What life insurance does
Life insurance pays a lump sum, the death benefit, to the beneficiaries you name when the insured person dies while the policy is in force. Families use it to replace lost income, pay off a mortgage and other debts, fund children's education, cover final expenses and estate costs, or keep a business running. Under IRS rules, life insurance proceeds received as a beneficiary because of the insured's death are generally not included in gross income, although interest paid on those proceeds is taxable.
Term and permanent coverage
The Insurance Information Institute (Triple-I) divides life insurance into two broad groups.
- Term life pays only if death occurs during the term, usually from one to 30 years. Level term keeps the same death benefit throughout; decreasing term reduces it over time. Term is the simplest and usually the least expensive way to buy a large amount of coverage.
- Whole life covers you for life, with fixed premiums and a cash value that grows on a guaranteed basis.
- Universal life adds flexibility: once cash value builds, you can adjust premiums and the death benefit within limits.
- Variable and variable universal life invest cash value in subaccounts similar to mutual funds. Values can fall with markets, and these policies are also regulated as securities.
Common riders
Riders customize a policy. Waiver of premium keeps the policy in force if you become disabled. Accelerated death benefit riders allow part of the benefit to be paid early after a terminal or, in some designs, chronic illness diagnosis. A conversion option lets you switch term coverage to permanent coverage without new medical underwriting. Child and spouse riders add small amounts of coverage for family members.
What drives the price
Premiums depend on age, sex, health history, height and weight, tobacco use, family history, occupation, dangerous hobbies, the amount of coverage and, for term, the length of the term. Fully underwritten policies usually include a medical questionnaire and sometimes an exam and lab tests; simplified-issue and guaranteed-issue policies skip some steps but typically cost more per dollar of coverage. Buying younger and in good health generally locks in lower rates.
How to choose coverage
Estimate how much your family would need: years of income to replace, outstanding debts, education costs and final expenses, minus savings and existing coverage such as a group policy at work. Match the term to your longest obligation, such as a mortgage or the years until your youngest child is independent. Consider permanent coverage for lifelong needs like estate planning or a dependent with special needs. Name primary and contingent beneficiaries and keep them current. Group life coverage through work is convenient, but amounts are often modest and coverage may end or need to be converted when you leave the job. Our life insurance calculator can help you size the death benefit.
Consumer protections
State law gives new policyholders a free look period, at least 10 days in many states and longer in some cases such as replacement policies, to cancel for a full premium refund. During the contestable period, usually the first two years, the insurer may review the application and can rescind a policy for material misrepresentation. If an insurer fails, state life and health guaranty associations protect policyholders up to limits set by each state's law.
How claims work
A beneficiary files a claim form with the insurer along with a certified death certificate. Most claims outside the contestable period are paid promptly once paperwork is complete, as a lump sum or under a settlement option. If you are not sure whether a relative had coverage, the NAIC offers a free Life Insurance Policy Locator that asks participating insurers to search their records.
Polis Re helps you compare life insurers, term lengths and policy types and request quotes in one place. Policies are issued by licensed insurers and placed through licensed producers in your state.
