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Grief and loss are tough emotions to deal with. You don't want your family and friends to deal with sudden funeral expenses and a newly unstable financial situation at the same time.
Buying life insurance can help protect a family financially in the event of a death. The death benefit money can be used to pay for funeral costs, living expenses, debt, and any other final expense. Purchasing life insurance is a smart move for people with dependents or with hefty financial obligations.
Use the guide below to learn about the life insurance basics. You’ll learn about your options for life insurance plans and what to consider when choosing a life insurance company.
Individuals looking for a life insurance policy can choose a permanent policy or a temporary policy.
Term life insurance: A term life insurance policy offers life insurance coverage for a specific period of time, typically 10-30 years. People who purchase term policy make monthly premium payments for coverage. The beneficiaries of insured people who die during that time receive the death benefit.
Term life policies can be renewable or later be converted into permanent life insurance. If the policyholder is still living at the end of the term, some life insurers will return the premium payments in one lump sum. Term life insurance coverage tends to have lower premium rates than permanent policies because it is only temporary.
Whole life insurance: Whole life insurance provides life insurance coverage for an individual’s entire life. The monthly cost is higher and does not change over time. The cash value of the policy also grows in a tax-deferred account and can be used as an asset while living.
Universal life insurance: Like whole life insurance, universal life insurance also provides coverage for an individual’s entire life and grows a cash value that can be used while living. Insurance premiums, the monthly payments, go into a tax-deferred account and grow with interest. A universal life insurance policy, however, also offers individuals more flexibility in determining how much coverage they purchase and setting payment schedules.
There are also several types of universal life insurance, including indexed universal and variable universal life insurance. These types come with different investment strategies.
Final expense insurance: Final expense insurance is also referred to as burial insurance, cremation insurance, and funeral insurance. This kind of life insurance has a lower death benefit because it only covers funeral and other last expenses. Because the benefit amount is smaller, the life insurance rates are more affordable. This is the best life insurance for seniors who do not have a permanent life insurance policy or may not qualify for a term policy. Purchasing a final expense life policy can help protect the financial stability of friends and family taking care of your last affairs.
Accelerated death benefit: The policyholder can receive part or all of their policy’s death benefit early if the insured is terminally ill.
Accidental death benefit: If the insured individual dies in an accident, the insurance company will give additional money to the beneficiaries in addition to the death benefit.
Add to cash value: This option allows the policy’s beneficiaries to receive the accumulated cash value of the policy in addition to the death benefit. This option is only available with permanent life insurance policies.
Additional death benefit: Similar to the accidental death rider, if the insured dies under certain circumstances outlined in the policy, the beneficiaries may receive additional money to the death benefit.
Additional purchase option: This option allows the policyholder to purchase more insurance coverage at a later date.
Children’s term: Parents may add their children to their own insurance policies to extend their insurance coverage to their children. It's one way to buy children's life insurance. It doesn’t matter if the children are stepchildren, adopted, or born to you.
Long-term care insurance: This rider can help defray the high cost of home visits or long-term care in a facility. Long-term care insurance can also be purchased on its own.
Paid-up additions: When a permanent life insurance policy accrues cash value over time, policyholders can choose to use the accrued value to add coverage or cash value to a policy using the dividends. The additional coverages are called paid-up additions.
Renewable term: This clause allows a term life insurance policy to be renewed for a certain amount of time without having to be re-evaluated by the insurance company.
Term conversion: This allows individuals to change their term life insurance into a permanent life insurance policy when the term expires.
Term insurance: This option can be attached to a permanent insurance policy and provides more insurance coverage for a specific period of time.
Waiver of premium: If policyholders become disabled, they are no longer required to make monthly payments to maintain their life insurance policy.
Beneficiary: A beneficiary is the person who receives the death benefit when the insured person passes away. Policyholders should name at least two beneficiaries just in case they outlive one of them.
Death benefit: The sum of money the insurance company pays to the beneficiaries when the insured person passes away. Death benefits are not taxed via the income tax.
Paid-up status: This is when a permanent life insurance policy has accrued enough cash value to allow the policyholder to stop making payments for a while or to add paid-up additions.
Policy rider: Additional coverage that becomes part of a life insurance policy.
Premium: The monthly payment for a life insurance policy.
Underwriter: Underwriters evaluate applications for insurance. They assess the risk and cost at which the company is willing to assume the risk.
When thinking about life insurance, you need to consider your financial obligations.
Life insurance is especially important for young and middle-aged people because they generally have more financial obligations that may not be met in the event of their death. It is also less expensive to purchase life insurance at a younger age than at an older age. When choosing a life insurance policy, think about what you need and may want in the future.
For example, if you’re single, you may just need an insurance policy that will help cover debt and funeral expenses. Depending on how you think you may age or how you want to spend retirement, you may also want a plan that offers flexibility by adding disability and long-term care coverage.
If you’re married and want to have children, you may want a policy that offers the option to add your children to your life insurance plan just in case. Coverage is generally offered for children ages 15 days to 18 years old. Even with health insurance, medical bills can be a sudden, crippling expense.
Life insurance providers allow people to buy life insurance policies for others. Parents can buy life insurance for their children. If you are a dependent on someone, you can insure their life and name yourself the beneficiary of that policy. It can help secure your finances.
Need more help? Learn more about the best life insurance advice and the worst life insurance advice.
When choosing a life insurance company, there are several things to consider. Life insurance carriers have different policy packages and rates. Make sure the company you choose has the combination of life insurance and riders that meet your coverage needs.
Before an application is approved for insurance, the life insurer will underwrite the policy. The underwriting process takes into account the age, gender, work, health, and more in determining the insurability of the applicant and what life insurance rates they qualify for. For example, tobacco users usually pay a higher premium than people who don't use tobacco or who have quit.
The application process may vary slightly life insurance carrier to life insurance carrier. Many life insurance companies require applicants to undergo a medical exam as part of the underwriting process. The medical exam is used to help determine the risk of insuring an applicant. Some health issues can affect the cost of premium payments. In some cases, completing a medical questionnaire is sufficient for underwriting.
For more information on premium costs and underwriting, read "Why is my premium so high?: What you need to know about life insurance underwriting."
Some insurance policies do not require a medical exam. These policies are sometimes referred to as no-exam or guaranteed-issue life insurance policies. They tend to have higher life insurance premiums but may save certain individuals money.
Call a few life insurance agents to get life insurance quotes or work with an independent insurance agent. Independent agents can do the quote fetching for you and help you evaluate your options. Their industry knowledge and experience are especially beneficial for clients with certain medical conditions.
Compare the life insurance products, rates, and packages to make sure that you are using your money in the best way. Some companies may reject your application, so keep your options open.
You’ll also want great customer service and knowledgeable agents to help you understand your policy and options before you purchase a policy. Some people use independent insurance agents or advisers to help them find the best company and policy for themselves. Independent insurance advisers are especially helpful for individuals who may be difficult to insure because of age or health concerns.
Before purchasing a life policy, you’ll also want to take a look at the insurance company’s history of fulfilling claims, their ethical standards, and customer service. These are good indicators of the likelihood that they will meet their claims obligations. If a company has lawsuits against it, either for failure to fulfill claims or for ethical issues, you probably want to avoid that insurer because it may not be trustworthy.
You’ll want to look at the financial strength rating and health of the company. Companies that have high financial strength ratings publish them on the company's website. Choose life insurance company that has a high financial rating from A.M. Best, Standard and Poor's (S&P), Moody's, or A.M. Fitch. These are the main financial rating agencies.
You don’t want your family to be in a situation where they make a claim and the company doesn’t pay because it cannot. You can find this information by looking at life insurance reviews by consumers, filed complaints, and third-party ratings.
Learn more about how BestCompany.com rates life insurance companies.
Deciding the kind of policy to buy, comparing quotes, working with an independent life insurance agent, and researching companies will help you find the best life insurance company for you.
For more helpful information on choosing a company and buying life insurance, read: "What's the Best Way to Buy Life Insurance?: What You Need to Know About Buying from an Insurer, Agency, and Online Retailer."
View Best Life Insurance Companies
Life insurance companies have different specializations. Some companies specialize in term life insurance. Others offer permanent life insurance policies in addition to term policies.
Policygenius is currently ranked at the top of Best Company's list.
You can purchase directly from the insurer, work with an independent life insurance agency, or even apply for a policy online. View the top life insurance companies to see which one is the best fit for you.
Life insurance is coverage for your life. It could also be coverage for a dependent or someone you are dependent on. You'll want to buy enough life insurance to replace lost income, pay off lingering debt, and pay for funeral expenses. This coverage amount is called the death benefit.
When the insured person passes away, you make a life insurance claim. The insurance company will then pay the death benefit to the beneficiary specified by the policyholder, or the person who bought the policy. You or the beneficiary can use this lump sum as you need to for living expenses, funeral costs, debt, etc.
When you buy life insurance you insure someone’s life and purchase a certain amount of coverage for their life. This coverage is called the death benefit. The amount of the death benefit will be what the insurance company pays when you file a claim. You can choose the amount of coverage you want to buy.
Term life insurance only offers life insurance coverage for a set amount of time. If the insured person dies after the term, the insurance company will not pay a death benefit.
Term life insurance differs from whole life insurance because it doesn't last a lifetime and tends to be much cheaper. Read more about the difference between term and whole life insurance or what to consider when buying term life insurance.
Whole life insurance is a kind of permanent life insurance. The coverage does not expire unless the policyholder stops paying premiums. Premiums are set, and do not change. Whole life insurance also accrues cash value with a predetermined interest rate that the policyholder can use as an asset while still living. Read more about what to consider when buying whole life insurance.
Whole life insurance is different from term life insurance because it lasts a lifetime, accrues cash value, and tends to be more expensive. Read more about the differences.
Universal life insurance is another kind of permanent life insurance. The coverage only expires if the policyholder stops making premium payments. Universal life policies have more flexibility with premium payments. Policyholders can adjust their monthly payments based on their financial goals.
Like whole life insurance policies, universal life insurance policies accrue cash value. Universal life insurance policies have more options for how the cash value accrues interest. With some policies, it’s through investments.
Life insurance is intended to help individuals and families meet financial obligations in the event of death. If you are repaying student loans, making car payments, have high medical bills, or have a lot of credit card debt, you should consider purchasing life insurance. The death benefit that your beneficiaries would receive would help cover your financial obligations and may even help with funeral expenses. It would help to keep your family members’ finances healthy as well.
Even if you do not have very much debt, you should still consider buying life insurance if you have dependents. Life insurance will help ensure that your dependents are taken care of financially — whether or not you are the primary breadwinner of the household.
The amount of life insurance needed depends on each individual circumstance. One way to figure out the amount you need is to know how much debt you have and what your financial obligations are. Your life insurance policy should at least be able to cover these.
The price of insurance varies depending on the risk the company assumes by insuring you. Age and health strongly affect insurance premiums. The younger you are, the cheaper your monthly premium. The healthier you are, the cheaper your monthly premium.
Don’t worry if you have medical conditions. You should still apply and ask for quotes from insurance companies. Some insurance companies offer life insurance policies without requiring a medical exam. These are more expensive, but they are worth pursuing if you've had difficulty being approved for insurance.
For more information on how life insurance pricing works, read "Why Is My Premium So High?: What You Need to Know About Life Insurance Underwriting."
Employers most commonly offer group-term life insurance that provides coverage should you pass away while employed there. Group-term life insurance is often the most basic coverage. Some employers offer this kind of coverage free.
Sometimes employers offer employees optional additional coverage via voluntary life insurance or supplemental life insurance. If you opt into these programs, you’ll pay for the coverage before you get your paycheck. Opting into these programs gives you more coverage. These programs are good options for individuals who are having difficulty being approved for their own life insurance policy.
Be aware that life insurance coverage through your employer will end when you stop working for them.
It depends. Life insurance through your employer only lasts as long as you are an employee. If you have dependents or large financial obligations, it would be wise to purchase your own policy. If, after assessing your financial obligations, you can cover funeral expenses and your debt, then life insurance through your employer may be sufficient.
The cash value of a permanent life insurance policy can be invested in a tax-deferred account. Interest received from investing a life insurance policy is taxable. This allows you to use more funds to grow the cash value before paying taxes.
The government also does not assess an income tax on the death benefit. Depending on financial circumstances, death benefits can be taxed as part of an estate.
You should keep a life insurance policy as long as you have financial obligations that cannot be met in the event of death. It is wise to keep a policy until you no longer have debt or dependents.
It means that the life insurance policy has accrued enough cash value to allow the policyholder to either add coverage at no out-of-pocket expense, stop making monthly payments for a certain amount of time, or make no change.
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