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Life insurance isn’t the most pleasant topic to think about — but when you die, your family might be relieved you signed up for a policy.
What is life insurance?
Life insurance pays out after your death to the people you designate as beneficiaries — usually children, a spouse or other family members. It’s an important safety net if anyone depends on you financially. The life insurance payout can pay debts such as a mortgage, replace your income and provide college tuition funds.
Types of life insurance
Term life insurance covers a limited time period, such as 10, 20 or 30 years, and does not build cash value. If you die within the term, your beneficiaries receive the payout.
Permanent life insurance costs more than term but offers additional features like cash value that you can borrow against and grows over time. Whole life is the best-known form of permanent life insurance. Other types include universal, variable and variable universal.
» MORE: Types of life insurance
Comparison of types of life insurance
|Feature||Term life||Whole life||Universal life*|
|*Details regarding premium flexibility and death benefit flexibility vary for universal life policies.|
|Choices in policy length||
|Builds cash value||
|Premium payments may be flexible||
|Death benefit amount may be flexible||
|Most affordable way to buy life insurance||
|Cash value usually can be linked to investments||
Who needs life insurance?
NerdWallet recommends life insurance for anyone who has loved ones who depend on them financially. This includes parents, homeowners with a mortgage, business owners and others.
For many people the best option is term life insurance, which lasts for a limited time. Others may need permanent insurance, which does not expire as long as premiums are paid.
|Life insurance can help replace your lost income so your family can continue to pay for everyday expenses.||Term life insurance can cover your working years.|
|Life insurance would cover the cost of paying for services the parent does for free, such as child care.||Term life can cover the years your kids are young.|
|A policy could cover the support payments that a divorced parent makes.||Term life can cover the years of support payments.|
|Life insurance can make sure the child will have financial support after a parent dies.||Permanent life insurance provides a payout no matter when you die.|
|A policy can cover mortgage payments, so your family doesn’t have to move.||Term life insurance can match the years of a mortgage.|
|Life insurance could cover the cost of the debt.||Term life can be timed to end with the debt payments.|
|Life insurance can provide funds for heirs to pay estate or inheritance taxes.||Permanent life insurance is best for those with estate tax concerns.|
|If you don't have a lot of wealth, life insurance can provide a small inheritance to heirs.||Permanent life insurance will pay money for the inheritance, no matter when you die.|
|Life insurance can pay off business debts, help heirs to the business pay off estate taxes, or fund a buy-sell agreement that allows a business partner to buy out your share.||Term life or permanent life, depending on the issue to be solved.|
|Life insurance with a cash value component can provide a supplemental source of retirement savings.||Permanent life insurance, which builds cash value that you can access.|
|Small life insurance policies can pay for your funeral and final expenses.||Permanent life, such as final expense insurance.|
Term life is sufficient for most families. It costs less than whole life, and you can choose a term that matches the years when people depend on you financially. By the time the term ends, you may no longer need life insurance: Your house will be paid down, your kids will be grown, and you’ll have some money in the bank.
However, whole life insurance and other forms of permanent coverage can be useful in some situations.
|Choose term life if you:||Choose whole life if you:|
How to buy life insurance
Life insurance isn’t a purchase you make often, so you may not know where to start. Here’s how to get the coverage you need.
Determine how much life insurance you need
The amount of life insurance you need depends on your family’s needs and priorities. Do you have debts to pay? Will your family need to replace your income to meet everyday living expenses? Do you want to fund a college education for your children?
Although you may have some life insurance through your job, it’s generally a good idea to have your own policy in addition to the coverage provided by your employer. The policy through your employer is likely not enough to meet your family’s financial needs and typically ends if you leave the job.
Debt and income replacement calculators can help you decide how much life insurance coverage you need. Here’s a calculator to get you started. You can find more here: How much life insurance do I need?
Evaluate life insurance companies
Life insurance is a long-term purchase, and you want a company that can pay claims many years in the future. The biggest life insurance companies have long track records, but some smaller insurers are solid contenders as well. Check out insurers’ financial strength through ratings agencies such as A.M. Best or Standard & Poor’s. NerdWallet recommends avoiding insurers with an A.M. Best rating of B or lower, if possible.
NerdWallet’s ranking of the best life insurance companies also gives points to companies that have higher customer satisfaction scores and fewer complaints to state regulators.
Not all companies sell the same types of policies, and some focus on certain types, such as life insurance policies for children. Narrow your choices by knowing generally the type of life insurance you want.
Gather info you need
When you apply for life insurance, you’ll need to have a few documents on hand. You’ll likely need to provide information about your current and past health conditions and your family health history. The insurer may need your consent to get medical records and ask you to take a life insurance medical exam. Insurers also check other data sources to determine term life insurance quotes, such as MIB Group, which collects data on medical conditions, your driving record and hazardous hobbies.
You’ll need to choose beneficiaries, who will receive the payout when you die. Be sure you have their Social Security numbers and dates of birth.
You also may have to answer questions about criminal convictions and driving violations such as a suspended driver’s license or DUI, particularly if they happened within the past few years.
Compare life insurance rates
The best way to save on life insurance is to compare all your options. To be sure you find the best rate for you, compare life insurance quotes from several companies. Prices can vary widely, depending on the type of coverage you choose and personal factors such as your age, gender and health.
To give you a rough idea of what to expect, here’s a look at average annual life insurance rates for men and women at different ages and for different policy lengths.
|Person covered||Policy amount||Whole life||30-year term life||20-year term life|
|Annual premiums using an average of three lowest prices available in each category for healthy men and women. Source: Quotacy.|
|Male, age 30||$250,000||$2,403||$227||$152|
|Male, age 40||$250,000||$3,572||$343||$212|
|Male, age 50||$250,000||$5,548||$819||$473|
If you can, apply when you’re healthy
Life insurance companies use life expectancy as the basis for determining rates. Anything that could shorten your life expectancy could lead to a higher price. Your age, gender, medical conditions and family’s health history are all taken into consideration.
So it’s smart to buy life insurance as early as possible, when you’re young and healthy. If you wait, your rates will increase solely because of your age. If new health problems arise, your rates could go up even more.
But if you already have a health issue, don’t let that stop you from getting life insurance quotes. Insurance companies vary in how they view pre-existing conditions, and some types of life insurance don’t require a medical exam.