Life insurance is one way you can provide financial support for your loved ones after you die. When you open a policy, you will pay a regular premium – it is often monthly or annually and in exchange for coverage. As long as your policy is active and when you die, the insurance company will pay out a lump sum, also known as a death benefit, to the policy beneficiaries or nominees.
though many life insurance policies work the same way, each type has significant differences that further define how they work, including how long the coverage lasts, if the policy includes an investment component, and whether or not you can access funds before your death. Understanding these differences can help you select the best policy for your needs/requirements.
What Does Life Insurance Policies include?
Unlike other insurance policies, which typically dictate how the policyholder can use a claim payout, life insurance benefits can cover a wide variety of expenses. In many cases, policyholders invest in a policy to replace their income and ensure that their beneficiary can meet financial obligations, including:
- End-of-life expenses, such as funeral and burial costs
- Mortgage payments
- Tuition payments
- Personal debt, including outstanding loans or credit card bills
- Day-to-day expenses, like groceries
Financial obligations aren’t the only way to use death benefit funds, however. Some individuals choose to open a life insurance policy to build an inheritance for their children or make a charitable donation to the policyholder’s organization of choice.
Depending on the policy you choose, you may also be able to use the funds to manage expenses while you’re alive. For instance, if you have a whole or universal life policy, your insurer will likely let you borrow against it to fund expenses like your child’s college tuition or make a down payment on a house. However, keep in mind that if you do borrow against your account, the full death benefit may not be available if you die before paying back the funds.
What Doesn’t Life Insurance Cover?
Life insurance covers most causes of death, including natural and accidental causes, suicide, and homicide. However, some caveats may prevent your beneficiaries from receiving their payout.
Steven Weisbart, who served as the chief economist at the Insurance Information Institute until his retirement in 2020, says there are two common reasons why an insurer may deny a life insurance claim: a lapse in payment or misrepresentation of the insured’s health.
If health information is misrepresented or omitted, insurance providers may deny a claim. That is particularly true during the contestability period, which is typically a two-year window after the policy begins.
In addition to those common causes, an insurer may deny a claim based on the circumstances of the death. For instance, if the insured dies by homicide, the insurer may not cover the claim if the beneficiary is responsible for or involved in the victim’s death.
Life insurance policies also frequently include what’s known as a suicide clause, which voids coverage if the covered individual dies by suicide within a specific period, often two years, after opening a policy.
Finally, some insurance providers will deny claims if the insured dies while engaging in a high-risk activity, like skydiving, at their time of death. As such, it’s important to discuss life insurance coverage limitations with your agent or broker before purchasing a policy.
What Type of Life Insurance Do You Need?
Which type of life insurance you need depends on several factors, including your reason for purchasing a policy, your finances, and any investment goals you may have. Below are some of the most common life insurance policies available as well as when they may suit your needs.
- Term Life Insurance
A term life policy lasts for a specific period, typically from one to 30 years. During the term, the policyholder makes fixed premium payments in exchange for a guaranteed death benefit.
Under a term life policy, coverage ends at the end of the term. However, some insurance companies allow policyholders to extend the coverage to another term or convert it to a permanent policy. Term life insurance is often the most affordable policy available.
- Whole Life Insurance
Whole life insurance is one type of permanent life insurance. As long as the policyholder pays their premium, the policy will remain active for the insured’s entire life. In most cases, the policy premium and death benefit are fixed, and you will pay the same premium as long as you have the policy.
Whole life insurance also has a separate cash value component, which grows as the insurer pays dividends, a portion of the insurance company’s revenue that is paid to policyholders. Policyholders may be able to withdraw from or borrow against the cash value portion of their policy to fund expenses while they’re living.
Based on our analysis of current costs, a whole-life policy is typically more expensive than a term-life one, but it may be a good option if you don’t want a policy limited by term lengths. It also may be a good option if you’d like a savings component incorporated into your policy.
- Universal Life Insurance
Like whole life insurance, universal life insurance covers you for your entire life, as long as you make regular premium payments, and has a cash value. However, cash value growth depends on market growth.
When market interest rates are strong, the cash-back value of a universal policy will grow at a higher rate. The opposite is also true: when markets are performing poorly, the cash value will grow at a slower rate. Standard universal policies will usually have a guaranteed minimum interest rate.
You can also borrow against or withdraw funds from this account to pay your premium or to fund expenses like weddings, educational expenses, or a down payment on a new home.
Unlike whole life insurance, universal life insurance offers more flexibility because you can typically change your death benefits and premiums to accommodate changing circumstances. As such, it may be worth considering if you’re looking for a policy that provides more flexibility.
- Other Options in Life Insurance
Though the policies above are the most common, today’s robust insurance market provides consumers with many policies to choose from, including variations of those listed above. For instance, some providers offer no medical exam policies. That means you may be able to get a policy without a physical examination, something traditionally required by many insurers.
Likewise, you can also choose from variable life insurance. Like a whole life insurance policy, variable policies have a cash value and death benefit. However, the cash value of a variable life policy is built through investments, like mutual funds, bonds, and stock options. That means the cash value may grow quickly in a good market, but there is also more risk when the markets perform poorly as your cash value could decrease.
There are also insurance providers that offer variable universal life policies, which combine characteristics of variable and universal life policies. For instance, you’re allowed to make changes to the death benefit and premiums as your needs or circumstances change. Understanding your needs and long-term goals and discussing them with a trusted insurance agent or financial advisor can help you determine which type of policy best suits you and your beneficiaries.
How Much Does Life Insurance Cost?
Life insurance costs vary from person to person, as is the case with most insurance policies. Here are a few factors that can impact your insurance premiums:
- Age
One of the leading impacts on your life insurance premiums is your age. Life insurance is significantly less expensive for younger individuals, particularly those who are in generally good health. As you get older, premiums on a new policy will increase.
- Health
Healthier individuals will often receive better rates than those considered unhealthy or at higher risk for health problems. To determine this, your insurer may look for proof of pre-existing conditions or serious illnesses, like cancer or heart disease. They may also evaluate specific health metrics, like your weight, blood pressure, and cholesterol levels.
- Gender
Historically, men have paid higher rates than their female counterparts. In part, this is because men have a shorter life expectancy than women. This leads many life insurance companies to charge men higher premiums.
- Smoking & Tobacco Use
According to the Centers for Disease Control and Prevention, smoking and tobacco use can lead to numerous health conditions, including asthma, cancer, chronic obstructive pulmonary disease (COPD), heart attacks, and strokes. As such, smoking increases your premium payments.
- Policy Type
As indicated in the tables below, the type of policy you choose can drastically affect your life insurance premium. According to the data we’ve collected, term life insurance policies are typically cheaper, with longer-term policies costing slightly more than short-term ones. Permanent life insurance policies, including whole and universal, often cost more because coverage lasts for the insured’s entire life.
- Occupation and Hobbies
Some occupations and hobbies can have a higher risk of death. For instance, truck drivers, construction workers, and law enforcement officers have an increased risk of fatal injury. Similarly, some hobbies, like skydiving or scuba diving, also increase the chance of death. If you’re engaged in a high-risk activity, whether it’s occupational or leisure, you may pay a higher premium.
The comparison charts below provide a snapshot of how life insurance rates can change based on the above factors.
Cost Comparison By Life Insurance Policy Type for Women
| Policy/Age | 30 | 40 | 50 | 60 | 70 |
|---|---|---|---|---|---|
| 10-Year Term | $35.14 | $52.76 | $111.59 | $233.23 | $684.82 |
| 15-Year Term | $43.21 | $65.38 | $132.60 | $325.56 | $1,093.28 |
| 20-Year Term | $50.80 | $80.85 | $179.84 | $496.05 | $1,733.43 |
| 30-Year Term | $85.25 | $137.65 | $300.67 | N/A | N/A |
| Universal Life | $539.53 | $751.80 | $1,142.63 | $1,520.88 | $3,230.46 |
| Whole Life | $705.94 | $1,064.00 | $1,702.33 | $2,829.50 | $5,046.29 |
Cost Comparison By Life Insurance Policy Type for Men
| Policy/Age | 30 | 40 | 50 | 60 | 70 |
|---|---|---|---|---|---|
| 10-Year Term | $43.33 | $66.42 | $142.00 | $328.78 | $1,058.83 |
| 15-Year Term | $52.82 | $81.58 | $179.97 | $474.87 | $1,578.38 |
| 20-Year Term | $63.49 | $102.67 | $243.60 | $653.69 | $2,253.73 |
| 30-Year Term | $102.20 | $172.17 | $448.61 | N/A | N/A |
| Universal Life | $611.18 | $835.07 | $1,292.97 | $2,131.96 | $3,626.77 |
| Whole Life | $831.46 | $1,340.61 | $2,138.06 | $3,414.63 | $5,879.67 |
Cost Comparison By Life Insurance Policy Type for Smokers and Non-Smokers
FEMALE
| Age/ Risk Class | Preferred Plus Nonsmoker | Preferred Nonsmoker | Standard Plus Nonsmoker | Standard Nonsmoker |
|---|---|---|---|---|
| 35 Female | $33.43 | $42.88 | $58.34 | $68.97 |
| 45 Female | $71.73 | $85.92 | $120.37 | $133.17 |
| 55 Female | $176.28 | $191.80 | $267.05 | $327.10 |
| 65 Female | $578.55 | $675.14 | $841.03 | $1,002.70 |
MALE
| Age/ Risk Class | Preferred Plus Nonsmoker | Preferred Nonsmoker | Standard Plus Nonsmoker | Standard Nonsmoker |
|---|---|---|---|---|
| 35 Male | $39.60 | $51.87 | $71.51 | $85.97 |
| 45 Male | $93.05 | $112.76 | $157.22 | $187.91 |
| 55 Male | $243.52 | $271.74 | $371.21 | $467.74 |
| 65 Male | $806.63 | $956.74 | $1,260.51 | $1,502.84 |
Other Life Insurance Companies
- AAA
- AARP
- Allstate
- Amica Life
- Banner Life
- Bestow
- Colonial Penn
- Corbridge Financial
- Ethos
- Fidelity
- Gerber
- Guardian Life
- John Hancock
- Lincoln Financial Group
- MassMutual
- Mutual of Omaha
- Nationwide
- New York Life
- Northwestern Mutual
- Pacific Life
- Primerica
- Principal Financial
- Protective
- Prudential
- State Farm
- Transamerica
- USAA
