Life Insurance FAQ
Life insurance can be complicated. It’s important to understand the basics before purchasing a policy, including the different types, cost and death benefit options. Learning the facts can help you make the best decision for you and your family.
- Written by Rachel Christian
Financial Writer and Certified Educator in Personal Finance
Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.Read More
- Edited ByMatt Mauney
Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for ChicagoTribune.com, LATimes.com, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.Read More
- Financially Reviewed ByEric Estevez
Licensed Independent Insurance Broker
Eric Estevez is a duly licensed independent insurance broker and a former financial institution auditor with more than a decade of professional experience. He has specialized in federal, state and local compliance for both large and small businesses.Read More
- Published: August 10, 2020
- Updated: July 22, 2022
- 6 min read time
- This page features 6 Cited Research Articles
- Edited By
General Life Insurance FAQs
Life insurance is a contract between you and an insurance company. The insurer promises to pay a sum of money to a designated beneficiary after you die, and in exchange, you pay ongoing payments called premiums.
The two main types of life insurance are permanent and term. Costs and features vary.
Everyone may not need life insurance. If you are young, single and have minimal debt, a policy may not be necessary. However, if you have a family or major financial obligations — such as a mortgage — purchasing a policy can be a smart way to protect the people you care about after you die.
The right amount of coverage depends on several factors, including your financial status, family situation, health and age. Some experts recommend purchasing life insurance coverage worth eight to 15 times your annual income.
Others recommend a more personalized approach that considers your current income as well as any outstanding debts, remaining mortgage payments and college tuition costs for your children.
Life Insurance Types FAQs
Term and permanent are the two main types of life insurance. Permanent includes several subtypes, including whole, variable and universal.
All life insurance provides a death benefit to your beneficiary after you die. Permanent life insurance never expires while term life insurance lasts a specific amount of time. Permanent life policies also build a cash value you can access in retirement.
A permanent life insurance policy offers coverage that never expires so long as premiums are paid. It also features a growing cash value you can use and borrow against over time.
There are several different types of permanent life insurance, including whole, variable and universal.
Costs and Purchasing Life Insurance FAQs
The cost of life insurance depends on many factors, including the type of policy and coverage amount as well as your age, health and gender.
Policy rates are much more affordable when you’re young. Premiums can increase 8 to 10 percent each year you wait to buy coverage. Additionally, a policy worth $1 million will have higher premiums than a policy worth $250,000.
Rates for men tend to be more expensive than women due to life expectancy. Smokers always pay more for coverage than nonsmokers.
Purchasing a life insurance policy when you’re young is an easy way to obtain more affordable coverage.
Another option is purchasing term life coverage now and converting it to a permanent life policy later when you’re older and earning more money.
Finally, explore group life insurance if it’s offered through your employer. The rates tend to be lower than if you purchased a policy on your own. However, your group coverage may end or become more expensive if you leave your job.
In most situations, life insurance premiums are not subject to sales tax.
This means the premium amount quoted to you by the insurance company is the amount you pay. A percentage will not be added to cover taxes.
However, life insurance premiums are not tax deductible, either.
The best life insurance companies offer strong financial ratings, competitive pricing, positive reviews and stability.
You want a dependable company with high marks from independent rating agencies such as Standard and Poor's, A.M. Best, Moody's, Fitch and Weiss.
You can also check your state’s insurance regulations to ensure potential companies are properly licensed.
An independent insurance agent can compare policies from several companies for you and help you find the best quotes and coverage.
Life Insurance Death Benefits FAQs
Typically, life insurance death benefit proceeds are not taxed, and beneficiaries generally don’t need to report the payout as income.
There are a few rare exceptions, according to the Internal Revenue Service, such as paying tax on any accumulated interest if your beneficiary receives the death benefit in installment payments instead of a lump sum.
Yes. While you can leave your entire death benefit to a single primary beneficiary, you may also select a contingent beneficiary. This person only receives money if the primary beneficiary dies or is unable to accept the money.
You may also select more than one primary or contingent beneficiary and assign what percentage of the money each person will receive.
After you pass away, your beneficiary will need to make a claim with the insurance company.
To do so, they will need:
- Your death certificate
- A copy of the life insurance policy
- A completed claim form from the insurer
If you have named multiple beneficiaries, each person will need to submit their own separate claim to the insurance company.
An accelerated death benefit is a type of rider added to your life insurance policy, usually at a cost.
It lets you access some or all of your policy’s death benefit under certain circumstances when you’re still alive. This can include being diagnosed with a terminal illness or suffering a debilitating injury or disease.
6 Cited Research Articles
- Knueven, L. (2020, February 25). If You’re Considering Buying Life Insurance, Now Might Be the Right Time to Do It. Retrieved from https://www.businessinsider.com/personal-finance/life-insurance-premium-increases-set-to-slow-2020
- U.S. Internal Revenue Service. (2019, November 25). Life Insurance and Disability Insurance Proceeds. Retrieved from https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds
- American Council of Life Insurers. (n.d.). Life Insurance. Retrieved from https://www.acli.com/-/media/ACLI/Files/Fact-Books-Public/07FB19FChap7LifeInsurance.ashx?la=en
- Commonwealth of Massachusetts Division of Insurance Consumer Service Unit. (n.d.). Life Insurance Basics. Retrieved from https://www.mass.gov/service-details/life-insurance-basics
- National Association of Insurance Commissioners. (n.d.). Decided you need life insurance? Ask these questions before you buy. Retrieved from https://content.naic.org/consumer/life-insurance.htm
- Texas Department of Insurance. (n.d.). Do you need life insurance? Retrieved from https://www.tdi.texas.gov/tips/life-insurance.html