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Your family is unique — your life insurance should be, too.

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. Buying life insurance can be quick and easy. Unsure of where to start? We’ll walk you through the whole process, so you can get the right amount of coverage for you and your family. Learn how life insurance works, what types of policies are available, how much coverage costs, and how to buy a policy.

What is life insurance?

A life insurance policy is a contract with an insurance company. In exchange for regular premiums you pay over time, life insurance pays out after your death to the people you choose as beneficiaries — usually children, a spouse or other family members. It’s an important safety net if anyone depends on you financially. A life insurance payout can be used for debts such as a mortgage, to replace your income, or provide funds for college tuition.

Types of life insurance

There are two main types of life insurance:

Term life insurance covers a limited time period, such as 10, 20 or 30 years, and doesn’t build cash value. If you die within the term, your beneficiaries receive the payout. When your term life insurance expires, you can buy a new policy or reassess your options.

Permanent life insurance costs more than term but offers additional features like cash value that you can borrow against, which grows over time. Whole life is the best-known form of permanent life insurance. Other types include universal, variable and variable universal.

» MORE: The differences between term and whole life insurance

Who needs life insurance?

NerdWallet recommends life insurance if anyone depends on you financially. For many people, the best option is term life insurance, which lasts for a limited time. Others may need permanent insurance, which doesn’t expire as long as premiums are paid.

Term life insurance costs less than permanent insurance, 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. Term life is sufficient for most families.

However, whole life insurance and other forms of permanent coverage can be useful if you want to provide money for your heirs regardless of when you die. A permanent life insurance policy can also be useful if you want to spend your retirement savings but still leave an inheritance or money for final expenses, such as funeral costs.

» MORE: Who needs life insurance?

Average life insurance rates for 2021

The cost of life insurance depends on many factors, including your age, your health and how long the policy will last. Here’s a look at average annual life insurance rates for healthy men and women at different ages for $500,000 of coverage.

Age and gender Average rate for 20-year term life Average rate for whole life
Male, 30 $227 $4,015
Female, 30 $193 $3,558
Male, 40 $341 $6,042
Female, 40 $289 $5,413
Male, 50 $842 $9,432
Female, 50 $654 $8,440
Source: Quotacy

» MORE: Average life insurance rates for 2021

 

How to buy a life insurance policy

Shopping for life insurance during the pandemic? Be aware that insurers may have changed their products and policy applications. For the latest information on how to cope with financial stress during this emergency, see NerdWallet’s financial guide to COVID-19.

Life insurance isn’t a purchase you make often, so you may not know where to start or how to get life insurance quotes. Here’s how to get the coverage you need.

Determine how much life insurance you need

Consider your family’s needs and priorities when figuring out the amount of life insurance to purchase. Do you have debts to pay? Will your family have 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 life insurance provided by your employer. The policy through your employer likely isn’t 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 you need before you get quotes.

Evaluate life insurance companies

Life insurance is a long-term purchase, so 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 fewer complaints to state regulators.

Not all companies sell the same types of policies, and some focus on specific products, such as life insurance policies for children. Narrow your choices by reading life insurance reviews and knowing the type of coverage you want before you begin comparing life insurance quotes.

Gather info you need

Collect the information you need to apply for term life insurance or a permanent policy before you start the application process. You’ll likely need to provide information about your current and past health conditions, as well as your family’s 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, 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 quotes

The best way to save on life insurance is to compare all your options. To find the best rate for you, be sure to 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.

» MORE: 5 clever hacks for buying life insurance

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.

So it’s smart to buy a life insurance policy as early as possible, when you’re young and healthy. If you wait, your life insurance quotes will increase solely because of your age. If new health problems arise, your rates could go up even more.

You can still get life insurance if you have a medical condition. Insurance companies vary in how they view pre-existing conditions, and some types of life insurance don’t require a medical exam.

Life insurance FAQ

In general, people need life insurance if their death would place a financial burden on others. Examples include breadwinners, parents, homeowners, business owners and people with co-signed debt.
The amount of coverage you need depends on how much money you want your beneficiaries to receive. Ten times your annual income is a common estimate, but rules like this are not universal and may not reflect your specific situation. Take into account your current finances and future obligations, such as income, debts and daily expenses, when deciding how much life insurance you need.
The average life insurance rate is $26 a month, based on a $500,000, 20-year term life policy, which is the most common length sold. That being said, life insurance premiums can vary significantly among applicants and policy types. For example, the average rate for a $500,000 whole life policy for a 40-year-old female is roughly $400 a month.
Life insurance premiums are calculated using a variety of factors, such as age, health, driving history, policy length and coverage amount. Insurers use this information to estimate mortality rates and then set your premium based on the risk of insuring you.
You can gauge the financial strength of a life insurance company through ratings agencies like A.M. Best or Standard & Poor’s. NerdWallet recommends looking for an insurer with an A.M. Best rating of B+ or better. An insurer’s financial strength can give you an idea of how reliable the company will be in paying out a future claim. This is particularly important for life insurance as these policies often have to last decades.
When applying for a life insurance policy, you’ll likely need to provide information about your health and even complete an in-person examination. You may also be required to submit details on your lifestyle, hobbies, beneficiaries and family’s medical history. It’s worth gathering as much information as you can prior to completing a life insurance application to help speed up the process.
Term life insurance is sufficient for most people. It lasts a specific number of years and is typically cheaper than permanent life insurance. However, depending on your needs, you may want a permanent policy, such as whole life, that covers you for your entire life and comes with a cash value component.

 


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Lisa Green

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