Do you have a family? A business? Those who rely on your paycheck? Life insurance protects these people in the event you die unexpectedly and the financial security you provided is no longer there.
How does life insurance work?
When you buy a policy, you’re paying an insurance company a predetermined amount of money (the premium) for an agreed upon time limit (the term). If you die during this term, the insurance company pays your loved ones (the beneficiaries) the life insurance payout (death benefit).
Your beneficiaries receive the death benefit tax-free and they can spend the money however they wish.
You choose the type of life insurance, how long the term lasts, and how much death benefit your family is to receive. The insurance company decides how much it will cost you based on a number of risk factors.
With term life insurance, there are no surprises. Before you accept the policy, you know exactly what it will cost. Once you pay your first premium, the price of your policy is locked in and will never change through the entire term.
With permanent life insurance, there are many more complexities. The premiums are much higher than term life insurance because permanent life insurance is designed to provide coverage your entire life. It also has cash value accumulation potential and may pay out dividends.
Permanent life insurance may have fixed premiums or it may not. It depends on the type of permanent policy you buy.
» Learn more: Term versus Permanent Life Insurance
What should I know about a term life insurance policy?
Term life insurance is temporary. Your policy likely has the option to renew or convert it (into a permanent policy) but the cost of your policy will increase if you choose either of these options.
If you choose not to renew or convert, your term policy will expire once the term is over. If you’re still insurable, you can always buy a new policy.
Your policy is contestable during the first two years. This means if you die within the first two years of owning the policy, the insurance company has the right to investigate the death benefit claim and make sure you did not misrepresent yourself on your application. This contestability right helps prevent insurance fraud.
Your policy will not pay out due to death by suicide within the first two years. Insurance companies do not want people with the intent to die by suicide buying life insurance policies. If someone with a life insurance policy dies by suicide during this time period, the insurance company pays the beneficiaries whatever premiums were paid. So, essentially, your family receives a refund on the policy.
What should I know about a permanent life insurance policy?
Like a term life insurance policy, a permanent life insurance policy has a contestability period and suicide clause. Outside of these, there are many differences between term and permanent life insurance.
A permanent life insurance policy is designed to pay out no matter when you die as long as you keep the policy inforce (active).
Most permanent life insurance policies grow cash value. You have access to this account via policy loans and withdrawals. However, if your loan balance ever exceeds the value of your policy, your policy will terminate.
Some permanent life insurance policies pay out dividends. These are profits earned from the insurance company’s investments. If you own a participating life insurance policy, it’s like you’re a shareholder.
The ins and outs of permanent life insurance policies are very complex. You can learn more here on our whole life insurance page. You can also request personalized permanent quotes if interested.
See what you’d pay for life insurance
Comparison shop prices on custom coverage amounts from the nation’s top carriers with Quotacy.
Which kind of life insurance do I need?
Term Life Insurance
In most cases, an individually-owned term life insurance policy is the best option. It provides coverage for a specific amount of time to replace lost income due to the unexpected death of a provider. The life insurance proceeds (death benefit) can cover funeral costs, mortgage or rent payments, and help pay for your children’s education. The beneficiary can use the proceeds however they wish.
There aren’t too many bells or whistles, which makes term life insurance the most affordable type of life insurance available. You can add on certain benefits, which are called life insurance riders, to customize a term policy for specific needs, but for the most part term life insurance is straightforward and simple. If you die during the term, the policy beneficiary(ies) will collect the death benefit. If not, the policy will end once the term is over.
If a life insurance policy is individually owned, versus employer-sponsored, this means you take the coverage with you wherever you go. It doesn’t terminate if you leave your job.
Term life insurance is easy to buy online though Quotacy. Run term life insurance quotes in less than a minute and see real-time estimated pricing without giving away any contact information. If you’re ready to see your estimated quote, head over to our term life insurance quoting tool now.
Permanent Life Insurance
Permanent life insurance provides coverage on an insured person for their entire life as long as the premiums are paid. With many types of permanent policies, a portion of these premiums go toward building cash value within the policy. This cash value accumulates year after year and the policyowner can take out tax-free loans against it or withdraw the cash like you would a bank account.
However, loans and withdrawals can reduce the death benefit your beneficiaries receive. The balance of the loan accrues interest and if you don’t pay it back, this amount plus interest is taken from the death benefit before it’s paid to your beneficiaries upon your death. In addition, if the balance and accumulating interest ever exceeds the policy’s total cash value then the policy will terminate.
Withdrawals cannot be paid back. It’s permanently subtracted from the cash value and the death benefit. This means there is now less cash value left to earn dividends, accumulate, and borrow against.
Permanent life insurance can be a great asset in the right situations. It’s worth considering if:
- You’re in a high tax bracket.
- You’ve maxed out all available retirement accounts.
- You want insurance to cover estate taxes when you die.
- You own a business.
- You have a loved one who will be dependent on you his or her entire life.
The first four considerations would likely be best matched with a whole life insurance policy or universal life insurance policy. There are risks and costs to these policies, but also tax advantages. Talking with an advisor is essential when buying a permanent life insurance policy since they are far more complex than term life insurance. Learn more about permanent policies and get quotes by heading over to our whole life insurance education page.
If you need permanent life insurance mainly to have lifelong coverage and are more interested in saving money versus the bells and whistles, then guaranteed universal life (GUL) insurance is a great plan to consider. Guaranteed universal life insurance is less expensive and simpler than other permanent products. You typically won’t get the extra features like cash value or dividends but you’ll have lifelong coverage as long as the premiums are paid.
Below you can compare the costs between whole life and guaranteed universal life policies. These applicants in this example are healthy and have never used tobacco.
| $250,000 Whole Life Insurance Policy | $250,000 Guaranteed Universal Life Insurance Policy |
|---|---|
| Male, 40 = $375 per month | Male, 40 = $172 per month |
| Female, 40 = $325 per month | Female, 40 = $153 per month |
Because guaranteed universal life insurance is less complex than other types of permanent life insurance, you can instantly see quotes and buy it online through Quotacy without needing to schedule a phone call consultation first.
Simply pop over to our term life insurance quoting tool, but instead of choosing a specific term length, move the slider in the Length of Coverage box all the way to the right to “Forever”. This will allow you to view quotes for all the guaranteed universal life insurance options available to you.
Both Term and Permanent Life Insurance
There’s no rule that says you have to pick sides. You are allowed to own both term life insurance and permanent life insurance policies. This is a common strategy for individuals who want lifelong protection, but can’t afford one large whole life insurance policy to cover all their needs.
The most cost-effective strategy is to buy enough term life insurance that will cover all your debt and financial responsibilities. And choose a long enough term length to protect your family until all or a majority of your debt is paid off. Then also purchase a small whole life insurance policy to simply pay for your end-of-life expenses. This may include your funeral or to leave behind an inheritance.
Maria is 30 years old. She’s an assistant account executive at a supply chain management company. She contributes 6% of every paycheck to her 401(k). She also has an employer-sponsored $50,000 group term life insurance policy.
At 32, Maria gets married. She and her husband each purchase a $500,000 30-year term life insurance policy naming one another primary beneficiaries. Her premiums are $30 per month.
At 33, she and her husband also each purchase a $50,000 whole life insurance policy naming one another primary beneficiaries. Her premiums are $51 per month.
When Maria is 34, they have their first child.
At 35, Maria and her husband buy their first home. In this same year, she’s promoted to account executive and receives a raise. She also opens an IRA account and contributes $200 to it each month.
When Maria is 36, they have their second child.
At 53 years old, Maria’s $50,000 whole life insurance policy has a cash value of $12,221. If she desired, Maria could withdraw from this amount or take out a policy loan against it.
At age 55, Maria and her husband are officially empty nesters.
At age 60, she and her husband send in their last mortgage payment.
At age 62, their individually-owned term life insurance policies end. Their whole life insurance policies are still active.
At age 67, Maria retires and her group term life insurance policy terminates.
Considering this example, if Maria died unexpectedly any time between the ages of 32 and 62, her husband would receive benefit checks of $50,000 (group term life insurance), $500,000 (individually-owned term policy) and $50,000 (whole life policy minus any policy loans and interest, if any).
After Maria’s individually-owned term policy ends and she retires from work, her husband would receive the whole life insurance policy’s death benefit of $50,000 (minus any policy loans and interest, if any) whenever she died. If her husband dies before Maria or at the same time as Maria, the $50,000 would go to the contingent—or back up—beneficiary.
Laddering Term Life Insurance Policies
Another good life insurance strategy is laddering. Laddering life insurance policies can mean buying more than one policy at a time with varying term lengths and coverage amounts, or it can mean owning more than one policy and purchasing them at different intervals.
The laddering strategy is ideal if you have different financial obligations you want to cover but don’t want to pay expensive premiums for one large term life insurance policy.
Maria wants life insurance coverage to ensure her children will have money for college, the mortgage will be paid, and to provide income replacement to her spouse in case she dies unexpectedly. Instead of purchasing a single $1,000,000+ life insurance policy, she decides to layer multiple policies to save money and avoid being over-insured.
Policy 1: $500,000, 10-year term policy to financially protect her children until they reach adulthood
Policy 2: $300,000, 20-year term policy to cover the mortgage
Policy 3: $250,000, 30-year term policy to replace her income for her spouse until he retires
By layering these policies, for the first 10 years Maria will have over one million dollars in coverage. Then the amount of coverage (and what she pays in policy premiums) will decrease as her insurance needs decrease.
Because her age and health play a significant role in determining policy premium costs, buying the policies all at once, instead of waiting for when the needs arise, saves her money.
How to Buy a Life Insurance Policy
With Quotacy by your side, it’s never been easier or more affordable to buy life insurance.
Our term life insurance quoting tool doesn’t require any contact information upfront to see pricing. This allows you to comparison shop in peace without being bombarded with sales calls before you’re ready to apply.
When you’re ready to apply, the online application is simple and only takes a few minutes to complete.
After you apply, your Quotacy agent will review your application to ensure the insurance company you chose when applying is the best match for your risk factors. We work with over 25 of the nation’s top-rated life insurance companies and these companies may not view lifestyle and health information in the same light.
Comparison shopping is the best way to find the best price on life insurance. Quotacy shops the market for you at no extra cost.
If there is a company that is likely to treat your application more favorably than the one you applied to, your Quotacy agent will let you know.
Pop on over to our quoting tool to start shopping and financially protect your family.
0 Comments