Guide to Life Insurance | Bankrate

Few financial decisions feel as personal as choosing life insurance to protect the people you love. While the topic might not be the most comfortable to think about, having the right coverage can provide security and peace of mind for you and your loved ones. We know sorting through all the policy options can feel overwhelming at first. That’s why Bankrate’s insurance experts have created this all-encompassing life insurance guide to walk you through the essentials, helping you understand your choices and hopefully find the coverage that fits your family’s needs.

What is life insurance?

At its core, life insurance is an agreement between you and an insurance company to provide financial protection to your beneficiaries. You agree to pay a specific premium and keep your policy in good standing while the insurer agrees to provide a death benefit payout should you pass away. Here’s who’s involved in making this protection possible:

• Your insurance company: They provide your coverage.
• You, as the policy owner: You’re in charge of making payments and keeping the policy active.
• The insured person: This is the individual whose life is covered (this is often the policy owner, but not always).
• Your beneficiaries: The people you choose to receive the money (death benefit) — typically your family members — upon the death of the insured.

While most people think of life insurance as a single payment their family would receive, it can actually be more flexible than that. Many policies let you customize how your loved ones receive the money — whether all at once or spread out over time. The most common goal for life insurance is to replace lost income and help with immediate needs like monthly bills or mortgage payments, but it can do even more. It might help fund your grandchildren’s college education, enhance your retirement savings or help leave a lasting legacy for your family or favorite charity.

When you’re shopping for life insurance, you’ll mainly see two types: term life insurance and permanent life insurance. Term life covers you for a specific number of years. Permanent life insurance, on the other hand, is designed to last your lifetime and can build cash value over time. Each type comes with different options you can customize to fit your family’s unique situation.

Don’t worry if it seems like a lot to take in at first — we’ll help you understand exactly what each type offers, so you can feel more comfortable choosing the right fit for your family.

What is term life insurance?

Term life insurance is designed to provide financial protection for a specific period of time. It’s usually the most budget-friendly type of life insurance because it’s straightforward pure protection: you’re covered for a set number of years (usually 10 to 30), and if something happens to you during that time, your loved ones receive the policy’s death benefit. Your payments will typically stay the same throughout the term, so there are no surprise costs to worry about.

Level term life insurance is by far the most commonly purchased type of term insurance. Your premium is typically fixed for the entire term length and the death benefit is a guaranteed amount that also does not change. When the term is over, your coverage expires. Other types of term life insurance include:

• Return of premium (ROP) term: This option costs more, but if you outlive the term length, you’ll receive a refund of the base premiums you’ve paid.
• Decreasing term: With this term policy, your coverage decreases over time (although premiums remain fixed). It’s typically chosen to coincide with a specific debt, like a mortgage.
• Renewable term: This type of term policy lets you extend your coverage after the initial term, though you’ll pay more for the convenience. The upside is you won’t have to go through another medical exam. Many level term policies include the option to renew.
• Convertible term: This type of policy allows you to convert the term policy into a permanent policy within a specified period, offering more flexibility as your needs evolve. Many level term policies are convertible.
• Renewable term: With this type of term policy, the premium increases each year.

If you’re looking for reliable and straightforward financial security during life’s important stages, for instance, the years you’re paying a mortgage, raising children and saving for retirement, term life insurance is likely your best bet. But if you’re thinking about lifetime coverage or want some extra financial perks along the way, you could consider permanent life insurance instead.

What is permanent life insurance?

Permanent life insurance provides lifetime financial protection while offering valuable living benefits that can enhance your overall financial strategy. Unlike term coverage, these policies remain active throughout your life, typically until a coverage age range of 95 to 121, provided the policy remains in good standing. This could make permanent insurance particularly valuable for legacy planning and long-term financial security.

Types of permanent life insurance

The permanent life insurance market offers several policy types, each designed to address specific financial needs:

• Whole life insurance: The foundation of permanent coverage, offering guaranteed death benefits, fixed premiums and steady cash value growth. Participating policies may provide dividends, adding another layer of potential financial benefit.
• Universal life insurance: Provides premium and death benefit flexibility to accommodate changing financial circumstances, allowing you to adjust your coverage if your needs change throughout the years.
• Variable life insurance: Incorporates investment opportunities through market-linked subaccounts, offering growth potential, but you will need to take into account the market risks and fluctuations that come with these policies.
• Indexed universal life insurance: Balances growth potential with downside protection by linking cash value returns to market index performance, typically with both floors and caps.
• Final expense insurance: Offers coverage with few eligibility requirements, including no exam. While coverage amounts are limited, these policies can be beneficial for end-of-life expenses.

Cash value: A key feature

A distinguishing feature of permanent insurance is its cash value component — essentially a tax-advantaged financial tool that grows alongside your coverage. This component offers several advantages:

• Access to policy loans using your cash value as collateral
• Ability to make direct withdrawals on certain policies when needed
• Option to offset premium payments through accumulated value

The growth rate and access to your cash value will depend on your policy. For example, whole life policies typically offer slow and steady predictable growth, while variable policies tie growth to market performance, potentially offering higher returns but also higher risk.

Dividends for participating policies

Participating whole life policies may earn dividends based on the insurer’s financial performance. While not guaranteed, these dividends can be used in various ways to enhance your coverage, such as:

• Expanding your protection through additional coverage purchases.
• Reducing your ongoing premium obligations.
• Receiving direct cash payments.

While permanent life insurance typically comes with higher premiums than term coverage, it delivers extra benefits that could align with long-term financial plans you might be considering. The combination of lifetime protection, cash value accumulation and potential dividend opportunities could make it an appealing option for estate planning, wealth building and providing lasting financial security for beneficiaries.

Permanent life insurance policies often require monitoring to ensure that they perform as expected. The initial sales illustrations are based on projected values (interest rates/mortality costs/expense charges). Taking a large policy loan or withdrawal can erode a life insurance policy’s performance causing it to lapse before projected age. The insurance companies do not typically provide any warning.

How does life insurance work?

Life insurance provides financial protection for your loved ones in exchange for regular premium payments. While policies can vary widely, the process of obtaining and maintaining coverage generally follows the same steps.

1. Getting quotes

First things first — you’ll want to shop around and compare various providers. You may want to consider their financial strength ratings and customer satisfaction scores. Insurance companies look at things like your age, health and how much coverage you want to figure out your costs; and not all insurers evaluate individual risk factors in the same manner, so it can pay off to comparison shop.

2. Application and underwriting

Once you’ve found a policy you like, you’ll need to fill out an application. All applications require your personal information, such as name, date of birth, sex and location. Any additional required information depends on the underwriting process. Traditional full underwriting requires a health questionnaire, medical exam and, often, a review of medical records. However, there are several options now that don’t require a full medical exam for eligible applicants, such as accelerated underwriting and guaranteed issue underwriting. During this underwriting evaluation, the insurer determines if they can offer you coverage and at what cost.

3. Approval and activation

Your coverage kicks in as soon as you make your first payment. From there, it’s pretty straightforward: keep paying your premiums on time, and your coverage stays active. Every policy has a free look period, typically 10 to 30 days, after policy activation in which you’re eligible for a full refund if you decide the policy isn’t right for you.

How the death benefit works

If the insured passes away while the policy is active, the death benefit is paid to the designated beneficiaries. Beneficiaries can typically use the funds however they see fit — whether for paying bills, covering funeral costs or any other financial needs. However, specific instructions on when and how the beneficiaries receive the money may apply if the policy is owned by a life insurance trust.

It’s important to note that there are certain factors that can affect the death benefit payout, such as:

• Policy loans: Outstanding loans against the policy may reduce the death benefit.
• Withdrawals: Funds withdrawn from the cash value of a permanent policy can decrease the payout.
• Accelerated benefits: If the policy has living benefits and the policy owner makes use of these while alive, the amounts used can decrease the death benefit payout.
• Dividends as paid-up additions: Dividends can increase the payout amount, depending on how they are used.

Common exclusions to life insurance

Insurance companies do have some specific situations where they might not pay out the death benefit:

• Suicide clause: Death by suicide is typically excluded within the first one to two years of the policy.
• Contestability period: During the first two years, the insurer can review and deny claims if material misstatements were made on the application.
• Graded death benefit period: Certain policies, like guaranteed issue life insurance, may offer reduced death benefits during the first few years of coverage.

The role of riders

Riders are optional add-ons that allow you to customize your policy to better fit your needs. Some riders are free to add to your policy, while most require a nominal fee on top of the base premium. Common riders include:

• Accelerated death benefit rider: Provides early access to a portion of the death benefit if you’re diagnosed with a terminal illness. It is typically included at no extra cost.
• Conversion rider: Enables the policy owner to convert a partial or full amount of a term policy to a permanent policy without needing to go through underwriting again. It is typically included at no extra cost.
• Long-term care rider: Provides funds you can use to cover the cost of long-term care services.
• Child rider: Offers coverage for dependent children.
• Critical illness rider: Pays out a portion of the benefit if you’re diagnosed with a qualifying illness.
• Waiver of premium rider: Waives the premium in the event of a disability, allowing you to keep your coverage in force if you’re unable to work.

Who should buy life insurance?

Many people have life insurance needs. Below are the common reasons people consider buying life insurance:

Parents with young children

If you have children, having a life insurance policy in place may provide financial support if you were to pass away unexpectedly. The money can be used to pay for child care, educational expenses or for whatever your beneficiary sees fit. In this case, a term life insurance policy may be a good option to consider because it may be specifically tailored to expire once children become independent.

Parents with lifelong dependents

If you are caring for children with special needs or disabilities, you may consider permanent life insurance. Permanent life insurance helps ensure your child will have the financial support they need. Beyond the death benefit, these policies can work alongside special needs trusts to provide lifelong care while maintaining access to important government benefits. Considering this type of coverage could help guarantee your child’s quality of life and care continues exactly as you’ve planned it.

Divorced parents

If you’re divorced with kids, life insurance might actually be required by your divorce agreement. Courts could mandate coverage to ensure child support continues if something happens to either parent. It’s a practical way to protect your children’s future while meeting your legal obligations.

Young adults who want cheap coverage

Individuals who are young and healthy typically pay the cheapest life insurance premiums. Buying a policy at a young age may help you lock in a more affordable rate for the future. For young adults, a term life insurance policy with the option to convert to permanent coverage may be a good option to consider.

Business owners

Your business isn’t just your livelihood — it’s often your family’s financial foundation too. Life insurance helps protect everything you’ve built by providing funds to cover business loans, buy out your ownership share (with a buy-sell agreement) or support your family if they rely on business income. Many business owners also consider key person insurance to protect their company if they lose an essential team member.

Adults with significant debt

If you are an adult who has many debts, whether it’s student loans, personal loans or credit card debt, having life insurance could protect your loved ones from assuming your debt if you were to pass away. Note that some of your expenses, like credit card debt, won’t necessarily be your loved ones’ responsibility if you pass away — it is either paid off by the estate or becomes the responsibility of the joint account holder if there is one.

Homeowners with mortgages

If you own a home, life insurance can help protect your family’s ability to stay there if something happens to you. Many homeowners choose term policies that match their mortgage length, ensuring their loved ones can handle the payments or pay off the home entirely. This gives your family options — they can keep the home or sell it on their own terms, without financial pressure.

High-net-worth estate planning

For those with significant assets, life insurance can play a strategic role in preserving your legacy. These policies can help offset estate taxes and provide liquidity for your heirs without forcing them to sell important assets.

Seniors who want to pay for their funeral

Past a certain age, it becomes more difficult for seniors to purchase life insurance, especially those with health complications. But for seniors who want to pay for their own funeral expenses, buying final expense coverage may be beneficial. It lowers your family’s financial burden when you pass away, and it also allows you to make arrangements for your own funeral.

How much life insurance do I need?

Getting the right amount of life insurance coverage is about more than just picking a number. Let’s break down how to figure out what works for you, whether you’re considering term coverage, permanent insurance or a combination of both.

While you might hear advice like “get 10 times your salary,” the reality is generally more nuanced. Your ideal coverage amount should reflect your complete financial picture — from everyday bills to long-term dreams for your family. Think about your mortgage, any other debts, future college expenses and the lifestyle you want your loved ones to be able to maintain.

The following considerations could be beneficial when deciding how much life insurance to purchase:

• Your income: When calculating coverage, consider not just replacing your income but protecting all the plans it supports. For example, if you’re earning $100,000 annually, don’t just multiply that number. Think about what that income actually provides. Does it cover your children’s private school tuition? Fund family vacations? Support aging parents? Fund your retirement planning? Your life insurance should help maintain these important aspects of your family’s life, not just the basics.
• Your debts: If you pass away with outstanding debts, they may become your estate’s responsibility to pay off. If you want to keep your estate intact, you may want to ensure that you have enough life insurance coverage to pay off your debts, such as a mortgage, business loan, credit cards, medical bills, etc.
• Your children’s education costs: If you have children, you may want to consider the cost of their future education when choosing your life insurance coverage. If your kids currently attend private school, you might want to get enough life insurance coverage to pay the remaining tuition. The same goes for your kids’ college tuition if you want to help them pay for school.
• Your funeral plans: Some people have specific preferences when it comes to their end of life expenses and burial wishes. For example, if you know you want an elaborate funeral, you may want to consider that when you buy life insurance.

If you are not sure how much life insurance coverage you need, consider using an online life insurance coverage calculator. You will input some basic information, like your income, expected burial costs and the number of children you have, and the calculator will estimate how much coverage may be right for your situation.

How much does life insurance cost?

The cost of life insurance depends on several key factors that insurance companies consider when calculating your premiums. Let’s break it down into key factors and strategies to manage costs effectively.

A few of the factors affecting your life insurance costs are: 

Outside of these factors, policy type is another key component that will influence your premiums.

• Term life insurance: As we’ve mentioned, this is typically the most affordable option, usually offering fixed premiums for a set period.
• Whole life insurance: Premiums can be 10 to 15 times higher than term policies due to lifetime coverage and cash value growth.
• Universal life insurance: Offers flexibility in premium payments, allowing you to adjust them as your financial situation changes.
• Guaranteed issue insurance: Requiring no medical information for approval, premiums are high relative to the coverage amounts offered.

Now for the good part, there are a few ways you can help mitigate your life insurance costs.

1. Shop around: Life insurers follow specific underwriting guidelines, which can vary significantly from company to company. If you have a pre-existing condition, getting quotes from multiple companies can help you find the best rate.
2. Laddering policies: Instead of buying one large policy, you can save money by “laddering” multiple term policies with different expiration dates and coverage amounts to match your needs. This strategy helps make sure you aren’t overpaying for coverage you no longer need. For example:

• A 10-year term for short-term debt like a car loan.
• A 20-year term for a mortgage.
• A 30-year term for long-term expenses like children’s college tuition.

3. Improve your risk profile:

• Quit smoking.
• Address health issues where possible, such as managing high blood pressure or weight loss.
• Reduce risky hobbies before applying.

How do I buy life insurance?

Finding the right life insurance coverage starts with a thoughtful comparison of policies across multiple insurance providers. Since each company evaluates risk factors differently through its own underwriting processes, you’ll often find significant premium variations for comparable coverage levels.

Consider working with a licensed agent or Chartered Life Underwriter if you want assistance through the process. Gathering quotes from at least three reputable insurers can help in securing coverage at competitive rates. Many life insurance companies offer an online or phone application process for your convenience.

After you have reviewed quotes and selected which company you want, you will complete that company’s application process. As part of the application process, you may be asked to get a medical exam to assess your general health or complete a health questionnaire.

Finally, once your application is approved, you will sign the policy, pay your first premium and your coverage will take effect.

Frequently asked questions

• What is the best life insurance company?
  

  It depends. The best life insurance company for each person varies since each policyholder brings a unique set of needs and preferences to the table. For instance, some people may be willing to spend a little bit more for a company with excellent customer service. Those shoppers may want to seek out carriers with high customer satisfaction scores from J.D. Power.

  Others may want a term policy but are unsure if they’ll need coverage in the future, so they opt for an insurer that offers conversion capabilities. It’s also helpful to understand and remember that insurance carriers use different underwriting guidelines. For example, if you have specific risk factors — such as a health condition or a risky profession — Carrier A may assess your risk more favorably than Carrier B, potentially offering you a lower premium. Comparing quotes and researching carriers that align with your personal situation can help you find the company that best fits your needs.

• How can I get a cheaper life insurance premium?
  

  Unlike home or auto insurance, discounts are not available for life insurance policies. However, there are still ways to potentially get a lower rate. To help you receive the cheapest life insurance for your situation, you could consider:

  • Improving your health
  • Quitting your smoking habit
  • Manage health conditions with your doctor
  • Opt for term life instead of permanent life insurance
  • Choose a lower face amount for your policy
  • Use a laddering strategy with multiple term policies
  • Get quotes from multiple providers to compare rates

• Can you purchase life insurance with pre-existing conditions?
  

  Yes, it’s possible to purchase life insurance with pre-existing conditions, though your options and premiums will depend on the severity of your condition and the insurer’s underwriting criteria. Conditions like diabetes, high blood pressure or asthma typically won’t disqualify you, but they may result in higher premiums. However, more severe or terminal conditions might limit you to guaranteed issue or other specialized policies. For these reasons, it is again beneficial to get quotes from multiple providers or work with an independent agent or broker who can do the shopping for you to help you find the best policy that will cover any health concerns you may have.

• Is life insurance worth it?
  

  For many, life insurance is an important piece of their financial plan. However, whether life insurance is worth it to you is an individual choice. If you have a family that depends on your income or you have debt that your spouse or co-signer will be responsible for after you pass, then life insurance may be a good choice. Even if you don’t have dependents or debt, life insurance could help your loved ones follow through with your funeral and burial plans. If you’re unsure whether you need life insurance, you could consider consulting with a financial professional.