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Life Insurance Basics: Purpose, Policy Options & Costs

July 10, 2023
Our goal is to educate and advise on life insurance options, so you can feel confident in making the right choice, whether that’s through Quotacy or somewhere else. To ensure we provide accurate and trustworthy information, our writers follow strict editorial standards.

Some people only think of life insurance as money for their funeral, but it goes far beyond that. For many families, the most crucial reason to have life insurance is to replace a provider’s income.

In this guide, we’ll explore how life insurance works, your different options, and essential life insurance basics you should know.

Understanding Life Insurance

Life insurance is a valuable financial tool to help you protect your loved ones from economic hardship if you pass away unexpectedly.

If you have a policy, your beneficiaries receive a death benefit if you die, as long as it’s active. This money comes at a time your family needs it most.

The primary benefits of life insurance include:

  • Financial protection
  • Customizable coverage
  • Tax-free funds
  • Peace of mind

Parties on a Policy

A life insurance policy involves several parties with distinct roles and responsibilities.

  • Owner: The owner controls the policy and is responsible for paying premiums. They also have the authority to designate beneficiaries, access any available cash value and dividends, and transfer ownership.
  • Insured: The person whose life is covered. If they die while the policy is inforce, the death benefit is paid out. Premiums are determined based on their risk factors such as age, health, and lifestyle.
  • Beneficiary: The person or entity who receives the death benefit proceeds. You can name multiple beneficiaries on one policy.
  • Insurance Company: Also known as the insurer, provides life insurance coverage. Their responsibilities include collecting payment, assessing risk before offering coverage, determining a risk class for the insured to set pricing, and paying the death benefit when the insured dies.  
h Note: It’s common for the owner and insured to be the same person. The owner and beneficiary can also be the same person.

Types of Life Insurance Policies

A wide range of life insurance policy options exist to fit various needs. These options can be categorized into two main types: term life insurance and permanent life insurance. The right policy depends on your needs and budget.

Term Life Insurance

Term insurance is temporary coverage. It’s the most commonly purchased type of life insurance for families because it fits most budgets and aligns with specific financial goals and obligations.

Term life insurance policy details:

  • Policy length: Term life insurance covers a specific period, typically 10 to 40 years. After this term ends, your coverage expires unless you renew or convert it for a higher premium.
  • Death benefit: Also known as the coverage amount, varies widely, starting as low as $50,000 and going up to $65,000,000 or more. If the insured dies during the term, the beneficiaries receive the death benefit amount, typically tax-free.
  • Premiums: Term life insurance generally features lower premiums than any other policy. Once coverage is purchased, the rate remains fixed for the entire term, providing predictable and affordable payments.
  • Optional riders: Term life insurance policies offer the option to add various riders to customize the coverage according to individual needs. Some riders, such as an accelerated death benefit rider, are available at no additional cost. Other riders, such as a child rider or waiver of premium rider, require an additional fee for inclusion.

Permanent Life Insurance

Permanent life insurance offers coverage for the insured’s entire lifetime as long as premiums are paid. Many permanent policies also have the potential to accumulate cash value and earn dividends you can access while alive.

  • Cash value: As the policy matures, the cash value gradually increases, allowing you to borrow against this accumulated amount through policy loans or withdrawals.
  • Dividends: Some whole life insurance policies can earn dividends. These can be received as cash payments, used to make premium payments, or reinvested to acquire additional coverage, enhancing the policy’s overall value.

Permanent life insurance options include whole life, universal life, or variable life insurance. Each offers distinct features and flexibility.

Permanent life insurance policy details:

  • Policy length: Covers your entire life. As long as the policy is kept active by paying the required premiums, your beneficiaries receive a payout no matter when you die.
  • Death benefit: Coverage options for permanent policies range from a few thousand dollars to millions. When you die, the death benefit is typically received tax-free, minus any due policy loans if applicable.
  • Premiums: Permanent life insurance policies have higher premiums than term policies due to the lifelong coverage and the cash value component. They can be fixed or flexible, depending on the policy details.
  • Optional riders: Similar to term life, permanent policies also offer riders to enhance coverage. These riders include features like a guaranteed insurability rider.

Not sure which type of policy is best for you? Learn the details and differences between term and permanent life insurance.

The variation of features between term and permanent makes their costs incredibly different. Consider the table below. The example applicant is a healthy, non-smoking man paying monthly premiums.

20-Year Term PolicyAge 30Age 40Age 50
Whole Life PolicyAge 30Age 40Age 50

See What You Could Pay

Our quoting tool offers instant quotes for term life insurance and guaranteed universal life insurance, a permanent life insurance product focusing on death benefits rather than cash value. Use the tool below to see your life insurance quote.

How Life Insurance Works

If you’re new to buying life insurance, it can feel overwhelming as you consider:

We’re here to answer your questions and demystify life insurance to make your purchase easier.

Determining Coverage Amounts

You know you need life insurance, but you may be uncertain about how much.

A policy’s death benefit can save a struggling family from losing their provider. Understandably, you want to make sure you buy the appropriate amount.

The “right amount” of life insurance is different for everybody. Your needs depend on your financial situation, goals, and family circumstances.

Consider the following questions about your family’s situation to help determine the appropriate coverage to buy:

  • What is your income? Your policy should provide your loved ones enough money to replace the income you once provided until they can regain financial stability. A good starting point is to multiply your annual income by 10.
  • How much debt do you have? If you have debts that would become your family’s responsibility upon your death, include the outstanding amounts when deciding on the coverage to purchase. Consider both “good” debt, such as a mortgage, and “bad” debt, such as credit card balances.
  • How many children do you have, and how old are they? Raising children is costly, and the expenses increase with each child. Additionally, the younger your children are, the longer they need financial support. Therefore, the more young children you have, the more life insurance you need.
  • How much do you have in emergency and retirement savings? If you have diligently saved for emergencies and retirement, you can subtract these amounts from your coverage needs because your spouse will have access to these funds upon your death.
  • What other investments do you have? If you have other means of income that may continue even after you were to die, such as real estate investments, you can also subtract this amount from your coverage needs.
  • What are your end-of-life wishes? Burial costs more than cremation and memorial services can involve various expenses. Remember to include these costs when calculating your needs.

Essentially, the amount of life insurance you need can be approximated by calculating the total cost of your financial obligations and then subtracting any funds your loved ones can access after your death. Looking for an even easier way to determine your coverage needs? Use our free life insurance calculator.

Rates & Risk Factors

You understand the importance of life insurance, but you may wonder if it’s affordable. Fortunately, term life insurance is often cheaper than most Americans assume. Year after year, LIMRA conducts surveys to gauge people’s knowledge of life insurance, and on average, individuals tend to overestimate its cost by three times.

Life insurance companies underwrite applicants based on their risk factors. For example, smokers generally pay higher premiums than non-smokers, as smoking significantly lowers life expectancy.

During the underwriting process, you’re assigned a risk class that helps to determine how much your policy will cost.

The most common risk classifications fall into three groups: preferred, standard, and substandard.

  • Preferred classes are reserved for the healthiest individuals and offer the best pricing.
  • Standard risk classes are for people with average health and life expectancy.
  • Substandard classes are assigned to high-risk individuals.
  • Tobacco users have their own standard and preferred classes.

Applicants typically start in the Standard risk class and can be moved to a higher or lower risk class based on their unique health and lifestyle factors. The table below provides an example of how risk classes impact your price.

30-Year-Old Applying for a $500,000 20-Year Term Policy
Risk ClassMonthly Premium
Preferred PlusMale: $18.83 | Female: $15.16
PreferredMale: $23.82 | Female: $18.84
Standard PlusMale: $29.35 | Female: $25.30
StandardMale: $34.56 | Female: $28.67
Preferred TobaccoMale: $65.90 | Female: $54.15
Standard TobaccoMale: $81.87 | Female: $64.61
Table A (or Table 1)Male: $34.78 | Female: $29.72
Table B (or Table 2)Male: $40.21 | Female: $34.13
Table C (or Table 3)Male: $45.63 | Female: $38.55

In addition to your health and lifestyle factors, your age is another important determinant of your rate. Generally, the younger you are, the cheaper your life insurance is.

Consider the table below, demonstrating how your age influences the cost.

Healthy Individual Applying for a $500,000 20-Year Term Policy
Age at PurchaseMonthly Premium
30Male: $18.83 | Female: $14.86
35Male: $20.21 | Female: $15.16
40Male: $28.42 | Female: $17.26
45Male: $42.50 | Female: $24.00
50Male: $69.47 | Female: $54.52
55Male: $112.60 | Female: $82.76
60Male: $200.67 | Female: $140.51
65Male: $380.19 | Female: $257.34
70Male: $790.21 | Female: $697.30

Death Benefit Claims

Life insurance companies do not receive immediate notification when one of their clients passes away.

The beneficiaries are responsible for submitting a death benefit claim to the insurance company. This crucial step highlights the importance of open communication within your family regarding your life insurance.

Take the time to explain the following to your family:

  • What life insurance is for and why it matters
  • Ensure they know where to locate the policy information when needed
  • Note that beneficiaries can use the life insurance proceeds however they wish. No limitations or restrictions are imposed on how the funds can be used.

Policy Review

As your life changes, your life insurance needs may change too. We recommend reviewing your life insurance policies annually and with every significant life change, like marriage and births.

By regularly reviewing your policy, you ensure coverage remains sufficient and make any necessary updates.

Examples of policy items that may need updating:

  • Your address
  • Your bank account information
  • Beneficiary designations
  • Children listed on a child rider

Examples of why your coverage may no longer be adequate:

  • Increase in income: If your income has increased, you may need to adjust your life insurance coverage to protect your loved ones adequately.
  • Home purchase: Purchasing a new home may indicate a change in financial responsibilities, which calls for evaluating your coverage.
  • Small business venture: Starting or expanding a small business may require additional coverage to safeguard against potential financial risks.
  • Growing family: More children may prompt increased coverage to ensure their well-being.
  • Marital status change: Changes in marital status, such as marriage or divorce, can impact your coverage requirements and beneficiary designations.
  • Caregiving responsibilities: If you care for aging parents or dependent family members, reviewing your coverage to support them may be prudent.

FAQs: Life Insurance Basics

Here are some common questions and brief answers to help you understand the basics.

Who Needs Life Insurance?

You need life insurance if anyone depends on you. Life insurance provides financial security in the event of your premature death. It’s particularly vital for parents working outside and inside the home.

What Is the Most Common Type of Life Insurance?

Term life insurance is the most common type. It offers coverage for a specific period, usually 10 to 40 years, and pays out a death benefit if you pass away during that time. It provides affordable protection and can cover temporary financial obligations.

What Happens if I Miss a Payment?

If you miss a premium payment, your life insurance policy enters a grace period, typically 30 days, during which you can still pay without penalty. However, if you miss the grace period, the policy may lapse, terminating coverage. Make sure to buy a life insurance policy you can afford long-term.

Compare Quotes From the Nation’s Top Carriers

Life insurance companies offer varied prices because they each assess risk differently. Comparison shopping is crucial to find affordable coverage. However, individually contacting individual companies is time-consuming. That’s where Quotacy comes in.

As a broker, we have access to a wide range of insurance companies and products. When you apply, you’ll be assigned a dedicated agent who will advocate for you.

After evaluating your risk profile, we will identify the insurance company that best suits your needs. Your agent will handle the formal submission of your application and provide you with regular updates throughout the process.

Get a term life insurance quote today. You can instantly view pricing without having to disclose any personal information.

Note: Life insurance quotes used in this article are accurate as of July 10, 2023. These are only estimates and your life insurance costs may be higher or lower.


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