Do I need life insurance?
Not everyone needs life insurance – but most people can benefit from at least a small policy. This guide will help you make informed decisions when you begin to compare life insurance quotes.
You’ll definitely want a life insurance policy if you have people – a spouse, children, or others – who depend at least in part on the income you provide. Couples without children may also benefit from a policy – especially if one spouse has a much larger income. That spouse’s death could leave the survivor unable to pay bills established as part of a two-income household.
Don’t overlook a life insurance policy for a parent who doesn’t work outside of the home. Even though the parent isn’t bringing in a direct income, their loss could expose the family to additional expenses, such as needing to pay for childcare so the other parent can continue to work. In these cases, even small life insurance policies provide some extra protection for the entire family.
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Even single people without dependents may benefit from having a small, cheap policy to make sure they don’t saddle their loved ones with funeral expenses and related costs if they pass away.
While most people could use some life insurance, the amount of coverage they need can vary widely from a few thousand dollars to several million – it depends on many factors ranging from family size, current income and more.
How much life insurance do I need?
This is, perhaps, the most common and also the most difficult question to answer when it comes to purchasing life insurance. There is no one rule or formula to determine what you need – although you’ll hear several as you learn more about the topic.
The amount of life insurance that is best for you depends on many factors, including:
- How much income you need/want to replace, and for how many years you might need to replace it. (The average 30-year-old has many more work years ahead of them than a 55-year-old – and your life insurance policy has to make up those extra years of income if you die unexpectedly.)
- Your surviving spouse’s ability to increase his or her income and expenses that might be related to that (Would he or she need to go back to school? Pay for childcare so they can switch from part-time to full-time work? Move to a location with better opportunities?)
- What debts you have that might need to be paid by your remaining family (mortgage, joint credit card debt, etc.)
- If you want the policy to cover your funeral expenses
- Future expenses you anticipate and want to plan for, such as college tuition for minor children or to help pay for an adult child’s wedding, etc.
- If you want to leave a legacy to remaining family members, donations to a favored charity, etc.
- Your family’s current savings and expected income from other sources (Social Security, investments, inheritances, etc.) It also depends upon your personal comfort with risk. For example, if you have significant savings already or other outside sources of income, you may be able to take a smaller life insurance policy, if you wish.
You should also consider if any significant expenses would no longer be a factor for your family to pay upon your death. For example, some debts you hold would be discharged or easily terminated upon your demise; federal student loans are not payable after your death, and a car lease could be ended, and those payments stopped, etc.
Most life insurance companies, as well as most financial advice companies and many other websites, have free life insurance calculators you can use to estimate your life insurance needs. They all use different criteria and will likely give you wildly differing results. Calculators from companies selling life insurance policies are more apt to advise higher-value benefit policies, which may or may not be necessary. Insure.com has a fairly thorough computational system available here. Be sure you know what your needs will be when to compare life insurance quotes.
It is essential to sample a few different life insurance calculators from different sources to see both what kinds of factors they consider, and what amounts of coverage they recommend to provide the best life insurance policy for you. While the results will vary, you’ll likely find that most of the suggestions fall within a tight range. That will give you an idea of where to start – you can adjust the amount of coverage you buy higher or lower depending on the knowledge of your own financial situation.
For example, let’s say most calculators recommend you purchase between $300k and $500k in life insurance, but you know that your spouse is about to finish an advanced degree and double his or her income. In this situation, you can probably safely purchase $300k, knowing that they will be less reliant on your income. On the other hand, if you have reason to think that your family might take on more debt in the future or burn through some savings, it would be wiser to buy a larger policy, closer to the $500k end of the spectrum.
What are the types of life insurance?
There are two basic types of life insurance: term and whole life – and a few variations within those two categories.
Term life insurance policies pay out if you die during a set “term” – usually 10, 20 or 30 years. So, for example, if you were to purchase a 30-year term life policy (and you renew it annually), and then you passed away 20 years into the term, your beneficiary would receive the full benefit. If you live through all 30 years, the policy would expire, and the benefit would disappear.
Term life is usually the cheapest form of insurance, but be aware that after paying your premiums for the term of the policy, if you’re still alive, you won’t get a penny in benefits. If you prefer to have something to show for your payments, take a look at a whole life policy or one of its variations – but understand that you will pay considerably more for the guaranteed benefits.
Term life policies are the simplest, most cost-effective and easiest to understand, and therefore are considered the best choice for most people. But if you want more coverage or flexibility, you can consider one of the following types of life insurance policies.
Whole life – A whole life policy remains in effect for your entire life from the time of purchase, assuming you continue to pay your premium and don’t cancel the policy. It offers you a guaranteed benefit to your beneficiary upon your death, as well as guaranteed annual cash value growth. Your annual premium typically will be a fixed rate for the life of the loan.
Many whole life insurance policies allow you to take loans against the cash value balance of the policy. But be aware that if you die while there is an outstanding loan, that amount will be deducted from the policy’s death benefit. There may be other financial and tax implications when taking a loan against these policies. If you are interested in buying a life insurance policy with this option, make sure that you read it carefully and thoroughly understand all the provisions related to loans. Be sure to shop around, get whole life insurance quotes from various companies before choosing which policy is right for you.
Universal life – A universal life insurance policy is a variation of a whole life policy that gives you a little more flexibility. With a universal policy, you have some flexibility in selecting when you make your premium payments, and you can make certain adjustments to your coverage as your needs change over time. For example, you can increase your benefit if you add a child to your family, or reduce the benefit once your mortgage is paid off.
Universal policies also have a guaranteed annual cash value growth similar to whole life policies.
Variable life – Variable life policies are structured more like investment tools than purely insurance products – which has pros and cons. With a variable life insurance policy, you can choose how funds are invested in stocks, bonds, etc., in hopes of increasing your cash value growth over time. However, that also exposes you to investment risk and market fluctuations, so a minimum cash value is not guaranteed.
Variable universal life – These policies are even more like investment tools, with the additional flexibility and risk that comes with it. These policies give you more flexibility in making changes to your coverage amounts, the way the money is invested, and how premium payments are handled. It also exposes you to more investment risk.
Other life insurance options
There are other kinds of life insurance products that you may want to consider.
Annuity – With an annuity, you pay a lump sum at the beginning of your contract with a life insurance company. The company manages and invests those funds and pays the money back to you in fixed amounts at set times within an agreed upon timeframe.
Annuities can be a good choice for someone who is concerned about outliving their savings. But there are many different types of annuities, and not all are equally appropriate for all people. This type of product is also well known for having attracted scam artists, so check your information – and the seller – carefully before you buy an annuity.
Annuities have widely varied terms and tax implications. Work closely with a trusted financial advisor if you are considering this kind of insurance product.
Mortgage life insurance – this policy is designed to pay off the outstanding balance of your mortgage at the time of your death, and the beneficiary is usually the bank, not your loved ones.
Think carefully before purchasing this kind of policy. Often the policies are relatively costly, and they limit your beneficiary’s ability to decide how best to manage your estate after you pass. For example, depending on the circumstances of your death, it might make more sense for your beneficiary to sell the house and use the insurance benefit for other purposes rather than pay off the mortgage.
However, for certain people in high-risk groups who wouldn’t be able to purchase other types of life insurance, mortgage life insurance may be a viable way to get some protection for their loved ones.
Senior life insurance/life insurance in retirement – Most seniors do not need to carry life insurance. Your children are grown and on their own, and you have resources (savings, pensions, etc.) to help provide for a surviving spouse. But there are situations where you may need – or simply want – to have a life insurance policy.
A life insurance policy for seniors can provide more security for a surviving spouse if you are concerned your retirement savings won’t be enough. If you care for a child or grandchild who is still a minor, or an adult child or another relative who is disabled or has special needs that will require ongoing care, it can be smart to have a life insurance policy to help provide for them. Some seniors also use life insurance as a way to ensure a final gift to a favored charity or to make sure the family will have enough cash on hand to cover funeral expenses.
For seniors with large estates, life insurance policies can also be a way to protect some assets from tax liability.
Buying insurance when you are older is more expensive for the simple reason that it is more likely the insurance company will have to pay the benefit, so be prepared for your life insurance quotes to be higher than they would be for people in a younger age bracket. Many companies specialize in providing life insurance policies for seniors, but unfortunately, some are less trustworthy than others. If you are buying life insurance as a senior, investigate the company carefully, check with your state insurance board to make sure they are in good standing and be skeptical of any quotes that seem too good to be true.
What life insurance might not cover
When beginning to compare life insurance, be aware that not all policies cover everything.
Most policies have some exclusions, such as not paying a death benefit for suicides, or only covering accident-related deaths. The more restrictive policies can seem appealing at first glance because they cost much less – you’re also much less likely to see any benefit from them.
Read your policy carefully before purchasing to make sure you know what you are covered for and that it lines up well with the kind of protection you feel you need. For example, if a policy excludes any motor vehicle-related death and you’re an avid motorcycle rider the policy is not a good fit for you.
What does life insurance cost?
Life insurance costs will vary a bit depending on your age, sex, health history, driving/accident history, how much/what kind coverage you opt for, and of course, which insurance carrier you choose.
Typically, men pay a little more than women in similar health. You’ll also pay more if you are older and/or have known pre-existing medical conditions, such as diabetes, cancer or if you are (or recently were) a smoker. With some policies, you may also pay more if you engage in certain high-risk occupations or hobbies. Term life costs less than a whole life policy with a similar benefit amount.
But even with those variations, the cost of life insurance is reasonable, typically a few hundred dollars per year for a term life policy with a benefit ranging from hundreds of thousands to one million dollars. For an older person not in perfect health who is seeking a larger benefit and a whole life policy, the premium might be a few thousand dollars each year.
How can I get inexpensive life insurance?
You don’t want to pay more than needed for life insurance, but this is one product where to a large degree, you get what you pay for. In general, the cheapest policy will provide far less protection than the more expensive ones.
Your life insurance premium will be dictated largely by the type of policy you get and your own health history. But there are steps you can take to lower your overall costs. When you are comparing quotes, ask your agent or broker if there is a “price break” or “price tier” close to the amount of coverage you are considering buying. Life insurance premiums drop a bit at certain levels (usually around multiples of $50k), so if you are looking at a policy for $325k, you may find that the same policy with $350k in coverage is slightly cheaper. Similarly, if you were planning to buy $510k in coverage, you may run the numbers and find that a $500k policy is close enough to what you need with a significant discount on the premium you would end up paying.
You may also be able to get cheaper life insurance if you have other insurance policies – such as home or auto – with the same insurance carrier. When you’re comparing rental insurance quotes, check if multi-policy discounts (also sometimes called “multiline” discounts) are offered and then compare those quotes to ensure you are getting the best life insurance rates available. You can also save some money on your life insurance policy by buying it when you are younger – the older you are, the more the policy will cost no matter what.
Buying a term life policy is another way to save money. Premiums for term life are significantly cheaper than for the other types of life insurance policies.
The other ways to get more affordable life insurance are not quick fixes – but if you know you don’t need life insurance for at least a year or two, they can help lower your future costs. The healthier you are, the less your life insurance will cost. Some of the major factors life insurance carriers look at is your weight, whether you smoke, if you have diabetes, heart disease or other chronic conditions, and if you have a good driving record. By maintaining a healthy weight, not smoking, driving safely and getting good medical care to prevent chronic illness (or keep it under control) you can help your future self acquire cheaper life insurance.
What is the best life insurance policy for me?
There is no one “best” life insurance policy. In choosing the best policy for you, your first course of action is to decide what coverage you do (or don’t) need and then find the policy that most closely matches that list. Factors to consider include:
- Whether you need (or just want) a policy that will protect you for a few years or one that will definitely pay out at the end of your life
- How much of a benefit you want to leave for your loved ones
- If you want a life insurance policy with some investment options so you can try to increase your family’s benefit – and if you are willing to take on the additional risks that come with that flexibility
- If you have any health conditions or engage in high-risk hobbies or occupations that might make it harder and/or more expensive for you to buy a traditional policy
Answering these questions will help you narrow down both the carriers you may want to consider and the kinds of policies for which you’ll want to get quotes.
How do I compare life insurance quotes?
Once you have an idea of what kinds and amounts of coverage you need, you can start the process of getting life insurance quotes.
Make sure you shop around and check a variety of carriers. While all insurance carriers have access to similar data for underwriting, they use slightly different criteria to assess your risk. By shopping around, you have a better chance of finding an insurer who can offer you a better quote.
Although it doesn’t directly lower your life insurance costs, consider getting what is called a “level-premium” policy. A level-premium policy is a term policy in which your premium stays the same each year for the length of the term.
Once you have a list of a few carriers you want to get quotes from, you should take a look at the company’s life insurance ratings. These ratings tell you more about the financial strength of the company and help give you more peace of mind that the company will be around and able to pay your family the benefits they are owed. The last thing you want is to buy life insurance and then have to rely on a financially shaky company to manage that money and be trusted to pay your benefit when the time comes. There are many things to consider when you begin to compare life insurance quotes but in the end, doing some advanced preparation can make the choices a lot easier.
There are a few ways you can review life insurance company ratings. This link provides both customer ratings and financial strength ratings from Standard & Poor’s. You can also contact your state insurance board or agency to see what information they provide. Other companies that provide ratings information are A.M. Best Co. and Moody’s Investors Services
Major life insurance carriers
Standard life insurance policies are available from most companies, but the five carriers listed here are among the best known and were rated highly by J.D. Power for their offerings.
State Farm – with top marks across the board, this was the highest rated of all the insurance carriers in the survey
Nationwide – earned good marks from customers in every category including price and customer service
Northwestern Mutual – also received good marks for overall satisfaction, price and policy offerings
Pacific Life – snagged its highest ratings for customer interaction and good marks for satisfaction, billing, and price
MassMutual – received good ratings from customers for its service and billing, but only fair marks for overall satisfaction, pricing and policy offerings
Annuity – an insurance product in which the insured makes a large, lump-sum payment and in return the insurance company makes regular, incremental payments to the insured from the investment proceeds of the principal
Beneficiary — the person or persons designated by the insured to receive the payout from a life insurance policy
Carrier – the company underwriting your insurance policy
Convertible life insurance – a policy that can be modified from type to another for an additional fee
Exclusions – items or types of damage not covered by an insurance policy
Insurance agent or broker – the individual or agency from whom you buy your policy. They may be independent and sell policies from many different companies, or they may work solely with one insurer.
Level premium life insurance – a policy in which the premiums you pay remains the same every year for the length of the policy
Life insurance – an insurance policy that pays out a specific cash benefit upon the death of the insured person
Mortgage life insurance – coverage designed with a benefit that is enough to pay off a specified mortgage balance. The designated beneficiary is usually the mortgage holder, not the insured person’s family.
Term life insurance – an insurance policy that is in effect for a defined period of time, usually 10, 20 or 30 years
Universal life insurance — a hybrid of term and whole life insurance, this is a permanent life insurance policy that is lower cost, like term life, and offers a savings vehicle that builds up cash value over time, similar to whole life insurance
Whole life insurance – an insurance policy that pays a benefit upon the death of the insured and builds up an additional cash value over time