September 3, 2024

What to Know About Life Insurance

About Nicole Pajer

Nicole Pajer is a Los Angeles-based freelance published in The New York Times, Woman's Day, AARP, Parade, Wired, Glamour, People and more.

Navigating the world of life insurance can be overwhelming. With so many options and different types of insurance available, it can be hard to decide what policy to get.

You may want to start by considering, what exactly is life insurance? What does a policy cover? And how do you go about signing up for a plan if you determine that you want one? We talked to a life insurance expert to answer some of the most frequently asked questions that people generally have about life insurance these days.

Navigating the world of life insurance can be overwhelming. With so many options and different types of insurance available, it can be hard to decide what policy to get.

What exactly is life Insurance?

“Life insurance is a contract between an individual and an insurance company, where the insurer promises to pay a designated beneficiary a sum of money upon the insured person's death,” says Susana Zinn, an independent life and health insurance agent in Florida and California. In exchange, she adds, the insured pays regular premiums to the insurer.

What Exactly Does Life Insurance Cover?

Life insurance is generally about providing financial support to your loved ones if something happens to you. Zinn explains that having a life insurance policy is primarily designed to cover the financial needs of your beneficiaries in the event of your death. For instance, there's the death benefit, which is the main feature of a life insurance policy. This, says Zinn, is typically a lump-sum payment that goes to your beneficiaries after you pass away.

In addition to a standard life insurance policy, “[T]here's accidental death and dismemberment coverage, which offers extra protection if an accident leads to death or serious injury,” says Zinn. There are also other policies for terminal illness benefits, which typically allow you to access a portion of your benefits early if you're diagnosed with a terminal illness.

How does life insurance work?

When you buy a life insurance policy, you agree to pay regular premiums to the insurance company. “In return, if you pass away while the policy is active, the insurer pays a death benefit to your named beneficiaries,” says Zinn. She stresses that the specifics can vary based on the type and terms of the policy.

What are the different types of life insurance available?

There are many different types of life insurance to choose from. Zinn walks us through some of the more common options below:

Term life insurance: Provides coverage for a specific period, like 10, 20, or 30 years. This generally offers a death benefit, but doesn't have any cash value.
Whole life insurance: A type of permanent insurance that provides lifelong coverage and includes a cash value component, meaning it can accumulate value over time.
Universal life insurance: Another form of permanent insurance. It typically comes with flexible premiums and death benefits and also includes a cash value component.
Indexed universal life insurance: A type of universal life policy where the cash value grows based on the performance of a stock market index.
Variable life insurance: Offers a cash value that can be invested in various accounts similar to mutual funds.

What is a Beneficiary?

A beneficiary is a person or entity who is designated to receive the death benefit from a life insurance policy upon the insured individual's death. Beneficiaries, says Zinn, can be individuals, trusts, charities, or estates.

How are premiums determined?

When it comes to life insurance, the premiums to be paid by the insured individual are determined by a variety of factors. For starters, age often plays a big role. Younger people typically enjoy lower premiums on a life insurance policy because they're generally considered lower risk. But there are also plans available for older adults. Health can also be another important factor. “If you're in good health, you're likely to receive better rates,” says Zinn.

“On the flip side, risky lifestyle habits, such as smoking, can drive up your premiums,” she says. The coverage amount also matters. Higher coverage amounts generally mean higher premiums. “Lastly, the type of policy you choose affects the cost,” adds Zinn. Permanent policies usually have higher premiums than term policies because they offer lifelong coverage and may have additional benefits like cash value.

Do you need a physical to get life insurance?

A physical exam, or medical underwriting, is often required to assess your health and determine your premiums for a life insurance policy. “Some policies, known as no-exam life insurance, may not require an exam but may have higher premiums or limited coverage,” says Zinn.

Is life insurance taxable?

The death benefit paid to beneficiaries is generally not subject to federal income tax. “However, any interest earned on the benefit after the insured's death may be taxable,” says Zinn. “Estate taxes may apply if the policy is part of a large estate.”

Is it ever too late to get life insurance?

While it's generally ideal to purchase life insurance when you're younger and healthier, it’s not necessarily too late. Many companies offer life insurance policies to people in their 70s and 80s and there are specific policies geared towards older adults. So no, it’s never too late to get it! But do keep in mind that premiums may be higher, and your options may be more limited as you age.

Who should consider life insurance?

Those who may want to consider life insurance include “[I]ndividuals with dependents, significant debt, or financial responsibilities that would burden others after their death,” says Zinn. She notes, however, that you might not need it if you have sufficient assets to cover your financial obligations or lack dependents or debts.

How do you go about setting up life insurance?

The first step in getting life insurance is to assess your needs, including whether you need or want a life insurance policy at all. Then, you can start by determining the coverage amount that works for you based on your financial obligations and the number of dependents you have. “Once you have a good idea of your needs, it's time to compare policies,” says Zinn. She suggests looking at different policy types and insurers to find the best fit for you. “I recommend talking to an independent life insurance agent who works with various carriers and can help you choose the best option on the market,” adds Zinn.

Once you've found a policy that suits you, the next step is to apply. To do this, you’ll generally be asked to complete an application and undergo any necessary medical exams needed as a condition of obtaining your policy. “After your application is approved, you'll need to select beneficiaries—these are the people who will receive the death benefit if something happens to you,” says Zinn.

After setting your life insurance up, remember to keep up with your premium payments to maintain coverage. “It’s a good idea to review your policy regularly to ensure it still meets your needs as life changes,” adds Zinn.

You may also want to consider a life insurance policy with living benefits, also known as accelerated death benefits. “These allow the insurance company to advance part of the death benefit to you while you're still alive if you become seriously ill,” says Zinn. This type of plan is designed to provide some financial relief during what is likely a challenging time.

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