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Life Insurance Explained

If you're in the process of shopping for life insurance, you already know that it can be confusing. Did you know 40% of adults don't have any life insurance coverage?1 Finding the right policy has multiple steps:

What is life insurance?

Life insurance is an agreement between you and an insurance company that the company will pay your beneficiaries a tax-free benefit if you die within the conditions of the policy. It can serve as financial protection for your loved ones who would lose your income in the event of your death.

There are two main types of life insurance: term and permanent.

Term life insurance offers coverage for a set period of time. If you pass away during the term that your policy is still in place, your beneficiaries receive a benefits payout.

More info on Term

Permanent life insurance offers coverage for your entire life, as long as you continue to pay your premiums on time. When you pass away, your beneficiaries receive a payout on the policy. Permanent life insurance policies offer a component that can accrue cash value, which accumulates on a tax-deferred basis.*

More info on Permanent

Compare them side-by-side

Permanent life insurance can be broken down into a few additional categories, mainly whole life, universal life and variable universal life.

This chart explains the factors included in different types of life insurance.

(Scroll left to view the full chart)


Life Insurance Policy Length Cash Value  Premium Structure Additional Considerations
Term Term 1-30 years NO Stay level or increase over time, depending on policy Doesn’t accumulate cash value
Term w/return of premiums Termw/ return of premiums 1-30 years NO Stay level or increase over time, depending on policy Premiums are returned if policy expires2
Whole Whole The rest of your life3 YES Level Low risk, but less lucrative than other investment options
Universal Universal The rest of your life3 YES Can vary based on taxes and what customer wants to pay Premiums, death benefits, and frequency of payments can be changed.
Variable  Variable Whole The rest of your life3 YES Level Cash value may be at risk of losses due to underlying investments fluctuating, but also allows for greater earning potential
Variable Universal Variable Universal The rest of your life3 YES Can vary based on taxes and what customer wants to pay Similar to variable whole, above, but allows you to increase and decrease the death benefit

2This rider comes at an additional cost.

3As long as your premiums are paid on time.

*Note: A permanent policy's cash value can be used to pay premiums, or may be accessed via loans or withdrawals. Policy loans and withdrawals will reduce cash values and death benefits, and may cause the policy to lapse. Additional premium payments may be required to keep the policy in force. Withdrawals may be subject to a surrender charge. Withdrawals and any unpaid loans are subject to ordinary income tax and, if taken prior to 59 1/2, a 10% federal additional tax.

Calculate your coverage needs

As a general rule, you can calculate how much life insurance you need by adding your income (times the amount of years you want to be protected) + your current debts + your future financial commitments (like college costs for your kids and your final expenses) minus your liquid assets (like your savings and current life insurance coverage).

Let's look at an example of how this could work:

John currently makes $50,000 a year and wants coverage for at least the next 18 years, when his youngest child should be done with college. He currently owns a home and he has $130,000 left on his mortgage. He wants to leave at least $10,000 for his own funeral and at least $20,000 to help pay for his children's college. He also has $15,000 in savings and $100,000 in life insurance from his current employer.

To play it safe (many financial professionals will recommend getting slightly more life insurance than you think you need), John could round up and look for a 20-year, $1,000,000 policy.

Don't have a pen and paper? Our online calculator below can help you figure it out.

So the math would be:

$900,000 (income × 18)

+$130,000 (debt)

+$30,000 (future commitments)

-$15,000 (savings)

-$100,000 (current life insurance)

Total = $945,000

Hypothetical illustration for informational purposes. Your needs and situation will vary.


Based on your answers, you should consider

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in life insurance coverage.

To confirm this amount or ask questions before making a purchasing decision, you should speak with a licensed insurance agent.

Call 1-855-303-4640 to speak with a licensed agent today.

The cost of life insurance

If you're like most Americans, term life insurance is probably less expensive than you think. A 2015 study, from Life Happens and LIMRA, found that 80 percent of participants overestimated the cost of term life insurance.4

Survey participants estimated that $250,000 in 20-year term life insurance for a healthy 30-year-old would cost $400 a year. In reality, the average cost is closer to $160.4 Overall, term life policies are typically less expensive than permanent alternatives. Term policies don't last for your entire life like permanent policies, nor do they accrue cash value.

Insurance companies use certain personal information to determine your rating class, which in turn will determine the premium you will pay. Your rating class can depend on a number of different factors, including your:

  • Age
  • Gender
  • Health status
  • Tobacco usage
  • Medical history
  • Hobbies and lifestyle
  • Family medical history
  • Driving record
  • Blood testing

Applications for traditional, fully-underwritten life insurance policies will include some type of medical evaluation or exam for the insurance companies to check the factors listed above. The better your health, the more affordable your policy will be.

Younger people, women and non-smokers have lower life insurance rates on average. The older you are, the higher your premium will be to reflect the greater risk to the insurer. Buying a policy while you're still young and healthy is the best way to save money in the long run.

Tobacco use is also a big red flag for insurance companies reviewing your application. Smoking increases your risk for a long list of health conditions, which may cause an increase in your premium rate and negatively impact your ability to qualify for certain types of life insurance. You may want to quit smoking for other reasons, but saving money on your life insurance could be an added bonus.

Ready to discuss your life insurance needs? A licensed insurance agent is standing by to help you find a life insurance plan. Give us a call at 1-855-303-4640 today.

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