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Let’s first define life insurance in its most basic form. Life insurance is a type of insurance that pays money to the family of someone who has died. 

When life insurance was first used in the 1800s, it was designed to help widows and orphans when the head of the household passed on. Since then life insurance has evolved into much more than that.

Key Takeaways

Life insurance insures someone’s life. Upon this person’s death, the insurance company pays a death benefit to the policy’s beneficiaries.

If you have anyone who relies on you financially, you need life insurance. What type and how much you need depends on your unique situation.

The cost of life insurance will vary by individual and type of product. Don’t wait to buy life insurance because your age plays a large role in premium pricing and you never know what life may bring.

Who needs life insurance?

The need for life insurance depends on an individual’s personal circumstances. If you’re wondering whether or not you need life insurance, consider for a moment what would happen to your loved ones if you died unexpectedly.

  • Could your family afford to stay in the same home?
  • Could your children attend college?
  • Could your spouse afford child care, car and house maintenance, and pay off debt on his/her own?
  • If you’re single, could your parents, children, or other relatives afford your funeral, final expenses, and any debts you may have?

Parents have the most need for life insurance. It costs a lot of money to raise a child from birth to age 18. And in most cases, the child does not automatically become financially independent on their 18th birthday.

Would your loved ones have enough money to take on these financial responsibilities without your income? Life insurance protects against the what-ifs in life.

An unexpected death in the family is not only emotionally devastating, but is often financially devastating as well if the provider did not have life insurance.

What can life insurance do?

Life insurance can help protect you in three key areas of a financial plan: your income, retirement, and estate.

Income

  • Family income replacement – Life insurance benefits may enable your survivors to maintain their current lifestyle and standard of living, despite the loss of your paycheck.
  • Mortgage protection – Continuing to make mortgage payments may be a struggle for your family without your added income. Life insurance death benefits may be used to pay off outstanding mortgage balances, enabling your family members to continue living in their current home.
  • Children’s education – Funding college education today can be very difficult. A properly structured life insurance policy may provide a benefit that ensures that college is financially feasible even in the event of your death.
  • Life events – Life insurance can help pay for life events, such as paying for a child’s wedding.

Retirement

  • Retirement income – With living benefits, certain life insurance products can help supplement your retirement income.
  • Surviving spouse – Without your income, saving for retirement may be challenging for your spouse. Insurance benefits can help close that gap.

Estate

  • Estate planning – Life insurance can provide funds for estate taxes and other liabilities upon your death, and may help your survivors avoid the sale of a home or business in order to meet those obligations.
  • Wealth transfer – Life insurance can be used as a tool to help pass assets to beneficiaries for maximum tax efficiency.
  • Business protection and continuation – A buy-sell agreement, funded with life insurance proceeds, can be a powerful tool to help ensure the future of a business.

See what you’d pay for life insurance

Comparison shop prices on custom coverage amounts from the nation’s top carriers with Quotacy.

What are the types of life insurance?

There are two basic types of life insurance available: term and permanent.

Term life insurance is generally less expensive and is designed to provide pure death benefit protection for a specific period of time. If you die during the term, your beneficiaries receive a tax-free death benefit check. If you do not die during the term, you do not receive a refund.

Permanent life insurance can last a lifetime and may provide additional value beyond a death benefit, such as cash value and dividends. Permanent life insurance pays a death benefit when you die, not if you die.

Term Life Insurance

There are five key aspects of term insurance:

  1. Term insurance provides protection for a specific period of time. The term length options range from 10-40 years, and premiums are fixed the entire term.
  2. Term is often used when you know that at some point in the future you will no longer have a need for coverage.
  3. Term is less expensive than permanent.
  4. There is no cash value to access with term insurance.
  5. If you need to extend your coverage beyond your initial term, converting to permanent insurance may be an option.

Reasons you might want to consider term life insurance:

  1. You have a limited budget. Policy premiums for term insurance are generally inexpensive.
  2. You have a family with young children. You want to be able to financially support your children up to their adulthood.
  3. You have short-term insurance needs, such as mortgage protection, cost of tuition, and debts.
  4. You want to supplement an existing life insurance policy. You may consider term if you currently have only a group life policy or a permanent policy, but need some additional coverage.

Permanent Life Insurance

There are different permanent life insurance products available:

  • Whole Life is a straightforward permanent policy offering a level premium with both a death benefit and a cash value component.
  • Universal Life offers more flexibility, including the death benefit amount and premium payment amounts.

A whole life policy may feature:

  • Level premium payments
  • Death benefit coverage
  • Guaranteed cash value accumulation
  • Tax-deferred growth on policy values
  • Access to policy values through policy loans or surrenders

A universal life policy may feature:

  • Flexible premium payments
  • Adjusted death benefit coverage
  • Guaranteed minimum interest rate
  • Tax-deferred growth on policy values
  • Access to policy values through policy loans and withdrawals

» Learn more: Whole vs Universal Life Insurance Guide

Reasons you might want to consider permanent life insurance:

  1. You want your life insurance coverage to last a lifetime.
  2. You want both life insurance protection and tax-advantaged accumulation of cash value.
  3. You might need to access your policy’s cash value through loans or withdrawals to meet wealth transfer or retirement planning needs.
  4. You have advanced planning needs like business continuation or key person protection.
  5. You have dependents who will rely on you for their entire lives.

How much life insurance do I need?

Everyone’s insurance needs are different and determining your exact insurance needs takes a little numbers crunching. Quotacy has a life insurance needs calculator that will suggest a coverage amount after you answer a few questions about your circumstances.

Life insurance is not one-size-fits-all.

For example, if you’re a college graduate with $100,000 in private student loans, loans which were co-signed by your generous parents, and you don’t plan on ever having children and you want it to just be you and your best friend, Fido, in your apartment for the next foreseeable future, then you likely only need a small $100,000 life insurance policy to cover your loan debt, funeral expenses, and to make sure Fido is taken care of if something happened to you.

On the other side of the spectrum, if you’re a wife and mother of three young children and live in a home you and your husband took a $400,000 mortgage loan out on, then you’re going to need much more coverage than the dog-owning college grad.

How much will life insurance cost me?

Policyowners pay a certain amount, called premiums, to keep their life insurance policies inforce, or active. Premiums will differ between insurance companies and they will also differ between the types of insurance policies and the amount of coverage you get.

The insurance company determines premium costs by using statistics and mathematical calculations done by the actuarial department of the insurance company. But not all insurance companies use the same pricing guidelines. This is why working with a life insurance broker is the best way to ensure you’re getting the best price on a life insurance policy.

Life insurance brokers work with many different life insurance companies, versus being loyal to just one. Brokers are able to shop around to ensure you’re getting the best deal based on your risk factors.

When you apply through Quotacy, your agent reviews your application and makes sure you’re matched with the insurance company that will offer the best rate.

Let’s take a look at some examples to help illustrate the cost of life insurance.

Example 1:

James is 35 years old and lives with his wife Anne. They are currently working on paying off their $250,000 mortgage and he also has $50,000 left in student loans and $10,000 left to pay on his truck. He and Anne don’t currently have any children nor do they plan to.

Here are his answers to the life insurance needs calculator questions:

  1. What is your annual income? $70,000
  2. How many years of income do you want to replace? His wife works full-time and without a mortgage payment, he decides she would be able to become financially stable again after two years.
  3. How much do you owe on your mortgage? $250,000
  4. How much additional debt do you have? $60,000
  5. How much do you want to contribute to children’s college expenses? $0
  6. How much money will be needed for a funeral/burial? $10,000
  7. How much money do you currently have in savings and investments? $25,000
  8. How much life insurance do you already own that you plan on keeping? $0

Using the calculator, James’ insurance needs equal $450,000 in coverage. He would like to have this coverage last until he and Anne hit their retirement years, so he opts for a 30-year term. Using the quoting tool on Quotacy, we can estimate his monthly premium payments to be about $32, if he is a non-smoker and does not have any health issues.

Recap: A $450,000 term policy that will last until James turns 65 will cost him $32 per month.

Example 2:

Tim is 30 years old and lives with his wife Lucy and their two young children, one of which has been diagnosed with Down syndrome. Because their child is likely to need special care for the remainder of his life, Tim decides on whole life insurance to make sure the family will always be financially protected.

A $250,000 whole life policy for a healthy 30-year-old male has an estimated monthly premium of $238. As the policy matures, cash value will accumulate that Tim can use to pay for any needs that arise, such as medical bills.

Accessing the cash value will decrease the policy’s death benefit, however, unless he pays back the loan against the cash value before he dies.

Owning a whole life insurance policy ensures that when he dies, there will be funds available so his child continues to receive the best care.

Whether you only need simple term life coverage, or have more complicated needs better served by a permanent policy, Quotacy can help.

» Compare: Term life insurance quotes

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius, CLU

Senior Editor and Licensed Life Insurance Expert

Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.