What You Need to Know Before Buying Life Insurance

What is life insurance?

Life insurance is a contract between an insurance policyholder and an insurer that provides a monetary benefit to named beneficiaries upon the insured’s death. In exchange for premium payments, the insurer promises to pay the death benefit to the beneficiaries when the insured passes away.

Life insurance provides financial protection and income replacement for dependents and loved ones in the event of the insured’s death. The death benefit from a life insurance policy can be used to pay for final expenses, cover lost income, pay off debts, fund college education, donate to charity, and more. It essentially transfers the financial risk of dying prematurely from the insured to the insurance company.

There are several types of life insurance policies available, including term life, whole life, universal life, and variable life insurance. The main types differ in their premium structure, death benefit payout options, cash value accumulation, and duration of coverage. But they all share the fundamental purpose of providing a lump-sum payment to beneficiaries when the policyholder dies during the coverage period.

Life insurance can give policyholders invaluable peace of mind knowing their loved ones will be financially secure if they pass away unexpectedly. It’s an important component of a sound financial plan for many individuals and families seeking to protect against the loss of income and build an estate.

Why Get Life Insurance?

Life insurance provides financial protection and security for your loved ones in the event of your death. Here are some of the key reasons to consider getting life insurance coverage:

Protect Your Family and Loved Ones

The primary purpose of life insurance is to ensure your family is financially looked after if you pass away prematurely. The payout from a life insurance policy can help cover their living expenses, mortgage payments, healthcare costs, education expenses, and more. This provides peace of mind that your family will maintain financial stability.

Pay Off Debts and Final Expenses

The life insurance death benefit can be used to pay off any outstanding debts you have such as credit cards, loans, medical bills etc. This ensures your family does not inherit your debts. The funds can also cover funeral and burial costs which can be a significant expense.

Continue a Business

If you own a business, life insurance can help ensure it continues operating upon your death. The capital from a life insurance payout can assist with business continuity, replacing your role, or providing for a buy-sell agreement. This protects your business partners and employees.

Create an Inheritance or Leave a Legacy

The tax-free death benefit from a life insurance policy can provide an inheritance for your children, grandchildren, or other beneficiaries. This allows you to leave a financial legacy for your loved ones to help with their future.

Charitable Giving

You can name a charity as a beneficiary of your life insurance policy. This can enable you to make a larger charitable donation than you may otherwise be able to.

Types of Life Insurance

There are several main types of life insurance policies:

Term Life Insurance

Term life insurance provides coverage for a specific period of time, typically 10, 20 or 30 years. This type of policy only pays out if you die during the term. Term life is usually the most affordable option and makes sense if you need coverage for a certain time period, like while raising kids or paying off a mortgage.

The main types of term life insurance are:

  • Level term: The death benefit and premiums remain constant over the policy term. This is the most common type.

  • Renewable term: You can renew the policy for additional terms without a medical exam. Premiums increase each term as you age.

  • Decreasing term: The death benefit decreases over the term while premiums remain level. This works for covering a debt that decreases over time, like a mortgage.

Whole Life Insurance

Whole life insurance provides lifetime coverage as long as you pay the premiums. The policy accumulates cash value that you can borrow against or withdraw. Premiums are guaranteed to remain constant, but they are typically much higher than term insurance.

Whole life makes sense if you want permanent coverage or want to use the policy for estate planning purposes. The types are:

  • Traditional whole life: You pay a fixed premium for your entire life. The death benefit and cash value grow at a fixed rate.

  • Universal life: This offers flexible premiums and adjustable coverage. You can pay minimum premiums just to cover costs or higher premiums to build cash value.

  • Indexed universal life: This links cash value accumulation to a market index. Returns may be higher but also carry more risk.

Variable Life Insurance

With variable life insurance, you invest your cash value into investment subaccounts. Returns are tied to the performance of the investments and death benefits can fluctuate. Variable life offers the potential for higher returns but carries more risk.

Other Types

There are various other life insurance types for specific needs, such as guaranteed issue life insurance and final expense insurance to cover burial costs. An insurance agent can help you select the right policy for your financial situation and goals.

How Much Coverage Do You Need?

The amount of life insurance coverage you need depends on several factors related to your financial situation and responsibilities. Generally, your life insurance needs are based on ensuring your dependents maintain their standard of living and your debts can be repaid after you pass away.

Some key factors that determine how much coverage you should get include:

  • Income – Your income helps provide for housing, food, transportation and other living expenses for your family. Life insurance should cover enough to replace your ongoing income long enough for your dependents to adjust financially. Those with higher incomes need more coverage.

  • Debts – Your life insurance payout should be enough to pay off big debts like your mortgage, car loans, student loans and credit cards. This ensures your family does not inherit overwhelming debt.

  • Dependents – The more dependents you have, the higher your coverage needs. Consider factors like a non-working spouse, young children and elderly parents. You want coverage for their living expenses, education and care costs.

  • Final expenses – Your payout should cover funeral and burial costs so your family does not have to scramble to cover these expenses.

  • Financial goals – If you have goals like college savings for kids, charity donations or leaving an inheritance, factor those amounts into your needed coverage.

Taking the time to thoroughly evaluate these factors will help you determine the right amount of life insurance for your unique situation and give your family the financial security they would need in your absence. Discuss your needs with an insurance agent or financial advisor as well for guidance.

Getting Life Insurance

When you apply for life insurance, here’s what you can expect:


The life insurance application process starts by contacting an insurance company or agent. You’ll fill out an application with information like your age, health details, lifestyle factors, and the amount of coverage you want.

Some key things the application asks:

  • Your age and health history
  • Family medical history
  • Height and weight
  • Occupation
  • Income
  • Hobbies and lifestyle

Being thorough and honest on the application is important. The insurer needs to properly assess your risks.

Medical Exam

Most life insurance companies require a medical exam as part of the application. An examiner will:

  • Take your blood pressure, heart rate, height, and weight
  • Draw blood and urine samples
  • Potentially perform an electrocardiogram to check your heart

The exam gives the insurer a clear picture of your current health. Results outside normal ranges could potentially impact your eligibility or lead to higher premiums.

Policy Approval

After the application and medical exam, the insurance company will review your information and decide whether to approve or decline your policy.

Approval can take anywhere from a few days to a few weeks. Complex health histories may require additional review.

If approved, you’ll get a policy outlining your premium, death benefit amount, and other terms. Once you agree to the policy and pay your first premium, coverage starts.

Paying for Life Insurance

The cost of life insurance is called the premium. Premiums are typically paid monthly, quarterly, semi-annually, or annually. The total annual premium will depend on several factors:

  • Your age – Premiums are cheaper when you’re younger since life expectancy is higher. Premiums increase as you get older.
  • Your health – People in excellent health can qualify for lower premiums. Certain medical conditions can increase premiums.
  • The type of policy – Term life insurance policies are less expensive than whole life or universal life policies.
  • The amount of coverage – More coverage means higher premiums.
  • Length of the policy – Longer term policies spread out the risk over more years, decreasing the annual premium.
  • Extra add-ons – Options like disability riders or accelerated death benefits add to the cost.

The insurance company will calculate your specific premium rate based on the amount of coverage you select and your individual risk profile. You can get quotes from multiple insurers to compare rates.

There are a few ways to pay your premiums:

  • Automatically by direct debit from your bank account
  • By mailing checks to the insurance company
  • Online through the insurer’s website
  • Over the phone

Paying annually costs less overall than paying monthly, but the monthly amount may be more affordable. Many insurers offer discounts for paying annually.

Some life insurance policies have fixed premiums that remain the same throughout the policy. Others have increasing premiums that go up each year as you age. This is something to consider when selecting a policy.


When you purchase a life insurance policy, you will be asked to name a beneficiary – the person or people who will receive the death benefit payout when you pass away. Naming beneficiaries is an important part of the life insurance process.

You can name multiple beneficiaries and assign different percentages of the payout to each one. For example, you may name your spouse as 50% beneficiary and each of your children as 25% beneficiaries.

It’s crucial to keep your beneficiary designations up-to-date as your life circumstances change. Events like marriage, divorce, or the death of a beneficiary necessitate updating your beneficiaries. You can change your beneficiaries at any time by contacting your life insurance provider.

When naming beneficiaries, you can designate primary beneficiaries – who will receive payouts first – and contingent beneficiaries – who will receive payouts if no primary beneficiaries are living at the time of your death. Minors can be named as beneficiaries, but the payout will need to go into a trust until they reach the age of majority.

Some key considerations when selecting life insurance beneficiaries:

  • Name both primary and contingent beneficiaries.
  • Clearly specify what percentage should go to each beneficiary.
  • Avoid naming your estate as beneficiary – this can lead to probate delays.
  • Name a custodian for minor children to manage any payouts.
  • Update beneficiaries after major life events.
  • Notify your beneficiaries that they have been named.

Keeping your beneficiaries up-to-date will ensure the life insurance death benefit is paid out according to your wishes. Periodically review and update beneficiaries as necessary.

Claiming Life Insurance

When a loved one with life insurance passes away, filing a claim can be an emotional and stressful time. Here are some key steps that beneficiaries should take when claiming life insurance:

  • Obtain Multiple Copies of the Death Certificate: The insurance company will require a certified copy of the death certificate when filing a claim. Obtain around 10 copies, as they may be needed for other estate matters as well.

  • Locate the Life Insurance Policy: Find the original life insurance policy or contact the insurance agent or company to obtain details like the policy number, insurance company, and amount of coverage. This information will be needed when starting the claims process.

  • Review Beneficiary Designations: Confirm that you are still listed as the primary beneficiary on the policy. Contact the insurance company to check the beneficiary listings they have on record.

  • File the Claim: Reach out to the life insurance company, agent, or HR department for the employer policy. They can provide instructions and forms for submitting the claim. Provide information like a copy of the death certificate, policy documentation, and details on your relationship to the deceased.

  • Provide Additional Information if Requested: The insurance company will review the claim and may request additional information like medical records or a report from the medical examiner. Provide any documentation promptly to expedite claim processing.

  • Get Updates on Claim Status: Follow up with the insurance company regularly to check the status of the claim and answer any additional questions. This can help speed things along.

  • Receive Claim Payout: Once approved, the death benefit will be paid out to the named beneficiaries by check, direct deposit, or wire transfer per the designated percentages. The funds may take 1-2 months to receive after filing.

  • Pay Taxes on Claim if Required: Life insurance death benefits are typically not taxed, but there are exceptions. Consult a tax advisor to determine if any taxes are owed on the payout.

Filing a life insurance claim can be difficult during a time of grief. Being organized, submitting forms promptly, and following up diligently can help ensure the process goes smoothly.

Tax Implications

The majority of life insurance death benefits are received tax-free by beneficiaries. This makes life insurance proceeds more valuable than other assets that would be subject to taxes like IRAs or 401(k)s.

However, there are some exceptions to the tax-free nature of life insurance payouts. If a policyholder stops paying premiums and then sells their policy to a third party investor, the proceeds would be taxed as ordinary income. Additionally, if the policy is transferred to someone other than the insured within 3 years of the insured’s death, the death benefit payout would be included in their gross income and subject to the estate tax.

There are also cases where the interest earned on the cash value within certain permanent life insurance policies could be subject to taxes. Policyholders should be aware of rules like the 7-pay limit and modified endowment contract (MEC) regulations which can impact the tax-free status of cash value growth.

Overall, life insurance remains one of the most tax-advantaged tools for leaving an inheritance. But there are some caveats to be aware of to ensure your beneficiaries receive the full value of the death benefit tax-free. Consulting with a tax advisor or estate planning attorney can help optimize your life insurance strategies.

Alternatives to Life Insurance

Life insurance isn’t the only way to financially prepare for the future. Here are some alternatives to consider:

Savings Accounts

Savings accounts at banks or credit unions allow you to set aside money and earn interest over time. This creates a pool of savings you can use for financial goals or emergencies. Savings accounts are very liquid, meaning you can withdraw funds at any time. Interest rates are lower than other options but savings accounts offer security.

The main benefit of savings accounts is their accessibility and low risk. The main drawback is low returns. This makes them good for short-term savings goals but not optimal for long-term growth.


Investing money into assets like stocks, bonds, mutual funds, and real estate can generate higher returns over time. Investments involve more risk than savings accounts but allow your money to grow faster.

Common investment options include:

  • 401(k)s and IRAs for retirement
  • Index funds and ETFs for diversified investing
  • Real estate through rental properties or REITs
  • Brokerage accounts for individual stock picking

Investments are better suited for long-term goals like retirement. The value fluctuates so they involve more risk. But investing provides potential to grow wealth beyond just saving money.

Final Expense Insurance

Final expense or burial insurance provides a small death benefit, usually between $5,000-$20,000. It covers end-of-life costs like funeral expenses without needing a large life insurance policy.

Final expense insurance has lower premiums and coverage amounts than traditional life insurance. The policies are guaranteed so there are no medical exams required.

This type of insurance is an affordable way to ease the financial burden of final arrangements. It provides funeral cost coverage without requiring extensive underwriting.

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