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.

General Life Insurance FAQs

What is life insurance?

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.

Who needs life insurance?

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.

How much life insurance do I need?

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.

What is a beneficiary?
A beneficiary is the designated person on your policy who receives money from the insurance company after you pass away.
What can life insurance cover?
Life insurance is meant to ease financial hardship for your loved ones upon your death. Money paid out from your policy can be used to provide for financial dependents, pay off personal debts, replace your income, pay estate taxes, cover final expenses such as funeral costs or fund a charity endowment.

Life Insurance Types FAQs

What types of life insurance are available?

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.

What is term life insurance?
A term life insurance policy offers a guaranteed death benefit that lasts for a specific amount of time, such as 10, 20 or 30 years. If you pass away during this time, the insurance company pays money to your beneficiary. It’s the most affordable type of life insurance.
What is permanent life insurance?

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.

How long should a term life policy be?
A term life policy should last long enough to cover your largest financial obligations. For example, if you are only three years into a 30-year mortgage, it’s wise to select a 30-year term life policy. Or, if you recently started a family, you may want a 20-year policy to help cover expenses until your children become legal adults.
What’s the best type of life insurance?
Everyone’s situation is different. For many people, term life insurance is a good fit because it’s affordable and provides coverage during your primary income-earning years. However, permanent life insurance is ideal for people seeking lifelong coverage, tax advantages — and potentially — investment opportunities.
Josh Curtis, Independent Financial Advisor at RetireGuide, explains how to decide what life insurance is right for you.

Costs and Purchasing Life Insurance FAQs

How much does a life insurance policy cost?

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.

How can life insurance be more affordable?

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.

Are life insurance premiums taxable?

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.

When is the best time to buy life insurance?
The best time to purchase life insurance is when other people depend on you financially, such as a spouse or minor children. For most people, this is in their 30s or 40s. Life insurance is also more affordable when you’re young.
What insurance company should I choose?

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.

Josh Curtis, Independent Financial Advisor at RetireGuide, explains what life insurance riders are.

Life Insurance Death Benefits FAQs

What is a death benefit?
A death benefit is the money your beneficiary receives from the life insurance company after you die.
Are death benefits taxed?

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.

Can I choose more than one beneficiary?

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.

How are death benefits disbursed?

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.

What is an accelerated death benefit?

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.

Last Modified: November 16, 2021

6 Cited Research Articles

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