Life Insurance 101

No one really wants to think about life insurance. But if someone depends on you financially, it’s a topic you can’t avoid. Getting life insurance doesn’t have to be hard (or boring). We have some answers to common questions about life insurance so that you can make informed decisions about protecting your loved ones financially. 

Why is life insurance worth it?

There are many answers to the question of why is life insurance important. But by and large, the most important one is ensuring your family’s financial security and peace of mind.

If anyone depends on your income, they would most likely struggle if you were to pass away. That’s why life insurance is so important to have. There are different types of life insurance policies, but essentially they all pay cash to your loved ones when you die. Money from life insurance can be used to cover daily living expenses, a mortgage or rent payments, outstanding loans, college tuition and other essential expenses. Life insurance is the best way to ensure that your loved ones would be in a good financial place if you and your income were no longer in the picture.

What does life insurance cover?

Life insurance covers virtually any type of living expense. Some common expenses include:

Immediate Expenses

Funeral and burial costs
Uncovered medical expenses
Mortgage or rent
Car loans
Credit card debt
Taxes
Estate settlement costs

Ongoing Expenses

Food
Housing
Utilities
Transportation
Health care and insurance
Continue a family business

Future Expenses

College costs
Retirement

Do I need life insurance?

If someone depends on you financially, you are most likely someone who needs life insurance.

Life insurance provides cash to your family or loved ones after your death. This cash, known as the death benefit, replaces your income and the many non-paid ways you support your household. Your family can use this cash to pay for expenses like funeral costs, a mortgage, college tuition and more.

Just a few examples of people who often answer “yes” to the question of “Should I get life insurance?” include:

Married or partnered couples

Many partners find it difficult to make ends meet without the other earner’s income in the picture.

Married or partnered couples with kids

In addition to losing one partner’s income, the surviving parent may have to pay for childcare and more without the other parent around to pitch in.

Single parents

As the sole income earner for your family, you’ll want to think about how to replace your child’s only source of financial support.

Stay-at-home parents

From cooking meals to shuttling kids to school to helping with homework, stay-at-home parents perform many critical responsibilities that would be costly to outsource.

Empty nesters

Many surviving partners would not be able to maintain the lifestyle they worked so hard to achieve without life insurance.

Retirees

Depending on the size of your estate, your heirs could be hit with an estate-tax rate of up to 45%. Fortunately, cash from a life insurance policy gives heirs access to tax-free money to pay for immediate costs and more.

Business owners

Life insurance can help your business in many ways if you, a fellow owner or a key employee were to pass away

What are the different types of life insurance?

Types of life insurance generally fall into two categories: term life insurance and permanent life insurance.

Term life insurance

Term life insurance provides protection for a specific period of time (the term). This is often 10, 20 or 30 years. Term life insurance makes sense when you need protection for a specific amount of time--for instance, until your kids graduate from college or your mortgage is paid off.

Term life insurance typically offers the most amount of coverage for the lowest initial premium. This makes this type of life insurance policy a good choice for those on a tighter budget.

Permanent life insurance

Permanent life insurance provides lifelong protection for as long as you pay the premiums. It also accumulates cash value on a tax-deferred basis, which you can tap into to buy a home, supplement your retirement income, cover an emergency expense and more.

Because of these additional benefits, initial premiums are higher than what you’d pay for a term life insurance policy with the same amount of coverage.

You Might Want a Mix

Depending on your circumstances and financial goals, sometimes a combination of term and permanent insurance is the answer. Get an idea of the types of life insurance policies that could work for you by using our Product Selector.

What is the average life insurance cost?

The price of life insurance depends on three main factors: your age, your health and the type of policy you buy. In general, you’ll pay less the younger and healthier you are. You also typically pay less for a term life policy than a permanent life policy.

That said, don’t let your age or health status discourage you from considering life insurance. There are policies available for people of any age as well as those with high blood pressure, diabetes and a smoking habit. (Just know that you’ll generally pay more for your policy if you’re in poor health and/or smoke.)

Still wondering the answer to the question of how much does life insurance cost? If so, here’s a working idea:

A healthy 30-year-old can get a $250,000 20-year level term policy for just $13 a month.

That means that if you purchase that policy and pay the $13 a month without fail, your loved ones would get $250,000 if you were to die at any point during those 20 years.

How much life insurance do I need?

The amount of life insurance to buy depends on who you want to protect financially and for how long. For a general idea, consider the following:

1

Add up the immediate, ongoing and future expenses your family or loved ones would incur if you were to pass away.

That could mean everything from funeral costs to rent or mortgage to college tuition.

2
Add up the financial resources your loved ones already have.

That could mean a spouse’s income and life insurance that’s already in place.

3
Subtract your financial resources from the anticipated expenses.

The difference between the two numbers is the approximate life insurance to buy.

As an easy rule of thumb, experts recommend having life insurance that equals between 10 to 15 times your gross income. But many people need even more than that. To get a more accurate idea of how much life insurance to buy, check out our calculator.

Who can be a life insurance beneficiary?

A life insurance beneficiary is the person, people, trust, charity or estate who gets the payout on your life insurance policy after you die.

You’ll typically be asked to pick two kinds of beneficiaries: a primary and a secondary. The secondary beneficiary, also called a contingent beneficiary, receives the payout if the primary beneficiary is deceased. You can name more than one beneficiary, as well as the percentage of the payout you want to go to each one—for instance, you could designate 50% to a spouse and 50% to an adult child.

There are special considerations when it comes to providing for minors as well as naming a charity or your estate as a life insurance beneficiary.

What is the process for getting life insurance?

When you apply for life insurance, your life insurance application goes through a process called underwriting. Underwriting is when your insurance risk is evaluated. Approval and costs are based on your risk class.

There are two types of underwriting: traditional underwriting and simplified underwriting. In traditional underwriting, you fill out a formal application and typically undergo a short medical exam. It can take several weeks to be approved when the life insurance application undergoes traditional underwriting.

In contrast, simplified underwriting is usually a quick online life insurance application that does not require a medical exam. You can often receive instantaneous life insurance coverage. Just be aware that the coverage amount may be limited as well as more expensive with simplified underwriting.

What happens if I’m denied life insurance?

Good news: There are options if you’re initially denied life insurance. The first is to contact the company that denied you to see if there was a mistake on the life insurance application. If there was no mistake, find out the reason for the denial. Once you know, you can try working with an insurance agent that specializes in higher-risk applicants.

How often should I review my life insurance?

As a general rule of the thumb, it’s a good idea to touch base with your life insurance agent at least once a year or whenever a life change happens. A life insurance review will help ensure your coverage is at the right level to protect your loved ones.

Life insurance often needs to be adjusted after a big change like getting married, having a baby, starting a business, retiring and more. In these kinds of instances, you’ll want to schedule a life insurance review with your life insurance agent as soon as possible.

What are living benefits of life insurance?

Living benefits of a life insurance policy let you access your life insurance proceeds before you die. This is typically reserved for situations in which someone faces a terminal illness or injury. Many people use cash from living benefits to get their family’s finances in order or to take a special trip.

Living benefits, which are also known as accelerated death benefits, are typically available as a rider (or endorsement) to your life insurance policy.

How does life insurance pay out?

In most cases, the life insurance pay out is a lump sum paid to beneficiaries when the policyholder dies. To receive the life insurance pay out, you will have to file a claim with the insurer. They will need a certified copy of the death certificate in order to process the claim.

It can vary on how long it takes to get a life insurance check. Most insurers take between 30 and 60 days after receiving the claim. However, there can be delays. This is especially true if the policyholder dies within two years of taking out the policy or if there are unusual circumstances. Most life insurance policies do not cover death from homicide or suicide. Other insurers deny coverage if the policyholder died doing something illegal or lied on the life insurance application.

A life insurance pay out works differently if there’s an installment-payout option or an annuity option.

Real Life Story

Life insurance isn’t for the people who die. It’s for the people who live.

Michael, 32, was a fit and healthy family man. As he left to run a 10K race, he kissed his wife, Traci, good-bye along with newborn Calvin and “big” sister Josie. He never made it home. As he crossed the finish line, Michael collapsed and died. The Kovacic family would never be the same.

Traci says the hardest part for her was knowing that the love of her life was never coming home. “But the reality is that everything else stayed the same,” she says. “The paychecks stopped immediately, but I still had to keep the lights on, buy food, pay the mortgage and take care of the kids. Having life insurance meant I didn’t have to make any immediate decisions or sell the house. The life insurance saved us—and it still does today.”

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