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Life insurance is so many things. Boring is one of them. But when and if the time comes, it's one of the most important assets you can have. And the truth is, it doesn't need to be expensive. In fact, life insurance should be so affordable you have no problem paying the bill each and every month, because it is THAT important. Let's find the right type of life insurance for your situation, at a price you can afford to pay
Step 1: Understanding your situation
Step 2: Which Type is Right for Me?
Step 3: How Much Do I Need?
Step 4: Compare Plans & Quotes
Understand Your Situation
What's the Life Insurance For?
To most people reading this, the major goal of life insurance will be to replace the income of a lost family member if they were to pass away (or in some cases, get sick or injured).
The life insurance benefit is used by the surviving family to maintain their quality of life. It can be used to pay mortgage payments, so the family doesn't have to move. It can be used to pay for education, car payments, and insure the surviving spouse can retire at a reasonable age. Whatever you need it for, the benefit is paid to the pre-chosen beneficiary or beneficiaries, tax-free, to be used for whatever reason.
And while this is the most common use of life insurance, it has also has some other uses you may not be away of.
Business life insurance is used to insure important employees, so the company doesn't suffer as much financially if the employee were to die or get severly ill. Wealthier people use life insurance to pay their estate taxes, so the goverment doesn't interfere in the transfer of the real estate, wealth, or precious family artifacts to loved ones designated in their will. Other use it as a savvy, tax-advantaged investment tool.
The type of life insurance that is best for you depends on why you need life insurance in the first place.
The Types of Life Insurance
Term life insurance is the most well known, lowest priced, and most likely the right type of life insurance for your particular situation. For newlyweds, young families, or single moms or dads looking to insure the income of one another, term life insurance is probably your best bet.
Term is simple. It will cover the insured person for a "term", or a designated period. Terms usually come in amounts of 10, 15, 20, 25, or 30 years. So first, you pick your term, which is how long you need to be covered for. Then, you pick the amount of insurance, or the amount you would need paid out to your chosen beneficiary if you were to pass away. It's that simple.
Determining the amount of life insurance you need to purchase, and the correct term will be covered below. You can also check out our blog entry on term insurance for the whole story on getting the right term quote.
Some newer term policies have what are called "Living Benefits". These may be extremely valuable as they allow you to access your death benefit even if you haven't passed away.
Whole life is a type of permanent life insurance. Unlike term life insurance, it is designed to last the entire lifetime of the insured person, as long as premiums are paid on time. So if you have a a $50,000 whole life policy on yourself, it doesn't matter if you die at age 30 or age 100, your beneficiary will get paid $50,000.
Whole life insurance also has something called "cash value". Basically, cash value is like a little savings account attached to your plan. Over time, the cash value will increase, as you pay your monthly premiums and you earn interest paid from the insurance company each year. You may borrow from the cash value at any point, if you need funds for whatever reason. If you don't pay back the loan, the insurance company will just deduct it from the death benefit when you die.
Whole life insurance, because it is permanent and has an extra savings component, is often more expensive than term for the amount of insurance you are receiving. Therefore, whole life insurance is ideal only idea for final expense situations, where the insurance policy death benefit is relatively small, ($25,000) or under, and is strictly used to cover the funeral expenses of the insured person, and maybe a little extra.
Universal life is a relatively new form of life insurance. Universal life is basically a more advanced, more flexible version of whole life insurance. Like whole life, it has a cash value component, and some universal life policy's cash value can be pegged to a stock market index, like the S&P 500, to gain more interest. In addition, universal life insurance policies premiums (the monthly payment you make) are more flexible than whole life. Meaning, if you need to pay less one month, you can.
Universal life insurance is therefore ideal for people looking for life insurance as well as a conservative way to invest in their retirement or future. The gains made in universal life insurance policies cash value accounts is often treated more favorably when it comes to taxes than many investment funds.
Learn more about universal life favorable tax advantages here.
Which Type of Life Insurance is Right For Me?
Term life insurance is best for families or couples looking to replace the income of an earner.
Lowest Cost for
Most Death Benefit
Pick Your Term &
Many new policies have
Perfect for final expense insurance, which is insurance intended to cover funeral expenses + a little extra.
Tends to be more expensive than term for the amount of insurance you get.
Policies last as long as you stay alive, do not expire like a term policy does.
Best for younger people or families looking for life insurance + a conservative, tax advantaged pension
Flexible monthly premiums
Ability to peg cash value against market indexes like the S&P 500 or Dow Jones
How much life insurance do I need?
As a general rule, ten times your annual income is usually a safe bet. A nerd would tell you to figure out the most amount per month that you can comfortably afford, and buy that amount of life insurance. More is always better, but only if it's affordable on a regular basis.
There is a more complex calculation that can be made, which takes into account all the details of your situation and gives you a dollar amount. Use the calculator below for a detailed analysis of how much life insurance you need.
Can I combine life insurance & investments?
Depending on the type of investor you are, life insurance can play a prominent and beneficial role in your portfolio. Because of it's guarantees and extensive tax benefits, its worth a look to see if it can fit into your financial picture. Check out NerdWallet's take on the subject.
Compare Plans & Quotes Now
Of course, everyone wants the cheapest plan. But it's not that simple. One of our nerds can walk you through the entire process, helping you compare the options and quotes available to you. We're insurance nerds, it's what we like doing.
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