When you're shopping for the best life insurance policy for you and your family, there are important decisions to make. We'll help you determine how much coverage you need, find the right type of policy and get the best price.
How do life insurance policies work?
Life insurance is a contract between you and an insurance company. You pay premiums to keep the policy active, and in return, the company pays a sum of money, known as the life insurance death benefit, to your beneficiaries when you die. Beneficiaries may include your spouse, adult children, or other people or entities.
Beneficiaries generally don’t need to pay taxes on life insurance payouts and can use the money for any purpose, such as repaying debts or covering the cost of your funeral.
Life insurance typically covers natural and accidental deaths. Some policies also offer “living benefits,” which means they pay out a portion of the death benefit while you’re still alive if you’re diagnosed with a serious illness.Find out more about what life insurance covers.
The insured person and the policyholder aren’t always the same. For example, you might want to buy a life insurance policy on your spouse and name yourself the beneficiary if they die. Learn more about buying life insurance on someone else.
Common life insurance terms
Knowing these terms can help you better understand how your life insurance policy works.
- Cash value
Permanent life insurance policies typically have a savings portion that increases in value over time. This is known as the cash value. Once you’ve accumulated enough cash value, you may be able to withdraw money from or borrow against your policy.
- Exclusions
The circumstances in which your life insurance policy won’t pay out, such as death from a risky activity like skydiving. Exclusions vary among insurers and are listed in the policy documents.
- Face value
The basic death benefit of the policy. For example, if you buy a $500,000 policy, the life insurance face value is $500,000.
- Premium
The amount of money you’ll pay to keep your life insurance policy active. With most policies, you have the choice to pay monthly, quarterly, semiannually or annually.
- Rider
A rider is an optional add-on that can be used to customize your coverage.
- Underwriting
Life insurance underwriting is the process an insurer uses to gather information about you and set your premium.
Who needs life insurance?
Life insurance is designed to replace your income when you die. If you have a spouse, kids or other financial dependents, you may want life insurance.
Even if no one relies on your income, there will still be costs associated with your death. For example, your loved ones may have to pay for your burial and other end-of-life expenses. As you mull over whether to buy life insurance, think about your beneficiaries and what they’ll need after you’re gone.
» MORE: Who needs life insurance?
Consider buying life insurance if…
You have a spouse, children or other loved ones who would struggle financially without your income.
You want to cover your own final expenses, such as a funeral, burial or medical costs.
You have debts that other people would be responsible for after you die.
You may not need life insurance if…
No one relies on you financially.
You have enough savings or other assets to cover your final expenses.
You won’t leave any debts for your loved ones after you die.
Which type of life insurance policy is right for me?
There are two main types of life insurance: term and permanent. Term life policies cover you for a set period of time, such as 10 or 20 years. Permanent life insurance can last your entire life and typically includes a cash value component.
Term life insurance
Term life is popular because it's the most straightforward and affordable option. It's useful if you need coverage only for a set number of years, such as while you’re raising kids or paying off your mortgage. If you die during this timeframe, the policy will pay out to your beneficiaries. If you outlive your policy, no one gets paid.
Most term policies are "level," meaning the premiums and death benefit stay the same for the life of the policy. But if you need more flexibility, there are other options:
Annual renewable term life. This type of policy is for short-term coverage. It renews every year, and premiums generally go up each time.
Decreasing term life. With this type of policy, the death benefit goes down over time while the premiums stay the same. It’s often sold by lenders and used to cover a debt if you die before paying it off. (Mortgage protection insurance is an example of decreasing term life.)
Why choose term life insurance?
Term life is sufficient for most people. It’s predictable and affordable, and it covers you for the years you have the most financial responsibilities. Since it's a simpler product than other types of life insurance, you can get term life insurance quotes quickly and easily online. Some term policies can go into effect instantly.
Permanent life insurance
With permanent life insurance, a portion of the premiums you pay goes toward a cash value. Think of this as a savings account — it earns interest over time at either a fixed or variable rate.
Once you've built up enough, you can use the cash value of your life insurance while you’re still alive. For example, you can borrow from it, make withdrawals or use the interest payments to cover your premiums. If you no longer need coverage, you can even cash in your policy.
The way the cash value grows is the main difference between the main types of permanent life insurance. These include:
Whole life. The most popular type of permanent coverage, whole life offers level premiums, a guaranteed death benefit and guaranteed cash value growth.
Burial insurance. A type of whole life insurance, this is a small policy designed to cover final expenses, like your funeral and end-of-life medical care.
Universal life. With universal life insurance, you can adjust your premiums and death benefit as your needs change. The cash value growth is generally tied to market interest rates.
Indexed universal life. Similar to universal life, indexed universal life offers flexible coverage. Unlike standard universal life policies, the cash value growth is typically based on the performance of a stock index, like the S&P 500.
Variable universal life. This policy offers the same flexible coverage as universal life, but you can decide how your cash value is invested. Your insurer will typically present you with a range of stocks, bonds and mutual funds to choose from, making this a more hands-on life insurance policy.
Why choose permanent life insurance?
Permanent life insurance may be a good fit if you have lifelong coverage needs. For example, if you have a child with disabilities, permanent life insurance can help fund a trust for their ongoing support after you die. This type of coverage can also make sure your beneficiaries will receive an inheritance. And the cash value of the policy can be a useful source of funds while you’re alive.
» MORE: Term vs. whole life insurance
Questions to ask when choosing life insurance
When deciding which type of life insurance policy to buy, ask yourself the following questions.
Why are you buying life insurance?
A 65-year-old man hoping to cover burial expenses will have different life insurance needs than a 30-year-old single mom who wants to give her kids a safety net. Understanding why you need life insurance can help you choose the right type of coverage.
The following table includes the most common reasons to buy life insurance, with policy recommendations to match.
Note that the general advice below may not fit your situation. A fee-only life insurance consultant can help you find the coverage that best suits your needs.
Life insurance purpose | Type of policy to consider |
|---|---|
Term life insurance lasting as long as someone will be financially dependent on you. | |
Term or permanent life insurance. Term policies can give you temporary coverage while you build wealth to leave to your loved ones. Permanent policies generally offer a death benefit no matter when you die. | |
Term life insurance that expires once the debt is expected to be paid off. | |
Burial insurance. | |
Permanent life insurance, such as variable or indexed universal policies that let you build cash value based on market performance. |
Are you willing to take a medical exam?
Most life insurance applications include questions about your health, such as whether you smoke and how much you weigh. Some also require you to give urine and blood samples as part of an in-person life insurance medical exam.
Looking for a quicker, less intensive process? Look for a company that sells instant life insurance. These insurers still ask health and lifestyle questions. But if you qualify, they may approve and issue your policy the same day — no exam needed.Another option is guaranteed issue life insurance, which skips both the health questionnaire and medical exam and issues coverage, no questions asked. These policies tend to be for older applicants in the market for final expense coverage.
No medical exam policies may be appealing to people who have health issues or need coverage in a hurry. But if you’re in good health, you’ll probably get lower rates and higher coverage limits by going through the full medical underwriting process.
What’s your budget?
Because you’ll potentially be paying life insurance premiums for decades, it’s important to choose a policy you can afford long-term. If you start missing payments, your policy may lapse — leaving you without coverage for your loved ones.
Term life insurance tends to be significantly cheaper than permanent policies, so it’s easier to fit into most family budgets.
If you think you might want permanent coverage down the road but can’t afford it now, one option is to buy convertible term life insurance. This is a term policy that can be converted to a permanent policy later on, without having to take a medical exam.
How much life insurance do you need?
To figure out how much coverage to buy, start by thinking about your financial obligations now and in the future. Then, aim to take out a policy to match them.
For example:
Add up any major expenses like a mortgage or college fees.
Multiply your annual salary by the number of years you want your beneficiaries to be covered after you die.
Subtract any funds or assets you have that can be used to cover the expenses above.
Need more help? Use this calculator to help you estimate how much life insurance you need.
What other features should you add to your policy?
Riders are extras you can tack on to a life insurance policy. For instance, you might want your premiums covered if you’re no longer able to work, or maybe you want to be able to tap into your policy’s payout if you get sick.
See our full guide to life insurance riders.
Here are a few riders to consider adding to your life insurance policy.
How much does life insurance cost?
In general, term life is much cheaper than permanent life insurance. This is because permanent policies last longer and have a cash value component that grows over time.
If you compare average life insurance rates, you can see the difference. Below are average costs for a $500,000 policy for a healthy, nonsmoking 30-year-old woman, according to Covr Technologies, an insurance brokerage firm.
Whole life insurance: $3,959 per year.
Twenty-year term life insurance: $187 per year.
Many factors go into setting life insurance rates. The biggest ones are your age and health. The younger and healthier you are, the less you’ll pay for life insurance. You’ll also pay more if you need a higher amount of coverage.
Other factors include:
Your gender. Women tend to live longer than men, so their life insurance rates are usually lower.
Your smoking status. Smokers have a greater risk of certain illnesses, so they pay more for life insurance.
Your family medical history. If your parents or other close relatives have had serious health conditions, you might face higher rates.
Your lifestyle and occupation. Risky jobs or hobbies — think firefighting or skydiving — could also lead to higher premiums.
How to buy a life insurance policy
Once you’ve decided how much coverage you need and the type of life insurance policy you want, take these steps to get covered.
1. Get multiple quotes
We recommend getting life insurance quotes from a handful of companies to find the best deal. There are a few ways to shop:
Directly from the insurer. Many insurers let you answer a few questions, get a quote and often buy a policy online. Other companies have sales agents or financial professionals you can work with over the phone or even in person.
Not sure where to start? Check out our list of the best life insurance companies.
- See the best life insurance companies in specific categories
Online comparison sites. Some websites, including NerdWallet, help you to get online life insurance quotes from multiple insurers. This can save you time over visiting individual companies’ websites, though keep in mind the options you see will depend on which companies the site works with.
Life insurance agent or broker. If you’d rather outsource the shopping to someone else, reach out to an independent life insurance agent or broker. These professionals can shop around on your behalf and offer personalized advice about your insurance needs. As with online comparison sites, agents and brokers will provide quotes only from the insurers they partner with.
More Nerdy Perspective
Since life insurance is a long-term commitment, treat it like a big-ticket purchase. Shop around and get quotes from three to five insurers to make sure you're getting the best possible coverage for the best possible price. There are almost 800 life insurers in the U.S. competing for your business — my advice is to let them!
2. Compare companies and policies
You may be tempted simply to buy the cheapest policy, but it’s worth taking a few minutes to compare your options. Below are a few other factors to weigh besides price.
Financial strength. You want to make sure the insurer you choose will be around to pay out your policy years or decades into the future. Financial strength ratings from agencies like AM Best can help you gauge a company’s stability. NerdWallet recommends companies with an AM Best rating of A or higher.
Consumer complaints. You can find consumer complaint information on the National Association of Insurance Commissioners website. NerdWallet’s life insurance reviews also include information on consumer complaints.
Policy features. Even if they have the same face value and term length, there may be key differences between the policies you’re considering. Maybe one costs more because it includes more riders or can be converted to a permanent policy. In cases like these, a policy that looks more expensive upfront may provide better value.
Customer service. How easy is it to contact each company? Do they have a 24-hour customer phone line or an online chat? Can you update beneficiaries or pay bills through an online account? Features like these can make for a smoother customer experience over the life of your policy.
3. Finish your application
When you’re ready to lock down your policy, you’ll need to complete your life insurance application. Depending on the company and policy type you’ve chosen, the process may include taking a medical exam. You may also be asked to select your beneficiaries and decide on a payment schedule for your premiums (such as annually or monthly).
Always be honest on your application. If the insurer finds out that you’ve given false information, it can cancel your policy or refuse to pay your death benefit.
It can take a few weeks for your policy to be approved and issued. Review the final documents carefully to make sure details like the coverage amount, riders and beneficiaries are correct.
Once you’ve reviewed your policy, don’t just throw it in a drawer for the next 20 years. You may want to update your beneficiaries if you get divorced, or buy extra coverage if you have another child. Remember: When your life changes, your life insurance policy may need to change, too.
Frequently asked questions
Is life insurance worth it?
Is life insurance worth it?
Buying life insurance is probably worth it if your death would put a financial burden on other people. Think about getting a life insurance policy if your family depends on your income or you want to cover your own final expenses, such as funeral costs and medical bills.
How should I choose my beneficiaries?
How should I choose my beneficiaries?
Consider who relies on you financially, who might need to pay for your funeral and to whom you’d like to leave an inheritance. Keep in mind that if you want to leave money to minor children, you’ll need to appoint a guardian or set up a trust. Learn more about choosing life insurance beneficiaries.
Can I get life insurance through work?
Can I get life insurance through work?
If you don't need much coverage, check whether your employer offers group life insurance as a perk. Employee life insurance can often cover basic end-of-life expenses and may match some or all of your annual salary. Basic coverage usually doesn’t require an exam and may even be free.
Can you buy life insurance online?
Can you buy life insurance online?
It depends on the type of policy you want. You may be able to buy straightforward term or burial life insurance policies online, especially if you don’t need a lot of coverage. Higher-limit term policies and more complex permanent policies (such as whole or variable life insurance) are usually sold through financial professionals.
Life insurance ratings methodology
NerdWallet’s life insurance ratings are based on consumer experience, complaint index scores from the National Association of Insurance Commissioners for individual life insurance, and weighted averages of financial strength ratings, which indicate a company’s ability to pay future claims. Within the consumer experience category, we consider ease of communication and website transparency, which looks at the depth of policy details available online. To calculate each insurer’s rating, we adjusted the scores to a curved 5-point scale.
These ratings are a guide, but we encourage you to shop around and compare several insurance quotes to find the best rate for you. NerdWallet does not receive compensation for any reviews. Read our editorial guidelines.
Insurer complaints methodology
NerdWallet examined complaints received by state insurance regulators and reported to the National Association of Insurance Commissioners in 2021-2023. To assess how insurers compare with one another, the NAIC calculates a complaint index each year for each subsidiary, measuring its share of total complaints relative to its size, or share of total premiums in the industry. To evaluate a company’s complaint history, NerdWallet calculated a similar index for each insurer, weighted by market shares of each subsidiary, over the three-year period. NerdWallet conducts its data analysis and reaches conclusions independently and without the endorsement of the NAIC. Ratios are determined separately for auto, home (including renters and condo) and life insurance.
