No one likes to think about life insurance, but buying life insurance helps your family if you die.
Your survivors could use the life insurance policy's death benefit to pay off debts, cover funeral expenses, pay ongoing bills and meet long-term financial goals like college education for your kids.
Some forms of life insurance also include an investment component known as cash value, which can serve as a sort of savings account. These policies can protect an estate or business, provide support for a lifelong dependent, benefit a charity or provide money to heirs no matter when you die.
Most people buy life insurance to replace the income they would have provided their families. But life insurance isn't just for breadwinners. Stay-at-home parents should have enough life insurance to cover the cost of services that they provide, such as childcare.
Basic types of life insurance
There are two basic types of life insurance -- term life and permanent life. Let's take a look at the two plans.
Term life insurance is structured to cover you for a certain period, such as five, 10, 15, 20 or 30 years. Level-premiums is one type of policy. This means you'd pay the same amount every month. Another choice is annually renewable term life; premiums start out lower than they would with a level-premium term life policy, but then increase each year.
If you die within the term, then the policy pays a death benefit to your beneficiary.
After the term is up, premiums skyrocket and the policy becomes unaffordable. Once you stop paying premiums, the coverage disappears, and the policy is worth nothing.
Age and health play large roles in the cost of life insurance. Let's compare the costs of a 40-year-old person seeking the same 30-year term-life, $250,000 level-premium term life policy.
Here are the averages for each in January 2019 from Compulife:
- A 40-year-old healthy woman (with health status classified as Preferred Plus) would pay an average of $502 annually.
- A 40-year-old nonsmoker man (classified as Preferred Plus) would pay an average of $624 annually.
- A 40-year-old nonsmoker woman in normal health (classified as Regular) would pay an average of $693 annually.
As you can see, women usually get cheaper rates than men. Men are considered a higher risk and often die younger than women.
Now, let's see how smoking influences costs.
- A 40-year-old smoker man in normal health (classified as Regular) would pay $2,132 on average annually.
- A 40-year-old smoker woman in normal health (classified as Regular) would pay $1,634 on average annually.
As you can see, smoking means much higher rates. You'll pay much higher rates. If you quit, an insurer will likely require that you give up smoking for at least a year before it will give you lower nonsmoker rates. However, your smoking experience will likely still mean higher rates though not nearly as high as if you're still a smoker.
Last, let's check to see how age affects rates. Let's look at the same policies from above for someone who's 30, 40 and 50 years old.
- A 30-year-old nonsmoker woman classified as Regular health would be $426 annually.
- A 40-year-old nonsmoker woman classified as Regular health would be $693 annually.
- A 50-year-old nonsmoker woman classified as Regular health would be $1,573 annually.
It's wise to get life insurance while you're still young. Waiting until your 50s will limit your choices and cost much more than if you bought the same policy 10 years earlier.
Permanent life insurance covers you for your entire life. Permanent life is far more expensive than term life for two reasons:
- It pays a death benefit no matter when you die.
- Permanent life policies have cash value.
The cash account grows over time tax-free. You can borrow money from the account or cash in the policy if you decide you no longer want the insurance coverage. (Be aware you pay hefty fees if you surrender the policy in the early years.)
A variety of permanent life insurance policies are available:
- Whole life is the simplest form of permanent coverage. The premium and death benefit stay the same, and the return on the cash value is guaranteed.
- Universal life provides flexibility. As long as you meet the initial minimum payment, you can pay more or less or even skip premiums, and increase or decrease the death benefit.
- Variable universal life offers the potential for greater growth in the cash value than traditional permanent policies, but it comes with risk. You choose how the money is invested, and the policy's death benefit and cash depend on the investment's performance.
- Variable universal life is a hybrid of variable and universal life insurance. It allows you to vary your payments, invest your policy premiums, and vary your coverage amount.
How much life insurance to buy
When deciding on life insurance, you want to:
- Figure out how long you need coverage
- Think about how much your survivors would need if you were no longer around
- Factor in the immediate and long-range expenses you want covered and the debts you want paid off
- Subtract savings and proceeds from other life insurance policies
When you figure out those four factors, you're ready to buy a life insurance policy. The cost of life insurance depends on a variety of factors, including:
- Death benefit amount
- Type of policy and riders
- Your age, health and lifestyle
- Whether you smoke
- Company providing coverage
When you buy coverage, you'll fill out an application and likely take a medical exam. Don't give up if one company turns you down. Insurers have different underwriting policies so that you might find coverage with another.
Buying a life insurance policy
When buying a life insurance policy, shop around and get life insurance quotes from multiple companies. Make sure you compare the same coverage so that you are comparing similar policies.
You should also check insurers' financial ratings with a company that tracks that information, such as A.M. Best or Standard & Poor's. Additionally, research insurers' reputations through your state insurance department's website.
Once you're comfortable with the policy, price and company, you're ready to buy a life insurance policy that gives you peace of mind that it will help your loved ones if the unthinkable happens.
A good place to start is to let Insurance.com find you quotes. Just enter your zip code and get started.
Riders give you more benefits at a cost
You can pay more to add special features, called riders, to a term life or permanent life insurance policy. Available riders vary by company and policy.
Common riders include:
- Waiver of premium -- Waives the premium if you become seriously ill or disabled.
- Return of premium -- Returns the premiums you paid at the end of the term if you haven't used the policy.
- Guaranteed insurability -- Lets you purchase more insurance later without providing information about your health.
- Accelerated death benefit -- Allow you to collect a portion of your death benefit if you become terminally ill.
- Critical illness -- Provides money if you’re diagnosed with a critical illness.
- Guaranteed insurability -- Provides a policy without a medical exam.
- Long-term care -- Gives money from your health benefit for care.
Riders usually add to the cost of plans. For instance, if you added a return of premium rider, you might pay more than double each year. For instance:
- A 40-year-old nonsmoker woman classified as Regular health with a regular 300-year, $250,000 term policy would be $693 annually.
- A 40-year-old nonsmoker woman classified as Regular health with a return of premium plan would pay an average of $1,535 annually.
That's a difference of about $27,000 over the life of the policy. You'll have to decide whether that extra money is worth guaranteeing getting the premiums back.
What type of life insurance is right for you?
Similar to every other type of insurance, which kind of life insurance plan is right for you depends on your preferences and situation.
Here's when each type of life insurance would be a good option for you:
- You need coverage for a limited period, such as until the kids graduate from college and the mortgage is paid off.
- Your estate is small enough that it would not be subject to estate taxes.
- You're not interested in life insurance with an investment component.
- You have a lifelong dependent, such as a child with a disability, to provide for after your death.
- You have a large estate to protect or a family business to continue. The beneficiary could use the death benefit to pay the estate taxes, so your heirs would not have to sell off parts of the estate or business to pay Uncle Sam.
- You want a policy with an investment component.
- You want to leave a legacy.
You also have the option of choosing a combination of term life and permanent life insurance. You might want a large term life policy to cover you while your children are growing up and a smaller permanent policy to cover final expenses if you die after the term life insurance expires.
Most term life policies can be converted to permanent life insurance. You can buy an inexpensive term life policy when you're young and starting a career, and then convert portions of the coverage to permanent life insurance as your earning power grows.
No matter what life insurance you buy, make sure it fits your situation.