Are you one of the 69% of Americans who don’t feel they know enough about life insurance? It can seem like a complicated process, but it doesn’t have to be. So what is life insurance? It’s an insurance policy that will pay your beneficiaries cash when you die.

There are several kinds of life insurance policies with different premiums, terms, and payout types. Keep reading for everything you need to know about life insurance and how to choose the best policy for you.

How Does Life Insurance Work?

Policyholders with life insurance pass on a tax-free cash death benefit to their loved ones when they pass away. As long as the policyholder pays their monthly premiums on time, the beneficiaries will receive a payout.

When you die, your insurance provider will pay your beneficiaries after verifying the circumstances of your death. To ensure your loved ones receive the death benefit, pay your premiums on time for the length of your policy.

Images names key players in insurance, including policyhodlers, the insured, insurance companies, and beneficiaries.

What It Does (And Doesn’t) Cover

Each policy is different, so read the terms carefully when you’re shopping around for life insurance policies. All life insurance policies offer a tax-free cash benefit and it’s up to the beneficiary to decide how to use it.

Typically, beneficiaries use the death benefit to help cover these costs:

  • End of life expenses
  • Mortgage payments
  • Tuition payments
  • Personal debt
  • Daily necessities

This helps beneficiaries cover necessary costs in the months or years following the policyholder’s death and gives policyholders peace of mind that their loved ones will be cared for. Life insurance policies can also pass along wealth or inheritance tax-free, which is a big reason many people purchase life insurance.

However, life insurance doesn’t guarantee coverage in certain situations:

  • Death occurs within the contestability period
  • Death is a homicide where a beneficiary is responsible
  • Death is a direct result of the policyholder’s risky behavior 
  • Death from suicide

The contestability period occurs right after you take out an insurance policy. It typically last two years. If the policyholder dies within this time, the insurer will investigate the policyholder’s medical records to ensure they didn’t lie on their initial application.

If the insurer finds that the policyholder did lie, they’ll enact a rescission. This cancels the death benefit and refunds any premiums the policyholder paid. If there’s no evidence that the policyholder lied, the death benefit will be paid out as normal.

If the policyholder dies due to their own criminal behavior, this will often void their policy. Each policy will have different definitions of circumstances that may void the policy, so go over this with your agent and review the terms of your policy carefully.

Main Types Of Life Insurance

Term Life InsurancePermanent Life Insurance
CoverageLimited to when term is activeCovered for life
Cash ValueNoYes

Like any other type of insurance, there’s no one-size-fits-all life insurance policy. But with a bit of consideration of your needs and your beneficiaries’ needs, you can find a policy that works for you.

1. Final expense insurance

Best for: If you need a financial tool to help pay for burial expenses

Final expense life insurance is a very specific type of life insurance. It covers costs from the policyholder’s death, including funeral costs and lingering medical debt. This protects the policyholder’s family from dealing with these costs while grieving.

Funeral and burial insurance covers expenses of respectfully laying a body to rest regardless of cultural practices. Some common costs include:

Final expense insurance also pays out a tax-free cash death benefit that beneficiaries can use at their own discretion.

Funeral costs have been increasing since the 1960s. Final expense insurance helps reduce these costs and allows you to plan ahead to reduce stress for your loved ones. Talk to an agent at Choice Mutual today to explore your options and take care of your beneficiaries.

2. Permanent

Table compares permanent life insurance policies, including whole life and universal.

Best for: You need insurance to cover long-term financial responsibilities, such as care for a disabled child

Permanent insurance costs more than term life insurance. As long as the policyholder makes their payments, their coverage won’t expire.

A key difference between permanent and term life insurance options is that permanent life insurance builds cash value you can borrow against. Each time you pay your premium, a small portion goes to a cash value account from which you can borrow.

Borrowing against life insurance is typically tax-free, but it may be subject to interest. Sometimes, if the amount borrowed isn’t paid back before the policyholder’s death, the amount borrowed can be deducted from the beneficiaries’ payout.

There are two common types of permanent life insurance, which we’ll cover in the next section.

Whole life

Best for: If you want guaranteed coverage that will never change

Whole life insurance guarantees coverage and fixed monthly premiums — but this comes at a cost. Whole life insurance covers the policyholder for their whole life as long as they pay premiums. But it’s also the most expensive life insurance option and isn’t very flexible. 

Monthly payments for whole life insurance are locked in and won’t change once your policy becomes active. Carefully consider whether you can consistently make your monthly payments to ensure you won’t void your policy.

When you borrow against whole life insurance, the interest and monthly loan payments will always remain the same. This offers stability but also can be a disadvantage if the market would otherwise have a lower interest rate.


Best for: If you want flexible long-term protection

Universal permanent life insurance is long-term life insurance with variable premiums. There’s no set end to the insurance as long as you’re making payments. This plan is more flexible than whole life insurance — there will be times when your premium is much lower or higher than other insurance types.

The hope with universal life insurance is that you will pay less overall, but it’s impossible to know for sure. You can also borrow against universal life insurance, but the cash value of this plan varies, so the amount you can borrow varies too.

3. Term

Best for: You need insurance to cover short-term financial responsibilities, such as replacing income or paying back debts

Term life insurance is a more affordable option. It has lower premiums because it only covers a set amount of time. Term life insurances are commonly in 10-, 20-, or 30-year terms. Some policies will offer coverage until you reach a certain age. It’s uncommon for a policy to extend term life insurance coverage past the age of 80.

The drawback is if you die after your policy expires, your beneficiaries won’t receive the death benefit. Many term insurance policies have a clause that allows you to convert the policy to permanent life insurance before it reaches a certain age. For most policies with a convertible clause, it lasts halfway through the term.

There are three common types of term life insurance:

  • Decreasing term: Coverage decreases over time at a set rate.
  • Renewable term: Coverage renews annually, and premiums typically increase over time.

Level term: Coverage and premiums are fixed for the duration of the policy.

How Much Does Life Insurance Cost?

Icons indicate factors for insurance premium cost, including age, gender, health, lifestyle, and policy details.

There are many factors to consider when estimating your insurance costs:

  • Policyholder’s age and gender: Younger people and women have lower costs.
  • Policyholder’s health: Healthier people tend to have lower costs.
  • Policyholder’s family health: People with fewer known family illnesses tend to have lower costs.
  • Policyholder’s lifestyle: People with healthier or less risky habits tend to have lower costs.
  • Policy size and type: Smaller policies and shorter terms have lower costs.


How To Buy Life Insurance

Now that you know the different types of life insurance, how they work, and how to estimate costs, here’s how to obtain a policy to prepare for the future.

Graphic shows the 5 steps of getting life insurance, beginning with exploring options and ending with beneficiary payout.

1. Figure out your coverage needs

The first step to purchasing life insurance is to consider which type might be best suited for your needs. Along with expected expenses such as medical debts or end-of-life expenses, you’ll need to consider your beneficiaries’ needs.

For example, you might want to consider a larger policy if you have a spouse who doesn’t work or a disabled child. Alternatively, you might want a smaller policy if you’re not the primary breadwinner or don’t have many beneficiaries.

2. Prepare to apply

When you’re preparing to apply for a life insurance policy, there are some key documents and information you’ll want to gather to make the process easier. Each potential insurer may ask for different documents, so it’s helpful to gather all the possibilities as you shop around:

  • Detailed list of medical history
  • Proof of employment
  • Financial records
  • Family members’ health information
  • Identification such as driver’s license or passport
  • Social Security card
  • Beneficiaries’ names, addresses, birthdays, and Social Security numbers

You might be tempted to be dishonest on your application to score a better quote — this is never a good idea. If your insurer finds you’ve lied, they can increase your premium drastically, reduce your policy size, and even deny your beneficiaries death benefits.

3. Shop around and compare quotes

Once you’ve decided which type of life insurance to pursue and gathered the necessary information, you can shop around and gather quotes from different providers. 

With Choice Mutual, you can get life insurance quotes from major providers nationwide in minutes to compare and find the best deal with the coverage you need for your family. 

Once you’ve decided on your plan, you should consider speaking to an insurance professional to ensure you completely understand the terms and to discuss any riders you might add. Some common riders include:

  • Accidental death: If the policyholder dies due to a covered accident, the death benefit doubles.
  • Long-term care: If the policy requires care such as staying in a nursing home, the insurance company will contribute a set amount to help cover costs.
  • Child term: The policyholder receives a benefit if their child dies before a certain age.
  • Waiver of premium: If the policyholder acquires a disability that prevents them from making payments, the insurance company will waive premiums.

4. Stay organized and maintain your records

Once you’ve taken out your life insurance policy, it’s important to stay organized so your coverage doesn’t lapse and beneficiaries can access all the information they need. To simplify maintaining your life insurance, try these tips:

  • Set monthly premiums to auto-pay.
  • Keep a complete copy of your policy in a water- and fireproof safe.
  • Notify your beneficiaries that you have life insurance. Share your provider and how beneficiaries can contact them when you pass away.


Who Should Get Life Insurance?

When you’re young or healthy, life insurance is probably the last thing on your mind. But the sooner you get coverage, the lower your premiums will be. We can’t predict the future, but we can protect our loved ones with life insurance coverage. Who should take particular care while reviewing their policy?

  • Couples with different incomes who want to ensure their partners’ expenses are covered.
  • Those who want to ensure their final expenses are taken care of so it doesn’t burden surviving loved ones.
  • Parents who want to ensure that their children of any age are taken care of.
  • Healthy young adults who want to take advantage of low rates.
  • Wealthy individuals who want to avoid estate taxes.
  • People with co-signers on loans who want to avoid leaving their debts to others.

Essentially, everyone should carefully consider purchasing a life insurance policy. The sooner you do so, the lower your premium will likely be, and you’ll gain priceless peace of mind knowing that your loved ones won’t have to worry if anything happens to you.

Pre-existing Conditions

One important motivation to get life insurance early is to get coverage before you develop pre-existing conditions or while you’re managing these conditions well. The most common pre-existing conditions are:

You can still get coverage with preexisting conditions, but your premiums might be higher. This will depend on many factors that your provider will ask about, including:

  • Whether you engage in healthy habits
  • How often you visit the doctor to manage your condition
  • How reliably you take prescribed medication 


Frequently Asked Questions

The three main types of life insurance are:

  • Permanent life insurance: Covers the policyholder as long as they make payments
  • Final expense life insurance: Covers various costs associated with end-of-life care and laying the body to rest
  • Term life insurance: Covers the policyholder for a set period

Life insurance helps cover end-of-life costs for beneficiaries. If you purchase term or permanent life insurance, your beneficiaries will also receive a death benefit to cover living expenses.

Supplemental life insurance allows you to personalize your policy if you have group life insurance through an employer.


Compare Coverage To Pay For Your Final Expenses

It doesn’t have to be stressful shopping around to find final expense coverage that works for you. Choice Mutual helps you compare quotes in minutes from top providers so you know exactly what you’re getting out of your life insurance policy.

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  1. increasing since the 1960s.