that your family could use to cover those expenses, such as savings and existing life insurance. Leave out retirement savings if your spouse will need that later on.

The resulting number is how much life insurance you need. It may look high, especially if you’ve factored in income replacement for many years. Still, life insurance quotes are free, so it doesn’t hurt to price out the coverage you need.

If it turns out to be unaffordable, you can buy what you can afford now to lock in a good rate. You can buy more later, just be aware that several years from now your rate will be based on your older age and any health conditions you’ve developed.

Here is a calculator to help you estimate how much life insurance you will need.

How to Get Life Insurance Quotes

According to the Insurance Barometer Report, 49% of people  who don’t have life insurance say the reason why they don’t have coverage is because life insurance is too expensive. At the same time, many consumers overestimate the cost. The only way to know what you will pay is to get life insurance quotes from a few companies. Quotes are free. An experienced life insurance agent will know what companies tend to give the best prices based on your age, health and desired coverage amount.

Expect to be asked about your age, health, tobacco use, your family health history, driving record, and any dangerous occupations or hobbies.

When you have a quote that you like, you can start a formal application. You answer more questions in detail and apply for a specific policy type, amount of coverage and policy length (if you’re buying term life insurance).

Once you’ve submitted the application, some insurers may require a life insurance medical exam. These exams can take place at your home, work or sometimes a local exam office.

The time it takes to process an application varies significantly among companies and policy type.

• Some insurers offer no-exam life insurance, including instant approval for people who qualify, who are generally younger (under age 60) and without medical issues. Data about you is gathered from third-party sources, so your health is still judged.
• Some insurers offer no-exam policies that are guaranteed issue life insurance. You can’t be turned down. These applications use no health information about you, so they can be much more expensive.
• Some insurers use “accelerated underwriting” to skip the medical exam and process applications in a day or a week, depending on the company.
• And some insurers use a traditional process with a medical exam and an approval process that can take over a month.

How to Choose a Beneficiary

A life insurance beneficiary is the person who can claim the death benefit after you pass away.

You can name multiple beneficiaries and decide what percentage they each will receive when you die. Additionally, you should add contingent beneficiaries who will receive the death benefit if your primary beneficiaries have died.

Not everyone names people as beneficiaries. Some people name trusts. By creating a revocable living trust and naming it as the life insurance beneficiary, you can ensure that the money is used according to your wishes. For example, the trust money could be used to take care of children.

If you decide to name a trust the beneficiary of your policy, make sure to work with an attorney to structure the trust correctly. It’s also wise to work with a financial planner so that a trust is part of your larger financial plan.

It’s crucial to update and review your beneficiary selections regularly. For example, life events such as a marriage or a divorce can impact your selection.

To update your beneficiaries, contact your life insurer and submit a change of beneficiary form. Making changes only on a will won’t affect life insurance.

How Does a Beneficiary Make a Claim?

Claims can be paid quickly—in about a week, assuming the insurer has all the documents it needs. Don’t assume a life insurance company will contact you. It’s unlikely they know that your relative died. While some insurers are proactive in monitoring for insured customers who have passed away, they won’t discover a death immediately.

• Death certificate: To start the claim process you’ll need to submit a certified copy of the death certificate. The insurer won’t send it back. Therefore, you may want to request a few certified copies if you need them for multiple purposes.
• Contact the insurance company right away: While you may have a lot on your plate after a loved one passes away, the sooner you contact the insurer, the sooner you can get the money.
• Verify you have met all claim requirements: Once all of the claim paperwork is done, make sure you have all supporting documentation attached. This can include a claim form and death certificate.

Claims are typically paid within 30 days after the insurer receives the necessary documents.

You don’t need an original copy of the life insurance policy to make a claim. You only need to know the name of the insurance company and contact them to initiate the claim.

That’s why it’s important to let your beneficiaries know that you have a policy and tell them the name of the insurer. And insurers are contractually obligated to pay only the people listed on the policy.

Life insurance beneficiaries don’t have any restrictions on how they can use a life insurance payout. Money from life insurance money can be used to:

• Cover regular household expenses
• Pay off a mortgage or other loans
• Fund children’s education
• Keep a family business going
• Pay for the funeral and other final expenses

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