Life Insurance Guide to Policies and Companies

What Is Life Insurance?

Life insurance is a contract between an insurer and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.

For the contract to be enforceable, the life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities.

Types of Life Insurance

Many different types of life insurance are available to meet all sorts of needs and preferences. Depending on the short- or long-term needs of the person to be insured, the major choice of whether to select temporary or permanent life insurance is important to consider.

Term life insurance

Term life insurance lasts a certain number of years, then ends. You choose the term when you take out the policy. Common terms are 10, 20, or 30 years. The best term life insurance policies balance affordability with long-term financial strength.

Permanent life insurance

Permanent life insurance stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. It’s typically more expensive than term.

Burial or final expense insurance is a type of permanent life insurance that has a small death benefit. Despite the names, beneficiaries can use the death benefit as they wish.

Disclosure

We publish unbiased product reviews; our opinions are our own and are not influenced by payment we receive from our advertising partners. Learn more about how we review products and read our advertiser disclosure for how we make money. And see our complete list of the best companies for different types of policies.

Top-Rated Companies to Compare

AM Best Rating

Coverage Capacity

Issue Ages

Policies Offered

Prudential
Best Overall
Compare Quotes on Policygenius

Term, variable, and  universal

State Farm
Best Instant Issue
Compare Quotes on Policygenius

Term, whole, and universal

Transamerica
Best Value
Compare Quotes on Policygenius

Not Stated 

Term, whole, universal, and final expense

Northwestern Mutual
Best Whole Life

Term, whole, and universal

New York Life
Best Term Policies
Compare Quotes on Policygenius

$5,000,000 and up 

Term, whole, and universal

Mutual of Omaha
Best for No Medical Exams
Compare Quotes on Policygenius

$100,000 and up (term life)

Term, whole, universal, children’s, and accidental death

USAA
Best for Military

$10,000,000

Term and permanent

Loading shell for quizzesApp1 vue props component in Globe.

Term vs. Permanent Life Insurance

Term life insurance differs from permanent life insurance in several ways but tends to best meet the needs of most people. Term life insurance only lasts for a set period of time and pays a death benefit should the policyholder die before the term has expired. Permanent life insurance stays in effect as long as the policyholder pays the premium. Another key difference involves premiums — term life is generally much less expensive compared to permanent life because it does not involve building a cash value.

Before you apply for life insurance, you should analyze your financial situation and determine how much money would be required to maintain your beneficiaries’ standard of living or meet the need for which you’re purchasing a policy.

For example, if you are the primary caretaker and have children who are 2 and 4 years old, you would want enough insurance to cover your custodial responsibilities until your children are grown up and able to support themselves. You might research the cost to hire a nanny and a housekeeper or to use commercial child care and a cleaning service, then perhaps add some money for education. Include any outstanding mortgage and retirement needs for your spouse in your life insurance calculation. Especially if the spouse earns significantly less or is a stay at home parent. Add up what these costs would be over the next 16 or so years, add more for inflation, and that’s the death benefit you might want to buy — if you can afford it.

How Much Life Insurance to Buy

Many factors can affect the cost of life insurance premiums. Certain things may be beyond your control, but other criteria can be managed to potentially bring down the cost before applying.

After being approved for an insurance policy, if your health has improved and you’ve made positive lifestyle changes, you can request to be considered for change in risk class. Even if it is found that you’re poorer health than at the initial underwriting, your premiums will not go up. If you’re found to be in better health then you can expect your premiums to decrease.

STEP 1 - Determine How Much You Need

Think about what expenses would need to be covered in the event of your death. Things like mortgage, college tuition, and other debts, not to mention funeral expenses. Plus, income replacement is a major factor if your spouse or loved ones need cash flow and are not able to provide it on their own.

There are helpful tools online to calculate the lump sum that can satisfy any potential expenses that would need to be covered.

What Affects Your Life Insurance Premiums and Costs?

STEP 2 - Prepare Your Application

Life Insurance Buying Guide

Life insurance applications generally require personal and family medical history along with beneficiary information. You will also likely need to submit to a medical exam and will need to disclose any preexisting medical conditions, history of moving violations, or DUIs, as well as any dangerous hobbies such as auto racing or skydiving.

Standard forms of identification will also be needed before a policy can be written, such as your Social Security card, driver's license, and/or U.S. passport.

STEP 3 - Compare Policy Quotes

When you've assembled all of your necessary information, you can gather multiple quotes from different providers based on your research. Prices can differ markedly from company to company, so it's important to go to the effort to find the best combination of policy, company rating, and premium cost. Because life insurance is something you will likely pay on a monthly basis for decades, it can save an enormous amount of money to find the best policy to fit your needs.

Benefits of Life Insurance

There are many benefits to having life insurance. Below are some of the most important features and protections offered by life insurance policies.

Most people use life insurance to provide money to beneficiaries who would suffer a financial hardship upon the insured’s death. However, for wealthy individuals, the tax advantages of life insurance, including the tax-deferred growth of cash value, tax-free dividends, and tax-free death benefits, can provide additional strategic opportunities.

Avoiding Taxes — the death benefit of a life insurance policy is usually tax-free. Wealthy individuals sometimes buy permanent life insurance within a trust to help pay the estate taxes that will be due upon their death. This strategy helps to preserve the value of the estate for their heirs. Tax avoidance is a law-abiding strategy for minimizing one’s tax liability and should not be confused with tax evasion, which is illegal.

Who Needs Life Insurance?

Life insurance provides financial support to surviving dependents or other beneficiaries after the death of an insured policyholder. Here are some examples of people who may need life insurance:

Considerations Before Buying Life Insurance

Research policy options and company reviews — because life insurance policies are a major expense and commitment, it's critical to do proper due diligence to make sure the company you choose has a solid track record and financial strength, given that your heirs may not receive any death benefit for many decades into the future. Investopedia has evaluated scores of companies that offer all different types of insurance and rated the best in numerous categories.

Life insurance can be a prudent financial tool to hedge your bets and provide protection for your loved ones in case of death should you die while the policy is in force. However, there are situations in which it makes less sense — such as buying too much or insuring those whose income doesn't need to be replaced. So, it's important to consider the following:

What expenses couldn't be met if you died? If your spouse has a strong income and you don't have any children, maybe it's not warranted. It is still important to consider the impact of your potential death on a spouse and consider how much financial support they would need to grieve without worrying about returning to work before they’re ready. However, if both spouses' income is necessary to maintain a desired lifestyle or meet financial commitments, then both spouses may need separate life insurance coverage.

If you're buying a policy on another family member's life, it's important to ask — what are you trying to insure? Children and seniors really don't have any meaningful income to replace, but burial expenses may need to be covered in the event of their death. Beyond burial expenses, a parent may also want to protect their child’s future insurability by purchasing a moderate sized policy when they are young. Doing so allows that parent to insure that their child can financially protect their future family. Parents are only allowed to purchase life insurance on their children up to 25% of the in force policy on their own lives.

Could investing the money that would be paid in premiums for permanent insurance over the course of a policy earn a better return over time? As a hedge against uncertainty, consistent saving and investing — for example, self-insuring — might make more sense in some cases if a significant income doesn't need to be replaced or if policy investment returns on cash value are overly conservative.

How Life Insurance Works

A life insurance policy has two main components — a death benefit and a premium. Term life insurance has these two components, but permanent or whole life insurance policies also have a cash value component.

1. Death Benefit — the death benefit or face value is the amount of money the insurance company guarantees to the beneficiaries identified in the policy when the insured dies. The insured might be a parent, and the beneficiaries might be their children, for example. The insured will choose the desired death benefit amount based on the beneficiaries’ estimated future needs. The insurance company will determine whether there is an insurable interest and if the proposed insured qualifies for the coverage based on the company’s underwriting requirements related to age, health, and any hazardous activities in which the proposed insured participates.
2. Premium — premiums are the money the policyholder pays for insurance. The insurer must pay the death benefit when the insured dies if the policyholder pays the premiums as required, and premiums are determined in part by how likely it is that the insurer will have to pay the policy’s death benefit based on the insured’s life expectancy. Factors that influence life expectancy include the insured’s age, gender, medical history, occupational hazards, and high-risk hobbies. Part of the premium also goes toward the insurance company’s operating expenses. Premiums are higher on policies with larger death benefits, individuals who are at higher risk, and permanent policies that accumulate cash value.
3. Cash Value — the cash value of permanent life insurance serves two purposes. It is a savings account that the policyholder can use during the life of the insured; the cash accumulates on a tax-deferred basis. Some policies may have restrictions on withdrawals depending on how the money is to be used. For example, the policyholder might take out a loan against the policy’s cash value and have to pay interest on the loan principal. The policyholder can also use the cash value to pay premiums or purchase additional insurance. The cash value is a living benefit that remains with the insurance company when the insured dies. Any outstanding loans against the cash value will reduce the policy’s death benefit.

Good to Know

The policy owner and the insured are usually the same person, but sometimes they may be different. For example, a business might buy key person insurance on a crucial employee such as a CEO, or an insured might sell their own policy to a third party for cash in a life settlement.

Life Insurance Riders and Policy Changes

Many insurance companies offer policyholders the option to customize their policies to accommodate their needs. Riders are the most common way policyholders may modify or change their plan. There are many riders, but availability depends on the provider. The policyholder will typically pay an additional premium for each rider or a fee to exercise the rider, though some policies include certain riders in their base premium.

Borrowing Money — most permanent life insurance accumulates cash value that the policyholder can borrow against. Technically, you are borrowing money from the insurance company and using your cash value as collateral. Unlike with other types of loans, the policyholder’s credit score is not a factor. Repayment terms can be flexible, and the loan interest goes back into the policyholder’s cash value account. Policy loans can reduce the policy’s death benefit, however.

Each policy is unique to the insured and insurer. It’s important to review your policy document to understand what risks your policy covers, how much it will pay your beneficiaries, and under what circumstances.

Funding Retirement — policies with a cash value or investment component can provide a source of retirement income. This opportunity can come with high fees and a lower death benefit, so it may only be a good option for individuals who have maxed out other tax-advantaged savings and investment accounts. The pension maximization strategy described earlier is another way life insurance can fund retirement.

It’s prudent to reevaluate your life insurance needs annually or after significant life events, such as divorce, marriage, the birth or adoption of a child, or major purchases, such as a house. You may need to update the policy’s beneficiaries, increase your coverage, or even reduce your coverage.

Qualifying for Life Insurance

Insurers evaluate each life insurance applicant on a case-by-case basis, and with hundreds of insurers to choose from, almost anyone can find an affordable policy that at least partially meets their needs. In 2018 there were 841 life insurance and annuity companies in the United States, according to the Insurance Information Institute.

On top of that, many life insurance companies sell multiple types and sizes of policies, and some specialize in meeting specific needs, such as policies for people with chronic health conditions. There are also brokers who specialize in life insurance and know what different companies offer. Applicants can work with a broker free of charge to find the insurance they need. This means that almost anyone can get some type of life insurance policy if they look hard enough and are willing to pay a high enough price or accept a perhaps less-than-ideal death benefit.

Insurance is not just for the healthy and wealthy, and because the insurance industry is much broader than many consumers realize, getting life insurance may be possible and affordable even if previous applications have been denied or quotes have been unaffordable.

In general, the younger and healthier you are, the easier it will be to qualify for life insurance, and the older and less healthy you are, the harder it will be. Certain lifestyle choices, such as using tobacco or engaging in risky hobbies such as skydiving, also make it harder to qualify or lead to higher rates.

Who needs life insurance?

Life insurance is most useful for people who need to provide security for a spouse, children, or other family members in the event of their death. Life insurance death benefits, depending on the policy amount, can help beneficiaries pay off a mortgage, cover college tuition, or help fund retirement. Permanent life insurance also features a cash value component that builds over time.

What Affects Your Life Insurance Premiums?

What are the benefits of life insurance?

How do you qualify for life insurance?

Life insurance is available to anyone, but the cost or premium level can vary greatly based on the risk level an individual presents based on factors like age, health, and lifestyle. Life insurance applications generally require the customer to provide medical records and medical history and submit to a medical exam. Some types of life insurance such as guaranteed approval life don't require medical exams but generally have much higher premiums and involve an initial waiting period before taking effect and offering a death benefit.

How does life insurance work?

Life insurance policies all offer a death benefit in exchange for paying premiums to the insurance provider during the term of the policy. One popular type of life insurance — term life insurance — only lasts for a set amount of time, such as 10 or 20 years during which the policyholder needs to offset the financial impact of losing income. Permanent life insurance also features a death benefit but lasts for the life of the policyholder as long as premiums are maintained and can include cash value that builds over time.

More Life Insurance Company Reviews

Company

AAA Life Insurance

AARP Life Insurance

AFLAC Life Insurance

AIG Life Insurance

Allstate Life Insurance

American Fidelity Life

American Income Life

Ameritas Life Insurance

Assurity Life Insurance

Bankers Life Insurance

Banner Life Insurance

Bestow Life Insurance

Brighthouse Life Insurance

CMFG Life Insurance

Colonial Penn Life Insurance

Continental Life Insurance

CUNA Mutual Life

Ethos Life Insurance

Family First Life Insurance

Fidelity Life Insurance

Foresters Life Insurance

Freedom Life Insurance

GEICO Life Insurance

Genworth Life Insurance

Gerber Life Insurance

Guardian Life Insurance

Haven Life Insurance

Jackson National Life

John Hancock Life

Kemper Life Insurance

Ladder Life Insurance

Liberty Mutual Life

Lincoln Heritage Life

Lumico Life Insurance

Manhattan Life Insurance

Mass Mutual Life Insurance

Max Life Insurance

MetLife Life Insurance

Midland National Life

Mutual of Omaha Life

National Life Group

Nationwide Life Insurance

Navy Federal Life Insurance

NEA Life Insurance Company

New York Life

North American Life

Northwestern Mutual Life

Oxford Life Insurance Company

Pacific Life Insurance

Primerica Life Insurance

Protective Life Insurance

Prudential Life Insurance

Securian Life Insurance

SelectQuote Life Insurance

State Farm Life Insurance

Texas Life Insurance

Transamerica Life Insurance

TruStage Life Insurance

Unum Life Insurance

USAA Life Insurance

VA Life Insurance

Zander Life Insurance