Last Updated: April 26, 2024
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What is life insurance?

Life insurance provides financial protection for your loved ones if you pass away. It consists of tax-free lump sum of money to your loved ones after your death so you can make sure they’re able to pay everyday bills, children’s college costs, or final expenses. Moreover, a life insurance policy provides affordable financial protection – and peace of mind – to people with friends or family who rely on them.

Life insurance basics

In a life insurance policy, you (the insured) and your insurer (life insurance company) enter into a protective contract where in the event of your passing, your beneficiary (person or organization of your choosing) receives a death benefit, or a set amount of money you have designated to distribute.

You pay for the policy in the form of monthly or annual premiums. You can compare quotes from multiple life insurers to see the different monthly rates they charge for a policy.

If you die while your life insurance policy is in effect, its death benefit is paid out to your chosen beneficiaries, who can use the money to pay off debts, cover expenses, like your monthly mortgage or rent payments, and more.

Types of life insurance

There are two main types of life insurance policies to consider: term and whole life insurance.

Term life insurance offers protection for a set period of time, or a “term” before expiring. As the policyholder, you can choose your term, typically between 1 to 30 years. It’s often the less expensive of the two options, but once that term ends, so does your coverage. It’s best for those who have greater coverage needs for a certain period of time, such as while your family is still growing.

Whole life insurance is a type of permanent life insurance that has life-long cash value as long as you make the premium payments. Because of the lifetime coverage period, whole life usually has higher premium payment than term life.

No one type of life insurance coverage is inherently better than another. What’s most important is finding the solution that works best for your personal financial situation. Generally, whole life insurance can be good for people with complex financial situations or estate planning needs, but term life is the right choice for most shoppers due to its cheaper and more straightforward nature.

There are even more types of life insurance with their own benefits, drawbacks, and unique properties. It may be best to talk to an expert before choosing a more complex policy.

Getting started with life insurance

Understand why you need it. There are many purposes for life insurance protection – paying off mortgages, providing funds for your children, funding college education, contributing to charitable causes, and estate planning. Even if you don’t have any of these needs immediately, consider buying a small starter policy to anticipate the needs of your loved ones.

Determine the amount of life insurance coverage you need. There are many ways to calculate the right death benefit amount for you. Online calculators can be helpful in determining a ballpark figure of how much life insurance coverage you need. These will only provide hypothetical values though – you can also speak with an insurance agent and use other insurance resources.

Find the right policy for you. Think about whether term or whole life insurance may be a better fit for your financial situation. Start comparing quotes keeping in mind different premium amounts, customer service, and other ratings.