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If you want to provide for your family after you pass away, life insurance is a must. Here’s what you need to know about it and how to choose the best options for you.

A pen and life insurance policy sit on a desk beside money, reminding us why it’s important


Insurance is an agreement between an insurer (the insurance company) and an insured (the individual buying the insurance). If there’s an accident or loss, the insured receives a payout to cover that loss. Life insurance is one of the few types of insurance where the person who pays for it doesn’t receive the claim … their loved ones do.

Life insurance can be complicated, with different types and terms you should know before getting some. Let’s look at the ins and outs of life insurance, how it works, and why it’s important.

What Is Life Insurance?

Life insurance is different from other types of insurance. A life insurance contract includes one or more beneficiaries, like a spouse or children. If the insured dies, the policy pays those designated survivors. The money is often used to cover funeral expenses or replace the income that the policyholder used to provide.

You may have to take a medical exam before life insurance is issued, to determine how healthy you are (and how big a risk). Younger people generally pay less for coverage because they are less likely to die of natural causes.

Why Is Life Insurance Important?

Some people might think life insurance isn’t worth it because even if they pay into it for years, they can never collect on the claim. But it’s important if you have dependents or want to care for your loved ones when you’re gone. After all, your death could leave a huge hole in their lives — physically, emotionally, and financially. The only part you can really compensate them for is the financial aspect.

Most life insurance policies will only pay out on natural or accidental death. This condition is in place so a beneficiary can’t kill an insured with the intention of receiving money from the insurance policy — a plot point in many suspense movies.

Types of Life Insurance

Life insurance can be grouped into two main types: term (or temporary) and permanent. Each of these has multiple variations that fall under the main umbrella.

Term life insurance

Term life policies are often the least expensive to buy, but they’re not “‘til death do you part.” These temporary policies are taken out for a set number of years and then expire unless you renew them. Common initial terms are 10, 20 or 30 years, and optional renewal is usually on a year-by-year basis.

Different variations of term life insurance are handled in distinct ways over the long haul.

  • Renewable term life insurance is taken out for shorter periods, like one year. The price is only guaranteed for that term, and premiums increase at each renewal as the insured gets older.
  • Decreasing term life insurance is also renewable but the coverage decreases at a predetermined rate over the life of the policy.
  • Convertible term life insurance can be converted to permanent insurance if you choose to make the switch later.

Permanent life insurance

Permanent policies remain open and active until the insured dies, stops paying the premiums, or cancels the policy, which is known as surrendering. Permanent life insurance is usually more expensive and often comes with a choice of level or increasing death benefits.

  • Level death benefits have a fixed payout, regardless of how soon the insured dies.
  • Increasing death benefits rise in value over the years, so beneficiaries get a larger payout if the insured lives longer.

Most types of permanent life insurance are also known as cash value life insurance because they’re assets that can be sold, cashed out, used to pay the policy premium, invested, or turned into loan collateral.

Again, you have different variants to choose from.

  • Whole life insurance is the most popular type of permanent life insurance, with fixed premiums that never go up regardless of market conditions and a cash value that grows over the insured person’s lifetime.

  • Universal life (UL) insurance has flexible premiums that can be adjusted over time, and the policies earn interest on their cash value component.

    • Indexed universal life (IUL) policies uniquely pay the insured a fixed or equity-indexed rate of return on the cash value of the policy — the latter if you choose to invest some of your cash value in an equity index like NASDAQ or the S&P 500.

    • Variable universal life (VUL) insurance lets you invest the policy’s cash value in a separate linked account.

Choosing a Policy

If you’re looking for the most affordable option, you’ll probably want to focus on term life insurance. If you’d like your policy to be an asset that you can sell or leverage for loans and investments, you should take a look at permanent life insurance.

Within each umbrella, examine the various types available and pick a policy that best suits your life and your family’s needs.

What’s your budget? How much you can afford to pay for premiums will determine whether you consider term or permanent life insurance.

How long do you need coverage? If you have younger children, you’ll want a longer policy to make sure they’re taken care of until they’re grown.

How much money do they need? Decide what your beneficiaries require to uphold their standard of living, which might be higher if you’re the primary income earner now.

How healthy are you? If you’re older or have unhealthy habits, expect your premiums to be higher. However, some policies let you make healthy changes — like quitting smoking or losing weight — to get your future premiums decreased.

When to Purchase Life Insurance

The sooner you purchase life insurance the better, because you can’t predict the unexpected. But some scenarios make the coverage even more important.

  • Kids: If you have kids or adult children with special needs, life insurance will help care for them when you’re gone.
  • Partner: If you’re the sole provider or you share expenses with your partner or spouse, it will help them continue paying the bills in your absence.
  • Funeral: If you want to be buried or cremated and don’t have the funds saved up, life insurance can cover those expenses.

Bottom Line

Life insurance isn’t for you. It’s for the people you leave behind when you die. And if you care about making sure their lives aren’t financially impacted in your absence, life insurance makes a lot of sense.

Consider the various types of life insurance available and choose a plan that fits your budget and your needs. Term life insurance is more cost-effective but expires when the term is done, and permanent life insurance can be a great asset if you can afford it.

About the author:

Heather Vale

For over a quarter of a century, Heather has been working as a journalist in all media: TV, radio, print, and online. After establishing her career in Toronto, she has been living, working, and playing in Las Vegas for the past decade. She loves pulling apart complicated topics to make them simple, fun, and easy to understand, especially in the business and financial niches. But she also enjoys writing about the personal side of life, including success, relationships, families, and pets. She approaches everything from a yin-yang perspective, so her passion for wordplay and entertaining metaphors is always balanced with an intense (and some would say annoying) focus on facts and accuracy.

This material is for informational purposes only and is not intended to replace the advice of a qualified tax advisor, attorney or financial advisor. Readers should consult with their own tax advisor, attorney or financial advisor with regard to their personal situations.