Life insurance basics: term vs permanent
In short: life insurance pays money, called the death benefit, to the people you name (your beneficiaries) if you die while the policy is in force. Term life covers a set number of years and usually costs the least. Permanent life, such as whole or universal life, lasts your lifetime and builds cash value but costs much more. It matters most if others depend on your income, including family at home.
Who might think about it
Life insurance is meant to replace your income or pay debts for the people who rely on you: a partner, children, or parents you support in another country. If no one depends on your income, you may need little or none. A single person without dependants usually has other priorities first, such as an emergency fund.
Term life
- Covers a fixed period, such as 10, 20 or 30 years.
- Pays out only if you die during the term. If you outlive it, the cover ends and nothing is paid.
- Usually the lowest premium for the most cover.
Permanent life (whole, universal and others)
- Lasts your whole life, as long as you keep paying.
- Builds cash value that you may borrow against or take out, with rules and fees.
- Premiums are much higher than term for the same death benefit, and some types have investment risk or costs that are hard to compare.
If a policy is sold to you mainly as an investment or a way to save, ask for all fees and charges in writing, what happens if you stop paying, and what you get back if you cancel early (the surrender value).
How much cover?
People often add up what their family would need: years of income they would want to replace, debts such as a mortgage, future costs such as children's education, and final expenses. Then they subtract savings and any cover they already have, such as group life insurance from work (which usually ends when you leave the job). This is a rough approach, not advice; a licensed professional can look at your situation.
Beneficiaries
- Name your beneficiaries on the policy, and update them after marriage, divorce or a birth.
- If a beneficiary lives abroad, ask the insurer how they would claim and get paid.
- Tell your beneficiaries the policy exists and where to find the details. The NAIC runs a free life insurance policy locator for families who think a policy may exist.
Before you sign
- Check that the insurer and agent are licensed in your state.
- Answer health questions honestly; wrong answers can lead to a claim being refused.
- Most states give a free-look period, often at least 10 days, to cancel a new policy for a refund. Ask how long yours is.
Handy tools
- Salary converter: hourly, weekly, monthly and yearly pay, side by side.
- Monthly budget planner: see what is left each month and how your spending splits up.
General information, not financial or insurance advice. Coverage, prices and rules vary by state, insurer and policy. Read your policy and check with the insurer, a licensed agent or your state insurance department before you decide.