Life insurance financially protects your family and other people who rely on your income. If you have life insurance, it will make payments after your death to the person you name in your policy. This person is called your beneficiary. You can name more than one beneficiary. Your beneficiaries can use the money to pay bills and living expenses, pay off debts, pay for college, and other things. Some types of life insurance also build savings you can use during your lifetime.
Do I need life insurance?
Not everyone needs life insurance. In general, life insurance is a good idea if you have family or others who rely on you financially. There’s no formula to decide how much life insurance you need. To decide the amount that’s right for you, consider your debts, the amount of income your family must replace, and whether they’ll have bills or other expenses.
How do I get life insurance?
You can buy life insurance directly from insurance companies and agents. Insurance companies use a process called underwriting to decide whether to sell you a policy. This often includes passing a medical exam and answering questions about your health, job, and habits. A company can refuse to sell you a policy if it considers you a high risk because of your health or other reasons.
Some employers and groups – like churches, unions, and other associations – offer group life insurance to their employees and members. The underwriting criteria for group life insurance isn’t as strict. You usually don’t have to answer questions about your health. As a result, you might be able to get group life insurance even if you aren’t able to buy directly from an insurance company.
How much does life insurance cost?
The cost depends on your circumstances. Life insurance premiums are based on your age when you buy the policy. They’re usually lower for younger people. They can be high if you’re older or have risk factors. A company can charge you more if you smoke or have risky hobbies like skydiving or rock climbing. Your premium will also depend on other things, including the amount of coverage and policy features you choose.
For group policies, risk is based on the whole group, not on one person. The cost is usually cheaper than for a policy you buy directly from an insurance company.
There are two main types of life insurance: term life and permanent life insurance.
What is term life insurance?
Term life insurance offers protection for a set period of time. This period is called a term. The term can be for one year, or anywhere from five to 30 years or longer. You choose the length of the term. Term life policies pay a lump sum, called a death benefit, to your beneficiaries if you die during the policy’s term. The policy ends at the end of the term, unless you pay to extend it.
Term policies aren’t meant to provide coverage for your entire life. Most people who buy term life policies want coverage for only a time, such as while they’re raising a family or have children in college.
Premiums will stay the same for the entire term. They’ll go up if you renew at the end of the term. This is because your new premium will be based on your age when you renew, not when you originally bought the policy. To help avoid higher premiums later, consider buying a policy with a longer term.
Most companies offer term life insurance only up to a certain age, usually 70 or 80.
Key features of term life policies
The two most common features of term life policies are convertibility and renewability. They make it easier to get a different type of policy or keep the one you have.
Convertibility lets you exchange your term policy for a permanent life policy without having to take a medical exam or answer questions about your health. This can be helpful if your health gets worse after you buy a term policy.
Converting a policy will raise your premiums. Companies usually allow you to convert term life policies only for a time, typically until you turn 65.
Renewability lets you extend your policy for additional terms, regardless of your health and without having to take a medical exam.
What is permanent life insurance?
Permanent life insurance lets you build savings over time. You can withdraw from, invest, or borrow against this savings. You can also use it to pay premiums.
A portion of each of your premiums is put into an account, known as the cash value. The cash value grows at either a fixed or variable interest rate. Some policies tie the growth to indexes, such as the S&P 500, or to sub-accounts you choose. The sub-accounts are invested in stocks, bonds, or both. Your cash value could go up or down, depending on the performance of your sub-accounts.
It takes a policy several years to build a cash value. You might have to pay a surrender fee if you withdraw the money early. And if you withdraw more money than you paid in premiums, you’ll probably have to pay taxes on it. If you withdraw the entire cash value, the company might cancel your policy. If that happens, the coverage will end, and it could affect your taxes.
Premiums for permanent life insurance are higher than for term life. That’s because of the savings feature and because you’re buying coverage for a longer period. But if you buy a permanent life policy when you’re young and keep it, your premiums will likely be lower than for a term life policy you buy when you’re middle-aged or older. That’s because premiums are based on your age when you buy the policy.
Types of permanent life insurance
The two most common types of permanent life insurance are whole-life insurance and universal life insurance.
Whole-life insurance stays in effect for your entire life unless you cash the policy in or stop paying premiums.
Some whole-life policies might pay a dividend each year. You can get the dividend in cash, add it to your policy’s cash value, or use it to pay premiums. Dividends aren’t guaranteed. Your dividend could be lower than the company’s projection. Before you buy a policy, ask the company for a history of its projected dividends versus paid dividends.
Universal life insurance stays in effect until the maturity date, which is usually age 95 or 100, as long as you have $1 or more in cash value. At the maturity date, coverage ends and you get the cash value.
Universal life insurance is more flexible than whole life. You can change the amount of your premiums and death benefit. But any changes you make could affect how long your coverage lasts. If your premiums are lower than the cost of insurance, the difference is taken from the cash value. If the cash value reaches zero, your policy could lapse.
The company will send you a report each year showing your cash value and how long the policy might last. The estimate is based on the cash value amount, the cost of insurance, and other factors. Review it carefully. You might need to pay more in premiums to keep the policy in effect until the maturity date.
Most universal life policies earn a guaranteed minimum interest rate on the cash value. Variable universal life policies depend on the performance of the sub-accounts you choose. Agents who sell variable life insurance in Texas must have a federal securities license and a state insurance license.
Some universal life policies have a no-lapse guarantee. If your premium payments aren’t enough to cover the cost of insurance, the no-lapse guarantee keeps the policy in effect. You must pay your premiums on time for the guarantee to apply.
For another explanation of how universal life insurance works, watch our video about universal life policies.
Comparing the major types of life insurance
|Term Life||Whole Life||Universal Life|
|Premiums||Low at first but may go up each time you renew the policy. Premiums are based on your age when you buy or renew your policy.||Higher than term life at first, but usually don’t go up. Premiums are based on your age when you buy the policy.||Flexible. Premiums are based on your age when you buy the policy. Most policies let you change your premium payments, but it will affect your death benefit, cash value, or both.|
|How long policy lasts||The period you choose, usually one year, five to 30 years, or longer.||Your entire life if you keep the policy.||Depends. The policy stays in effect until the maturity date, usually at age 95 or 100, as long as you have a cash value.|
|What the policy pays||Death benefits only.||Death benefits, plus a possible cash value you can withdraw from, invest, or borrow against.||Death benefits, plus a possible cash value you can withdraw from, invest, or borrow against.|
|Advantages||Good option if you want coverage for a specific period, such as when you’re raising a family. You can convert to a permanent life policy or renew without having to take a medical exam.||Premiums, death benefits, and cash values are guaranteed.||Flexible. You can change the death benefit and premiums.|
|Disadvantages||Premiums will go up each time you renew. Doesn’t allow you to build savings.||Might be expensive to cover a short-term need. Usually little to no cash value in the first few years. Not flexible enough to make changes when needed.||Might be expensive to cover a short-term need. The payment isn’t guaranteed. Low interest rates can affect cash value, which might increase your premiums.|
Other types of life insurance
These types of life insurance provide only specific coverages:
- Credit life pays the balance of a loan if you die before the loan is paid off. Banks and other lenders may require you to buy a credit life policy as a condition of a loan.
If you already have life insurance, you might not need credit life. Instead, you can assign some of the death benefits to the lender to pay the loan balance.
- Prepaid funeral insurance pays your funeral expenses. An advantage of this insurance is that it locks in funeral costs at current prices. Funeral insurance can be expensive compared to other types of life insurance. The amount you pay in premiums might end up being more than what the policy pays when you die. And many policies won’t pay the full cost of the funeral if you die before paying a required amount. A regular life insurance policy or savings might be a better way to pay for a funeral.
You can usually add features or other coverages to your policy so it better suits your needs. You do this by buying policy riders. Some of the most common riders are:
- Additional term insurance adds term life coverage to a permanent life policy. For instance, if you need $500,000 worth of total coverage, you could buy a $100,000 whole-life policy with a $400,000 term life rider. As you make more money, you could convert the term life rider into a universal life policy or buy an additional whole-life policy.
- Guaranteed insurability lets you buy additional coverage regardless of your age or health. The company may still use these factors to decide on your premium. You usually must buy the additional coverage by a specified date or life event, such as when you retire or before you turn 50.
- Accidental death provides an additional payment if you die because of an accident. For instance, if you have a policy with a $500,000 death benefit and a $500,000 accidental death rider, your beneficiary would get $1 million if you die because of an accident. There are some restrictions.
- Disability waiver of premium covers the premium if you meet the policy’s definition of disabled. This rider is usually only available to people younger than 60.
- Accelerated death benefit option prepays some or all of the death benefit while you’re still living. You must have a terminal illness, specified disease, or long-term care illness. People often buy this rider to help pay long-term care expenses in case they need them later.
- Spousal rider provides term life insurance for your spouse. Basically, this rider combines two policies into one.
- Children’s rider provides term life insurance for your children. Most companies require the child to be at least 14 days old. Coverage typically lasts until the child turns 21 or 25.
Some employers and other groups offer life insurance as a perk. Those that do must make it available to all their employees and members regardless of age or health.
Most group life insurance is term life, but some groups offer permanent life policies as well. The amount of coverage is often limited. A basic group policy through your job usually has a death benefit equal to one or two times your annual salary. Other group policies cap the death benefit at a set amount, such as $100,000 for a term life policy and $50,000 for permanent life.
You usually don’t have to answer health questions or take a medical exam unless you want more coverage than the basic group policy provides.
If you get life insurance through your employer, coverage typically ends when you leave your job.
Companies usually pay the death benefit as a single lump sum, but there are other options. Either you or your beneficiary chooses how the death benefit will be paid. Common options include:
- Interest option.The insurance company keeps the death benefit and pays the interest to your beneficiary at regular intervals.
- Fixed period.The company pays the death benefit at regular intervals, with interest, over a chosen period.
- Life refund.The insurance company pays a set monthly amount to the beneficiary for the rest of his or her life. Under this option, the beneficiary could get more than the policy’s stated death benefit if he or she lives longer than expected.
Companies must pay death benefits promptly
Companies must pay the death benefit within two months after getting proof of death and verifying your beneficiary. For an individual life policy, the company must also pay interest on the death benefit from the time it got proof of death to the time it agreed to pay the death benefit. Companies might take longer to pay the death benefit if you die during the policy’s contestable period.
What is the contestable period?
Life insurance policies have a two-year contestable period. If you die within this period, the company may review the information you gave on your insurance application. If the company learns you gave wrong information or didn’t disclose something, it can deny payment. This can happen even if the wrong information was unrelated to the cause of death or was given by mistake. If a company denies payment, it must return the premiums to your beneficiary.
The company may also investigate the cause of death. During the first two years of a policy, companies usually won’t pay the death benefit if the cause of death is suicide. If the company doesn’t pay the benefit, it must return the premiums to your beneficiary.
Once your policy has been in effect for more than two years, the company must pay the death benefit regardless of the cause of death. Your policy will have a new contestable period if it lapses and you later reinstate it.
What if I miss a premium payment?
Most policies have a 31-day grace period after your premium’s due date. You may pay the premium during the grace period with no interest charged and still have coverage. If you die during this period, your beneficiary gets the death benefit minus the premium owed.
What if my policy lapses?
If you don’t pay the premium within the grace period, your policy will lapse. This means you no longer have coverage and your beneficiaries won’t get the death benefit when you die. You can usually reinstate a lapsed policy. To do this, you’ll have to pay the overdue premium with interest. Most companies will reinstate a policy within a five-year period. To reinstate a policy, you might have to answer health questions or take a medical exam.
- Make sure the agent and company are licensed to sell insurance. If you buy from an unlicensed company, your beneficiary might not get paid if the company fails. Licensed companies belong to a guaranty association that pays claims for failed companies. To learn whether an agent or company is licensed, use the “Look up a company or agent” feature on our website or call our Consumer Help Line at 1-800-252-3439.
- Check a company’s financial rating and complaint history. To learn a company’s financial rating and the number of complaints against it, call our Consumer Help Line or use “Look up a company or agent” feature on our website.
- Shop for a low- or no-load policy. You might save money if you buy a policy with low commissions and fees, which are known as the load. Financial planners who are licensed insurance counselors often sell these policies. They usually charge clients a flat fee.
- Get quotes from several companies. Rates vary by company.
- Compare “apples to apples.” Be sure the policies you compare offer similar coverage. A less expensive policy could have fewer features or a lower death benefit. A more expensive policy might be a better value when you consider the amount of the death benefit per premium dollar. Don’t choose a policy on price alone.
- Use your free-look period. Texas policies have a free-look period of at least 10 to 20 days. During this time, you may cancel the policy for any reason and get a full refund. Use this time to be sure the coverage is right for you.
- Review the information an agent gives you. Agents often use charts to show how a policy’s cash value might grow. These are usually projections and aren’t a promise of a policy’s performance. You could earn less than the projection. Ask for a history of the actual growth of cash values.
- Watch out for illegal acts. Agents can’t offer you a gift or a discount on an investment or loan to encourage you to buy life insurance. If you think an agent has made an improper offer, call our Consumer Help Line.
What if I want to replace my policy with a new one?
You should review your life insurance policy every few years to make sure it still meets your needs. But replacing a policy with a new one isn’t always a good idea. Before you replace a policy, consider these things:
- New policies usually take longer to build cash values and to pay dividends.
- The two-year contestable period begins again under the new policy.
- If changing to a new policy means withdrawing early from a permanent life policy, the surrender fees might reduce your cash value.
- You’ll probably have to answer health questions or take another medical exam.
It’s illegal for an agent to replace a policy just so the agent can get a new commission. If you think an agent has improperly replaced your policy or persuaded you to replace it, complain to us.
Having life insurance can affect your taxes and financial situation. Talk to an attorney or financial adviser to understand how it affects you. Here are some things you should know:
A policy’s cash value is considered an asset when determining whether you can get Medicaid. The earnings from a loan using the policy as collateral might also be an asset.
The cash value of a life insurance policy is tax-deferred. This means you don’t pay taxes on it until later, if ever. Withdrawals from the cash value are usually nontaxable until the cash value exceeds the total premiums paid into the policy.
The law considers a death benefit to be reimbursement for a beneficiary’s loss, and not income. Beneficiaries rarely have to pay income or inheritance taxes on a life insurance death benefit.
If you don’t name a beneficiary, or your beneficiary is dead, the company will pay the death benefit to your estate. Your heirs might have to pay taxes on money they get from your estate.
A policy’s cash value and death benefit are usually exempt from:
- demands in bankruptcy proceedings; and
- attachment, garnishment, or other legal processes.
Sometimes you might need to sell your life insurance policy to get cash. A life insurance policy is personal property. You can sell it just as you would your other property, but there are special rules.
If you have a terminal illness, you can sell your life insurance policy to a life settlement provider. To do this, a doctor must certify that you have two years or less to live. You don’t have to pay taxes on earnings from a life settlement.
You also might want to sell your policy if you outlive your retirement savings and need to pay living expenses. You’ll probably have to pay taxes on the money you earn from the sale.
How much can I sell a policy for?
Life settlement providers pay a percentage of the policy’s death benefit. For example, a settlement provider might pay $75,000 for a life insurance policy that will pay $150,000 when the policyholder dies. Sale amounts typically range from 10 percent to 75 percent of a policy’s death benefit.
Prices vary, so talk to several settlement providers. Settlement providers usually look at these things to decide how much to pay for a policy:
- Your life expectancy. Settlement providers will pay more for policies if you have a shorter life expectancy. Most won’t buy a policy unless you’re 65 or older or have a terminal illness.
- Your policy premiums. Settlement providers take over paying the policy premiums, so they’ll pay more for policies with lower premiums.
The income from a life settlement could affect your eligibility for Medicaid or other government programs. The income might not be exempt from bankruptcy or creditor proceedings. Before taking a life settlement, talk to an attorney or financial adviser.
Life settlement providers and brokers must register with us. For a list of registered life settlement providers and brokers, call our Consumer Help Line.
What other ways can I get cash from my policy?
- If your policy has a cash value, you can withdraw from it or cash your policy in. When you cash a policy in, you cancel it and get the money built up in the cash value.
- Many lenders will give you a loan using your policy as collateral. If you don’t pay back the loan, it will lower the amount of the death benefit.
- A policy with an accelerated death benefit will prepay all or some of the death benefit before you die. You must have a terminal illness, specified disease, or long-term care illness.