Life insurance is a legally binding contract between you and an insurance company. In exchange for premium payments (and if your policy is active when you die), the insurance company will pay a lump sum of money, referred to as a death benefit, to your chosen beneficiaries. However, not all life insurance policies are the same.
There are two main types of life insurance: term and permanent.
Term life insurance covers you for a set period of time, usually 10, 20 or 30 years. If you die within this time frame, your beneficiaries will be paid the amount specified in the policy. However, if you outlive your policy, no one receives a pay out. Term life insurance is typically the cheapest option for life insurance, and has no cash value component. There are a few types of term life insurance policies.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
- Renewable term insurance: According to the National Association of Insurance Commissioners (NAIC), "renewable term insurance guarantees the policyholder the right to renew at the end of the contract period without evidence of insurability as long as the premium is paid."
- Decreasing term insurance: With a decreasing term policy, coverage decreases over the life of the policy at a set rate. This form of insurance can be useful for paying down loans, like a mortgage, that decrease over time.
- Convertible term insurance: A convertible term insurance policy allows an individual to convert a term policy to a permanent policy.
Permanent life insurance as the name suggests, covers you for the remainder of your life — as long as you keep up with the premium payments. Although more expensive than term life policies, permanent life insurance policies build cash value over time. The most well-known form of permanent life insurance is whole life insurance.
- Whole life insurance: Whole life insurance offers a fixed death benefit when the policyholder dies. Both the death benefit and the premium are designed to remain constant throughout the life of the loan. With a whole life policy, a portion of each premium payment is put into a savings component referred to as the cash value. According to the National Association of Insurance Commissioners (NAIC), "Whole life policies are designed to build tax deferred cash value, which is the accumulation of premiums collected less applicable expenses and applicable insurance charges and they allow for borrowing against the cash value of the policy."
Cost: Several factors go into how much your life insurance premium will cost.
- Age: The sooner you purchase life insurance, the cheaper it is. This is because when you’re young, you pose less of a risk to insurance companies due to your good health. For this reason, purchasing life insurance in your 20s, as opposed to your 50s, can save you thousands of dollars over the course of the policy.
- Current health: Your health plays a big factor in determining how much your health insurance policy will cost. Are you a smoker? What's your family medical history like? Past, current and potential health issues will be considered.
- Lifestyle: Do you have any high risk hobbies, like auto racing or sky diving? What about a dangerous job? These can all raise your life insurance premiums.
You'll also need to calculate how much coverage you'll need. To do so, add up all the expenses you intend to cover. In addition to funeral costs, you'll want to consider mortgages, debts, college tuitions and income replacement for your loved ones.
Related Content
-
Costco Auto Program: Deep Discounts on Volvos and AudisGet thousands off a new Audi or Certified Volvo with the Costco Auto Program.
-
Are You Committing Insurance Fraud Without Realizing It?
More Americans commit insurance fraud than you might think, and many don't even know they're doing it.
-
Six Steps to Get Lower Car Insurance Rates
insurance Shopping around for auto insurance may not be your idea of fun, but comparing prices for a new policy every few years — or even more often — can pay off big.
-
When Should You Buy Life Insurance?
insurance If no one depends on your income for support, you probably don't need life insurance at all.
-
Retirees, It's Not Too Late to Buy Life Insurance
life insurance Improvements in underwriting have made it easier to qualify for life insurance, which can be a useful estate-planning tool.
-
How to Find Insurance Coverage in Disaster-Prone Areas
It can be difficult to find insurance in disaster-prone places, but these steps can help.
-
Flood Insurance: What It Costs and Why You Need It
insurance The average cost of a policy is about $939 a year, but premiums vary depending on your property's flood risk.
-
10 Things You Should Know About Life Insurance
A collection of information about life insurance.
