The Best Life Insurance Companies
- Lincoln Financial – Best for Boomers
- Mutual of Omaha – Best for Indexed Universal Life Insurance
- Pacific Life – Best for Retirement Planning
- Protective – Best for Universal Life Insurance
- Prudential – Best for Senior Life Insurance
- AIG – Best for Recreational Marijuana Use
- Equitable – Best for Variable Universal Life Insurance
- Nationwide – Best for Gen X & Millennials
- Northwestern Mutual – Best for Whole Life Insurance
- Penn Mutual – Best for Estate Planning
- Transamerica – Best for Term Life Insurance
- John Hancock – Best for Celebratory Cigar Use
What Is Life Insurance?
Life insurance is a contract between you and an insurance company. Essentially, in exchange for your premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death.
Your beneficiaries can use the money for whatever purpose they choose. Often this includes paying everyday bills, paying a mortgage or putting a child through college. Having the safety net of life insurance can ensure that your family can stay in their home and pay for the things that you planned for.
There are two primary types of life insurance: term and permanent life. Permanent life insurance such as whole life insurance or universal life insurance can provide lifetime coverage, while term life insurance provides protection for a certain period.
How to Find the Best Life Insurance Policy For You
With the wide variety of life insurance policies available, pinpointing the right one can be a challenge for any buyer. Don’t go it alone when trying to find the best life insurance policy. Financial advisors and experienced life insurance agents have the background to help you make the right decision based on your goals and budget.
Look at financial strength ratings. A strong financial strength rating is more than just peace of mind that the company won’t go out of business decades from now. Insurers with greater financial strength can be less likely to need to increase internal policy costs and premiums in response to challenging financial times.
Ratings are available from agencies such as S&P and A.M. Best, and are usually found on insurers’ websites.
Select life insurance as part of a larger financial plan. Here’s where a financial advisor can explain life insurance options in the context of your larger personal financial goals.
Don’t assume insurers offer competitive pricing for everyone. Insurers want your business, but they all operate from their own playbooks. Premiums can vary wildly and, for cash value policies, cash value growth can be very different among companies and policies.
Be aware that a life insurance quote for a cash value policy may not reflect what you’ll actually end up paying over the years to keep the policy in force.
“Current regulations in some states and for some products permit insurers to ‘quote’ a low premium while charging high costs—without disclosing that you may need to pay additional premiums later in order to avoid a lapse,” warns Barry Flagg, founder of Veralytic.
Insist that cost disclosures for universal life insurance be included in any proposals. A life insurance quote reflects what you’ll be billed for, but doesn’t tell you anything about a policy’s internal costs, such as expenses and fees, and the cost of insurance within the policy.
Be sure to insist that any universal life insurance illustration include the detailed expense pages or policy accounting pages. Products with a low premium quote could have higher internal costs, which can slow your cash value growth.
Types of Life Insurance
There are two primary types of life insurance: term life and permanent life.
Term life insurance
Term life insurance is a policy where you choose the length of coverage, such as 10, 15, 20 or 30 years. If you die within that term, your beneficiary will receive the death benefit. If you outlive the term, there is no death benefit.
Term life insurance is good for folks who want to cover a specific financial concern, such as income replacement during your working years.
Permanent life insurance
Permanent life insurance is good for folks who want a death benefit paid out no matter when they die. Permanent life insurance policies also have a cash value component that can accumulate money on a tax-deferred basis. Permanent life insurance is usually significantly more expensive than term life.
People who choose permanent life insurance usually have specific goals in mind, such as supporting financial dependents, funding a trust for heirs, or building cash value to supplement retirement savings.
Permanent life insurance can be broken down into main subtypes:
- Whole life insurance. This type of life insurance is predictable because the premiums, rate of return on cash value and the amount of the death benefit are all fixed and guaranteed.
- Universal life insurance. This type offers more flexibility and you may be able to adjust premium payments and death benefits within certain parameters. The cash value growth will depend on the insurer and the type of universal life insurance you buy: guaranteed universal, indexed universal or variable universal.
Permanent life insurance policies can be difficult to understand from quotes or hypothetical illustrations. Simply comparing life insurance quotes or some projection of cash values won’t reveal whether the policy is a good value. “Look under the hood,” advises Flagg of Veralytic. For example, a life insurance agent or financial advisor can request a Veralytic report to see how the policy you’re considering compares to industry benchmarks.
“Ultimately, the premium you’ll have to pay and/or the cash value growth you’ll see depends on what the insurer actually charges and how well the investments do. You want to confirm that internal policy costs are competitive and that the investments within the policy fit your risk tolerance,” cautions Flagg.
What Does Life Insurance Cover?
Life insurance covers death from illness, accidents and simply old age. This includes deaths from diseases, falls, car accidents and Covid. Deaths from accidental drug overdoses are covered.
A narrow type of life insurance called accidental death and dismemberment covers only deaths that are accidental, such as an accidental fall or car crash. It does not cover deaths by illness, disease or old age.
What Does Life Insurance Exclude?
Life insurance policies generally exclude only suicide within the first two years of owning the policy. This “suicide clause,” as it’s called, is a standard part of life insurance contracts. Apart from that, you can count on a life insurance policy to provide a payout no matter the cause of death.
There are cases where a payout could be jeopardized for reasons unrelated to the cause of death. For example, if the policyholder quit paying for the life insurance and the policy lapsed, there is no payout. However, if the policyholder only recently quit paying because of an illness—such as a hospitalization that prevented payments—beneficiaries might be able to reinstate the policy by paying the premiums due.
Life insurers could also deny a payout if they find that the applicant misrepresented something on the application, such as a health issue.
Do I Need Life Insurance?
If someone depends on you financially—either now or after your death—you may need life insurance. For example:
- Many people buy life insurance so it can act as income replacement for their families if they die unexpectedly.
- Some people provide financial support after their death by funding a trust with life insurance. For example, if you have a child with special needs, a trust can be used to provide for them.
Other common reasons people buy life insurance are:
- To provide funds for their own funeral.
- To provide money for their families to pay off a mortgage or other debts.
- To ensure that children have money for college tuition in case a parent passes away.
- To create supplemental income during retirement years with a cash value policy.
- To provide money to pay estate taxes to beneficiaries who are inheriting very large taxable estates.
How Much Life Insurance Do I Need?
You can calculate how much life insurance you need with a basic equation:
[Financial obligations you want to cover] －[existing assets that can be used toward bills] = Your life insurance need
Examples of “financial obligations you want to cover” might include income replacement, mortgage payments, college tuition and other large debts.
Examples of “existing assets that can be used toward bills” might include your retirement savings and other types of savings (such as a 529 college savings account), and existing life insurance.
