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Life Insurance 101: Your Questions Answered


Life insurance is important protection for your family, but there are a lot of factors to think about as you consider a policy:

  • Life insurance provides financial protection for those you leave behind, so you’ll need to pick a policy that reflects your family’s needs now—and into the future.
  • As an important part of your financial picture, learning which type of life insurance policy you need and how much coverage you should purchase deserves careful thought.

Life insurance is an essential part of any family’s financial plan. The peace of mind that comes from knowing that your family will be protected if something happens to you is a big part of why so many families get life insurance coverage.

There are many different types of policies — how do you determine which one to choose and how much life insurance you need? Here is a breakdown of some of the key terms and information that you should know.

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Do I Need Life Insurance?

Buying life insurance provides financial protection for those you would leave behind if you were to die unexpectedly. If you have children or other dependents, or if your spouse would face serious financial challenges if you were to suddenly pass away, you should consider purchasing a life insurance policy.

How Does Life Insurance Work?

Purchasing a life insurance policy is a form of a contract. You pay a monthly premium, and if you pass away while the policy is in effect, your named beneficiaries will receive a death benefit.

What is the Difference Between Term Life Insurance and Permanent Life Insurance? 

A term life policy has a set number of years ranging anywhere from 10 to 30 years. This range of years is the term of the insurance policy. If you die during the term, the insurer will pay out a death benefit to your named beneficiaries. Once the term ends, however, so do the potential benefits.

A permanent life policy does not have a fixed number of years, and it remains in place as long as you pay your premiums. The three most common types of permanent life insurance are whole life insurance, universal life insurance, and guaranteed universal life insurance. 

Permanent life policies are typically more expensive than term life policies, and frequently, this type of policy has a cash value. While the cash value is lower than the death benefit, it can serve as an asset you can borrow against or sell.

For most people — particularly those who are young and healthy — term life policies are the more affordable choice. The length of the term factors into your premium cost; a 30-year term will cost more than one set at 10 years. It’s always better to get permanent and or term while you are younger and healthier. 

How Much Are Life Insurance Premiums?

Premiums are monthly, annually and semiannual payments you make on your life insurance policy. Similar to other forms of insurance, the average cost of life insurance is based on risk assessment. The underwriting process examines aspects of your life and health and determines the risk level of an unexpected premature death. That risk assessment plays a significant role in determining your premium.

Your premium will vary depending on several factors, including:

  • One factor is the amount of the policy death benefit. The higher a benefit that you choose, the more your premium could cost.
  • Age is another significant factor in determining the cost of your life insurance premium. The older you are, the higher your premium is likely to be. Your health and lifestyle — such as your profession or your alcohol and nicotine usage — can also affect your premium costs.
  • Pre-existing and current medical conditions could also factor into your life insurance costs, with some conditions potentially resulting in a higher premium.

How Much Life Insurance Do I Need?

This is an important question to answer before you purchase a policy, and it will require a bit of homework on your part. You want the right amount of coverage to protect your family, but getting significantly more coverage than you need will increase the cost of your premium.

Within that estimate, you’ll need to adjust for your family’s needs, which could be greater or less than the estimate provided. A life insurance professional can help guide you through this process and customize the amount and type of coverage you may need or you can visit Guaranteed Rate Insurance website here to compare life insurance online or to speak with a life insurance agent. 

Your financial needs as a family could change over the years. For example, if you are the sole provider for a family of four, and your spouse stays home to care for young children, what would happen if you passed away suddenly? How long would it be before your spouse was able to find an income level that replaces yours, and how much would child care then factor into the equation?

Don’t forget to consider that costs related to death – such as funeral and burial costs and estate taxes – can add up. These are the types of questions a life insurance agent can walk you through to understand how much life insurance you may need.

How Can I Estimate How Much Life Insurance I Need?

Figuring out how much life insurance you need can be confusing, but there are some general rules that have industry experience and logic behind them. However, keep in mind that these are general estimates, and your needs could potentially be different.

  1. Estimate life insurance at ten times your income. This is the easiest and quickest way to estimate how much life insurance you may need. Simply take your gross income, and multiply that number by 10.
  2. Estimate life insurance at ten times your income, plus $100,000 per child. This estimate takes into account both the living expenses of your family and the cost of educating each child. It’s still an estimate, but takes the additional high-cost factor of raising a child into consideration.
  3. Estimate life insurance  using the DIME formula. DIME stands for “Debt, Income, Mortgage and Education.” Using this formula means that you need to consider how much debt – other than mortgage – that you currently have, your income level, your outstanding mortgage balance, and how much it will cost to educate your children – elementary school through college.

For each category, you’ll need to gather the numbers. For income, estimate how many years your family may need financial support and then multiply your income by that number. If your children are very young, this could be many years. If they are in high school, it will be fewer.

This estimate requires you to look at your expenses closely so you can develop an accurate reflection of your actual situation. 

You’ll still need to consider additional factors specific to your family. For example, if you have a child with special needs, your spouse may never be able to work full-time, and that child may be a dependent well into adulthood.

The term length you select should be long enough that it will extend beyond when your youngest child completes college or until your mortgage is paid off. This estimate protects your family from financial hardship if you die during the period when your children are still dependents.

Should a Stay-at-Home Parent Get Life Insurance?

One place where general estimates fail is in recognizing the economic value of the work stay-at-home parents do. Since income is the central component of these estimates, people sometimes assume this means that if a parent doesn’t work outside the home, there’s no need to purchase a life insurance policy to cover them.

In fact, if a stay-at-home mom or dad passed away suddenly, the surviving spouse would need to cover the work that they did. If children are very young, there would be considerable additional childcare expenses. Whether that means hiring full-time, in-home help such as a nanny or securing childcare spots at daycare, it is an expense that is currently covered by the spouse’s work in the home.

Since child care expenses would be a significant cost factor if a stay at home parent dies, the age of your children and how much longer they will be dependents is a big part of determining how much life insurance your stay-at-home spouse would need.

  • Is your stay-at-home spouse also caring for an aging parent or relative?
  • What other tasks do they handle that may need to be outsourced?

You’ll need to answer these questions before you can determine precisely how much life insurance is necessary.

Should I Get Life Insurance for My Children?

This is a frequently debated question, so let’s take a look at the pros and cons of getting child life insurance. Life insurance for children is typically whole life insurance, meaning it is in effect for as long as premiums are paid.

There are a number of pros that lean in favor of getting life insurance for children:

  1. It’s usually fairly inexpensive, and premium amounts are locked in. 
  2. Because it’s typically whole life insurance, it can act as a type of investment vehicle, building value over time.
  3. Life insurance would also cover the funeral costs if the worst were to happen and the child were to pass away.
  4. With whole life insurance, your child would be covered in the future — even if they choose a risky career or develop a chronic disease that would normally affect eligibility for life insurance or present a high cost later.

One con, however, is that life insurance premiums on a child would be a fixed expense that you would be paying until the child reaches adulthood. A life insurance professional can help you weigh your options and make the right choice for your family. 

What Kinds of Riders Are Available for Life Insurance?

Riders are additional coverage that can be added to your life insurance policy. Some are included at no extra charge, while others are at an additional cost. Riders allow you to customize your coverage so that you have exactly what you need to protect your family in the event of your death. 

Here are some common types of riders available for life insurance policies that you may hear about when you call and ask for a life insurance quote:

  • Accelerated death benefit rider: This allows you to receive a portion of the death benefit while you are still alive but have a critical, chronic, or terminal illness. The portion of the accelerated death benefit varies from one insurer to the next, so it’s important to understand the specifics — and if it’s included in your standard policy or must be purchased separately. 

The option to access death benefits before death allows the individual to begin to get their affairs in order, taking pressure off of the family during a stressful period. Accessing those funds means that the death benefit could be reduced, so be aware that there could be a potential impact for your family.

  • Child term rider: This is an alternative to purchasing life insurance for your child. Instead of a separate policy, a child rider is an additional coverage added to your life insurance policy that will provide a limited death benefit if your child dies. Typically, it will be enough to cover the expenses associated with a funeral and related costs. In some cases, this could be a more economical choice than a separate life insurance policy for a child.
  • Return-of premium rider: This provision allows a policyholder to receive back the amount paid in premiums if they do not die during the policy term. Although this sounds like a great deal, a return-of premium rider is likely to increase the cost of your premium considerably. You will be paying a substantially higher premium just to get that money back.

Do I Need a Medical Exam to Get Life Insurance?

Medical exams are one important way that an insurance company can assess your health risk, so some insurers do require a short medical exam before extending coverage. However, thanks to newer products and policies using algorithms, several life insurance companies now offer term and permanent life insurance with no medical exam required. 

These exams typically consist of some health-screening questions and a blood draw. Because scheduling an exam can present an issue for some, they can even be done in your home.

Some insurance companies are using video chats and online questionnaires to pre-screen applicants, allowing some to bypass an exam.

What Happens to My Term Life Insurance If I Outlive the Policy?

Purchasing term life insurance means that you’re insuring your life for the years of the term. If you die during that term, the insurance company pays a death benefit to your beneficiaries. If you live beyond your policy’s term, it’s an excellent time to review your life situation and determine how much coverage you need.

Many people purchase term life insurance policies to protect their families from financial hardship if the primary earner were to die unexpectedly. By the time you reach the end of a 30-year term life insurance policy, however, your financial picture may have changed dramatically. By this stage in life, you may have paid off your mortgage and your kids might be out on their own. 

You might still want a life insurance policy to cover things such as medical or funeral expenses, but you probably won’t need quite as much coverage. Most term policies will allow you to convert your term to a permanent policy within a set amount of years. The amount of coverage normally can’t be changed and the rate will increase due to the length of time of the policy. 

If you still want life insurance coverage after your term life insurance policy expires, there are options. One of the most important steps you can take is to talk to your insurance agent about your coverage needs before your term life insurance expires.

How to Get a Life Insurance Quote

You can quickly and easily get life insurance quotes online, but remember that premiums are based on the risk profile you present. The more an insurance company knows about you, the more accurately they can price out your premium. This may mean that your best bet to get a lower life insurance premium quote is to talk to a life insurance professional. With so many available options, a licensed agent can guide you to find a company, policy, and rate that is best for you.

Your family’s future, protected.

Get life insurance

The Bottom Line

Life insurance is an integral part of your financial picture and it can protect your family from financial hardship if you pass away unexpectedly. Talk to an agent or compare life insurance quotes online to learn more about your options.