Life insurance is often purchased for peace of mind. Many people, especially family breadwinners, want to be sure that their loved ones remain financially secure after they pass away, which is what a life insurance policy typically provides. In the event of your death, this type of insurance product provides a payment to your beneficiaries that can be used to cover any number of expenses. Without a life insurance policy in place, your family could struggle to pay for funeral costs, living expenses and the debt you leave behind.

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A lump sum payment isn’t the only benefit offered by life insurance policies, however. Certain types of life insurance policies can also be used to supplement your income during retirement and pay for your funeral expenses. If you’ve already decided to purchase life insurance, you may be wondering what policy type is right for you. To make the weighty decisions surrounding life insurance, you may want to start by researching term and permanent life policies, how to buy life insurance and how much it costs.

What is life insurance?

Life insurance is a policy between you and your insurance provider. You will pay a monthly or annual premium in exchange for a lump sum of money for your loved ones in the event of your death, which is called a death benefit. That money may help them cover things like unpaid medical expenses, funeral expenses and loss of income.

There are three main types of life insurance: whole life insurance, term life insurance and convertible life insurance.

Other life insurance types include universal life insurance, variable universal life insurance, indexed life insurance and final expense insurance.

What is whole life insurance?

Whole life insurance policies are active until the policyholder’s death. In other words, they do not expire as long as the policyholder is still living and paying the premium.

Whole life insurance premium rates and death benefits are typically fixed, meaning that they never change. Additionally, most whole life insurance policies come with a cash-value account that allows you to pay premiums, withdraw or borrow money against the policy once it has accumulated enough funds. Whole life insurance premiums are typically much higher than term life premiums.

If someone buys a whole life insurance policy for an annual premium of $4,000, they will pay the annual premium of $4,000 for the remainder of their life. While life insurance policies do have certain restrictions, like suicide clauses or challenges for being untruthful during the application process, your premium payments will typically guarantee that your beneficiaries receive a death benefit upon your passing.

What is term life insurance?

Term life insurance policies last for a predetermined period of time, usually between 10 and 30 years, before expiring. The death benefit is fixed under some term policies, while the death benefit decreases or increases under others as the policy ages. Premiums for term life insurance are usually, but not always, fixed. You’ll likely want to ask your insurance agent about this before signing a policy.

If someone buys a 20-year term life insurance policy for an annual premium of $1,000, they will pay the annual premium of $1,000 for the duration of the 20-year term. Death benefits will only be paid if the policyholder dies before the end of the 20-year term.

To get a term life policy, applicants will typically have to complete a medical exam before coverage is extended. Unlike a permanent life insurance policy, a term life policy will typically not come with a cash value account.

What is convertible life insurance?

If you have a convertible life insurance policy, you most likely signed up for a term life insurance policy and purchased a conversion rider that allows you to convert to a whole life policy when the term expires. This is not an option offered by all insurance companies, so be sure to ask.

If someone buys a 20-year convertible life insurance policy, they will pay the annual premium for the 20-year term with the option upon expiration to convert to a whole life policy. Typically, a policyholder will pay higher premiums for a convertible policy than a term policy.

How does life insurance work?

To understand how life insurance works, it may help to learn some basic life insurance terminology:

  • Policyholder: This is the person who takes an insurance policy out on someone, known as the insured. The policyholder and the insured are usually the same person, but it may be someone else such as a spouse or child. As the policyholder, you own the policy and have the ability to adjust your coverage, add riders, choose your beneficiaries, etc. You are also the one responsible for paying the annual premiums.
  • Death benefit: The money paid out to beneficiaries when the insured dies is called the death benefit. When you purchase a life insurance policy, the coverage limit you select is the amount of money that will be paid out in the form of the death benefit. Most life insurance policies have a maximum and minimum death benefit you can choose from. The higher your death benefit is, the more expensive your policy will be.
  • Beneficiaries: The individuals you have selected to receive death benefits in the event of your death are called the beneficiaries. You can choose one beneficiary, or multiple beneficiaries, and you may also have the option to designate a primary and secondary beneficiary. Most people choose a spouse or significant other as the beneficiary, but you can also name a charitable organization, business, or even a funeral home as the beneficiary, depending on the type of policy you have.
  • Premium: The amount of money you will pay to the insurance company for life insurance coverage is called the premium. Some life insurance policies have a fixed premium that stays the same for the duration of the policy, and others do not. You must continue to pay your premium in order for your policy to remain in force, otherwise, the insurance company can cancel your coverage.
  • Cash value: Permanent life insurance policies have a cash value component that grows over time. You can think of it like a savings or investment account. When you pay the premium, a portion of the money goes into the cash value account. At a certain point, you can borrow the cash value as a loan or use the funds to pay your premium.
  • Riders: Riders are endorsements, or add-ons, that you can purchase for tailored coverage. Every life insurance company offers different riders, but some of the most common ones are the long-term care rider, child rider, accelerated death benefits rider and critical illness rider.

Learn more: What does life insurance cover?

Who should buy life insurance?

Individuals who want to leave their loved ones with financial peace of mind after they pass away may want to consider life insurance. It does not matter how old you are, how much money you have or how many heirs you have. Here are some situations when you might want to consider buying a life insurance policy:

Parents with young children

If you have children, having a life insurance policy can provide financial support if you were to pass away unexpectedly. The money can be used to pay for child care, pay for the child’s education or however you see fit. In this case, a term life insurance policy may be a good option to consider, because it could be specifically tailored to expire once they become independent.

Young adults who want cheap coverage

Individuals who are young and healthy pay the cheapest life insurance premiums. Buying a policy at a young age can help you lock in a more affordable rate for the future. For young adults, a term life insurance policy with the option to convert to permanent coverage may be a good option to consider.

Adults with significant debt

If you are an adult who has many debts, whether through a mortgage, loan or credit card, having life insurance could protect your loved ones from assuming your debt if you were to pass away.

Seniors who want to pay for their funeral

Past a certain age, it becomes more difficult for seniors to purchase life insurance, especially those with health complications. But for seniors who want to pay for their own funeral expenses, buying final expense coverage may be beneficial. It lowers your family’s financial burden when you pass away, and it also allows you to make arrangements for your own funeral.

How much life insurance do I need?

Everyone has different life insurance needs. When you purchase life insurance, you may want to determine how much coverage is appropriate for your situation. Many experts recommend basing your life insurance coverage on your salary, but there are other factors you may want to look at. The following considerations could be beneficial when deciding how much life insurance to purchase:

  • Your income: Your life insurance coverage could be based on your income, especially if you’re the breadwinner in your family. For example, if you make $100,000 per year, you will likely need more coverage than if you made $40,000 per year. This is because your income determines your family’s lifestyle. Without your income, you would want them to continue living a similar lifestyle without worrying about selling your home or moving to a much cheaper area.
  • Your debts: If you pass away with outstanding debts, the amount you owe may not be automatically erased. In some cases, it may get passed down to your family members. For this reason, you may want to ensure that you have enough life insurance coverage to pay off your debts, such as a mortgage, business loan, credit cards, medical bills, etc.
  • Your children’s education costs: If you have children, consider the cost of their future education when choosing your life insurance coverage. If your kids currently attend private school, you might want to get enough life insurance coverage to pay the remaining tuition. The same goes for your kids’ college tuition if you want to help them pay for school, rather than relying entirely on loans.
  • Your funeral plans: Some people have preferences when it comes to their end of life expenses and burial. For example, if you intend to enter an assisted living facility when you get older, or you know you want an elaborate funeral, consider that when you buy life insurance. Otherwise, your end of life costs will be based on what your family members can afford, and knowing that those costs are covered can give you peace of mind as you get older.

If you are not sure how much life insurance coverage you need, consider using an online life insurance coverage calculator. You will input some basic information, like your income, expected burial costs and the number of children you have, and the calculator will estimate how much coverage may be right for your situation.

How much does life insurance cost?

The cost of life insurance is dependent on several factors like your age, overall health and existing medical conditions. The price also depends on what type of policy you select. Here are some things to know about the cost of life insurance:

  • Whole life insurance will likely be more expensive than term life insurance.
  • The younger you are, the cheaper your life insurance will be.
  • The better your overall health is, the cheaper your life insurance will be.
  • The fewer medical conditions you have, the cheaper your life insurance will be.

How do I buy life insurance?

First, we recommend seeking life insurance quotes from insurance providers to find out about how much you’ll pay for your desired coverage. Note that life insurance premiums are generally based on your age and level of health, but should not vary greatly among providers for similar coverages and policy types.

After you have reviewed quotes and selected which company you want, you will complete that company’s application process. Many of the largest life insurance companies offer an online or phone application process for your convenience. As part of the application process, you may be asked to get a medical exam to assess your general health or complete a health questionnaire.

Finally, once your application is approved and you have agreed upon a premium, you will sign the policy, pay the premium and your coverage will take effect. Keep in mind that the time between applying for life insurance and when your coverage starts is typically at least a few weeks.

Frequently asked questions