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Not everyone needs life insurance. In general, life insurance is a good idea if you have family or other people who depend on you financially. To decide the appropriate amount, consider your debts, the amount of income your family must replace, and whether you will have bills or other expenses.
Your life insurance company will make payments to the person you name on your policy after you die. This person is called the beneficiary. You can name more than one beneficiary. Your beneficiaries can use the money to pay bills and living expenses, pay off debt, pay for college, and other things. Some types of life insurance also generate savings that you can use throughout your life.
How can I get life insurance?
You can purchase life insurance directly from insurance companies, agents or brokers. Brokers sell insurance for multiple insurers.
Insurance companies use a process called underwriting to decide whether to sell you a policy. This often includes a medical exam and answering questions about your health, work, and habits. A company may refuse to sell you a policy if it believes you are a high risk due to your health or other reasons.
Some employers and groups, such as churches, unions, and other associations, offer group life insurance to their employees and members. The underwriting criteria for group life insurance are not as strict. You generally do not have to answer questions about your health. As a result, you may be able to get group life insurance even if you can't buy it directly from an insurance company.
How much does life insurance cost?
The cost depends on your age, health, and risk factors. when you buy the policy. The price is usually lower for young people. A company may charge you more if you have health conditions, smoke, or have dangerous hobbies such as skydiving or mountain climbing.
For group policies, the risk is based on the entire group, not a single person. The cost is usually cheaper than a policy you could buy directly from an insurance company.
More information: Are you retiring? Think about insurance.
Types of life insurance
There are two main types of life insurance: term life insurance and permanent life insurance.
What is term life insurance?
Term life insurance offers protection for a set period of time. This period is called a term. The term can be one year, or five to 30 years or more. You choose the length of the term. Term life insurance policies pay your beneficiaries a lump sum, called a death benefit, if you die during the policy term. The policy ends at the end of the term, unless you pay to extend it.
Term policies are not made to provide coverage for your entire life. Most people who buy term life insurance policies want coverage for only a time, such as when they are starting a family or when they have children in college.
Insurance premiums will remain the same throughout the term. They will increase if you renew them at the end of the term. This is because your new insurance premium will be based on your age when you renew, not the age you were when you originally purchased the policy. To help avoid higher insurance premiums in the future, consider purchasing a policy with a longer term.
Most companies offer term life insurance only up to a certain age, usually up to age 70 or 80.
Features of term life insurance
The two most common features of most term life insurance policies are the ability to convert and renew. These make it easier to get a different type of policy or keep the one you have.
The conversion capability allows you to change your term policy to a permanent life insurance policy without having to have a medical exam or answer questions about your health. This can be helpful if your health worsens after purchasing a term policy. Converting a policy will increase your insurance premium. Companies generally only allow you to convert to term life insurance policies for a period of time, usually until you turn 65.
Renewability allows you to extend your policy for additional terms, regardless of your health and without having to undergo a medical exam.
What is permanent life insurance?
Permanent life insurance allows you to build savings over time. You can withdraw, invest or use it to borrow against these savings. You can also use it to pay insurance premiums.
A portion of each insurance premium is applied to an account, known as the cash value. The cash value grows at a fixed or variable interest rate. Some policies tie growth to indices, such as the S&P 500 or subaccounts you choose. Subaccounts are invested in stocks, bonds, or both. Your cash value could go up or down, depending on the performance of your subaccounts.
It could take several years for a policy to accumulate cash value. You may have to pay a surrender fee if you withdraw the money early. And if you withdraw more money than you paid in insurance premiums, you will probably have to pay taxes on this money. If you withdraw the entire cash value, the company could cancel your policy. If this happens, your coverage will end and could affect your taxes.
Permanent life insurance premiums are higher than term life insurance premiums. That's because of the savings features and because you are purchasing coverage for a longer period.
You will want to speak with a financial consultant before purchasing permanent life insurance.
Types of permanent life insurance
The two most common variations of permanent insurance are whole life insurance and universal life insurance.
Ordinary life insurance remains in effect throughout your life, unless you collect the value of the policy or stop paying insurance premiums.
Some ordinary life insurance policies may pay an annual dividend. You can receive the dividend in cash, add it to the cash value of your policy, or use it to pay for insurance premiums. Dividends are not guaranteed. Its dividend could be lower than the company's projection. Before purchasing a policy, ask for a history of the company's projected dividends compared to dividends actually paid.
Universal life insurance remains in effect until your maturity date, which is generally at age 95 or 100 as long as you have $1 or more in cash value. On the maturity date, coverage ends and you receive the cash value.
Universal life insurance is more flexible than ordinary life insurance. You can change the amount of your death benefit insurance premium. But any changes you make could affect how long your coverage lasts. If your insurance premiums are lower than the cost of the insurance, the difference is taken from the cash value. If the cash value reaches zero, your policy could be voided.
The company will send you an annual report with the amount of your cash value and how long the policy can last. The estimate is based on the amount of cash value, as well as the cost of insurance and other factors. Review the report regularly. You may have to pay more in insurance premiums to keep the policy in force until the maturity date.
Most universal life insurance policies earn a minimum guaranteed interest rate on the cash value. Variable universal life insurance policies depend on the performance of the subaccounts you choose. Agents who sell variable life insurance in Texas must have a federal securities license and a state insurance license.
Some universal life insurance policies contain a no-lapse guarantee. If your insurance premium payments are not enough to cover the cost of the insurance, the no-lapse insurance guarantee prevents the policy from lapsing. You must pay your insurance premiums on time for the guarantee to apply.
Watch: What you should know about universal life insurance (subtitled in Spanish)
Comparison of the main types of life insurance
| Term life insurance | Permanent life insurance | ||
|---|---|---|---|
| Ordinary life insurance | Universal life insurance | ||
Insurance premiums | It initially goes down, but can increase each time you renew the policy. Premiums are based on your age at the time you purchase or renew your policy. | Initially higher than term life insurance, but typically does not increase. Insurance premiums are based on your age at the time you purchase the policy. | Flexible. Insurance premiums are based on your age at the time you purchase the policy. Most policies allow you to change your insurance premium payments, but this will affect your death benefit, cash value, or both. |
How long does the policy last? | The period you choose, usually one year, five to 30 years or more. | Your entire life, if you maintain the policy. | Depends. The policy remains in force until the maturity date, generally upon reaching ages 95 or 100 as long as you have a cash value. |
What the policy pays | Death benefits only. | Death benefits, plus possible cash value that you can withdraw, invest, or use to take out a loan. | Death benefits, plus possible cash value that you can withdraw, invest, or use to take out a loan. |
Advantages | Good option if you want coverage for a specific period, such as when you are starting a family. You can convert it to a permanent life policy or renew it without having to undergo a medical exam. | Insurance premiums, death benefit, and cash value are guaranteed. | Flexible. You can change the death benefit and insurance premiums. |
Disadvantages | Insurance premiums will increase each time you renew the policy. It does not allow it to generate savings. | It can be expensive to meet a short-term need. It usually has little or no cash value for the first few years. It is not flexible enough to make changes when necessary. | It can be expensive to meet a short-term need. Payment is not guaranteed. Low interest rates can affect cash value, which can increase insurance premium payments. |
Other types of life insurance
These types of life insurance provide only specific coverages:
- Credit life insurance pays the balance of a loan in the event you die before repaying the loan. If you already have a life insurance policy, you may not need credit life insurance. Instead, you can assign part of the death benefits to the lender to pay off the balance of the loan.
- Prepaid funeral insurance pays for funeral expenses. An advantage of this insurance is that it sets funeral costs at prices. Funeral expense insurance can be expensive compared to other types of life insurance. The amount you pay in insurance premiums often exceeds what the policy pays when you die. Additionally, many policies will not pay the full amount of funeral expenses if you die before paying a required amount. A regular life insurance policy or savings program may be a better option to pay for funeral costs.
Modification of your policy
You can usually add features or other coverages to your policy to make it better fit your needs. This is done by purchasing riders for your policy. Some of the most common additional clauses are:
- Additional term life insurance adds term life coverage to a permanent life policy. For example, if you need $500,000 of comprehensive coverage, you could purchase a $100,000 permanent life policy with an additional $400,000 term life insurance rider. As you earn more income, you can convert part or all of the rider to a universal life policy or you can purchase another regular life insurance policy.
- Guaranteed insurance allows you to purchase additional coverage, regardless of your age or health condition. The company may still use these factors to determine the price of your insurance premium. Generally you must purchase the additional coverage before a certain date or set life event, such as retirement or before turning 50.
- Accidental death insurance provides an additional payment if you die as a result of an accident. For example, if you have a policy with a death benefit of $500,000 and an accidental death rider of $500,000, your beneficiary would receive $1 million if you die due to an accident. There are certain restrictions.
- The Disability Insurance Premium Waiver covers your insurance premium if you qualify as disabled under policy definitions. This rider is generally available only to people under age 60.
- The accelerated death benefit partially or fully prepays death benefits while you are still alive. You must have a terminal illness, specific illness, or an illness that requires long-term care. People often purchase this rider to help pay for long-term care expenses in case they need it later.
- The spousal amendment clause provides term insurance coverage for your spouse. Basically, this rider combines two policies into one.
- The child amendment clause provides term insurance for your children. Most companies require that the child be at least 14 days old. Coverage generally lasts until the child turns 21 or 25.
Group life insurance
Some employers and other groups offer life insurance as an additional benefit. Those who offer it must make it available to all their employees and members, regardless of age or health status.
Most group life insurance is term life insurance, but some groups also offer permanent life insurance policies. The amount of coverage is often limited. A basic group policy through your job typically has a death benefit equal to one or two times your annual salary. Other group policies limit the death benefit to a fixed amount, such as $100,000 for a term life insurance policy and $50,000 for permanent life insurance.
Generally, you don't have to answer health questions or have a medical exam unless you want more coverage than the basic group policy provides.
If you get life insurance through your employer, coverage generally ends when you leave your job.
How life insurance pays the death benefit
Companies typically pay the death benefit in a single lump sum, but there are other payment options. You or the beneficiary choose how the death benefit will be paid. Common payment options include:
- Option of interest. The insurance company retains the death benefit and pays interest to your beneficiary at regular intervals.
- Fixed period. The company pays the death benefit at regular intervals, with interest, over a selected period of time.
- Life refund. The insurance company pays the beneficiary a set monthly amount for the rest of his or her life. Under this option, the beneficiary may receive more than the death benefit stated in the policy if he or she lives longer than expected.
Companies must pay death benefits in a timely manner
Insurance companies must pay death benefits within two months of receiving proof of death and verifying your beneficiary. For an individual life insurance policy, the company must also pay interest on the death benefit from the time the company receives the proof of loss statement until the time the company accepts the claim and agrees to pay. the death benefit. Companies may take longer to pay the death benefit if you die during the policy's trial period.
What is the trial period?
Life insurance policies have a trial period (contestable period) of two years. If you die within this period, the company can verify the information you provided on the insurance application. If the company discovers that you provided incorrect information, or withheld information, it may deny payment. This can happen even if the incorrect information is not related to the cause of death or was provided in error. If the company denies payment, it must reimburse your beneficiary for insurance premiums.
The company may also investigate the cause of death. During the first two years of the policy, companies usually will not pay the death benefit if the cause of death is suicide. If the company does not pay the benefit, it must return the insurance premiums to your beneficiary.
Once your policy has been in force for more than two years, the company must pay the death benefit regardless of the cause of death. Your policy will have a new trial period if it is canceled and then you reinstate it.
Policy cancellation
What happens if I miss a payment on my insurance premium?
Most policies have a grace period of 31 days after the date you pay your insurance premium. You can pay your insurance premium during the grace period without being charged interest and you will still have coverage. If you die during this period, your beneficiary receives the death benefit minus any insurance premium due.
What happens if my policy has been cancelled?
If you do not pay the insurance premium during the grace period, your policy will be cancelled. This means that you no longer have coverage and your beneficiaries will not get the death benefit when you die. Generally, you can reinstate a policy that has been cancelled. To do this, you will have to pay the insurance premium that is overdue plus interest.
Most companies will reinstate a policy within a five-year period. To reinstate the policy, you may need to answer some health questions or have a medical exam.
Purchasing life insurance
- Make sure the agent and company are licensed to sell insurance. If you buy from an unlicensed company, your beneficiary may not receive payment if the company goes bankrupt or becomes insolvent. Licensed companies belong to a guaranty association that pays the claims of companies that go bankrupt or become insolvent. To find out if an agent or company is licensed, use the “Company or Agent Search” feature on our website or call our Consumer Help Line.
- Check the company's financial solvency and complaint history. To find out how financially sound a company is and the number of customer complaints, call the Consumer Help Line or use the Company Search feature on our website.
- Look to purchase a policy with no sales commission or a low sales commission. You could save money by purchasing a policy with low commissions and fees. This type of fees and commissions is known as loading. These policies are often sold by financial planners who are licensed insurance counselors. Typically, they charge clients a flat fee.
- Get quotes from multiple companies. Prices vary depending on the company.
- Make your own comparisons. Make sure the policies you compare offer similar levels of coverage. A cheaper policy may have fewer features, or provide a smaller death benefit. A more expensive policy may be a better value when you take into account the amount of the death benefit for each dollar collected. Don't choose a policy based on price alone.
- Use your free trial period. Policies in Texas provide you with a free-look period of at least 10 to 20 days. During this time, you can cancel the policy for any reason and receive a full refund. Use this time to make sure coverage is right for you.
- Verify the information your agent provides you. Agents often use tables to show you how a policy's cash value can grow. These tables are generally projections and should never be taken as a promise of policy performance. You could earn less than the projection. Ask for a history of current growth in cash values.
- Stay alert for any illegal acts. Agents cannot offer you a gift or a discount on an investment or loan to encourage you to purchase life insurance. If you think an agent has made you an inappropriate offer, call our Consumer Help Line.
See: How to buy life insurance (English only)
What happens if I want to replace my policy with a new one?
You should review your life insurance policy every few years to make sure it still meets your needs. However, replacing a policy with a new one is not always a good idea. Before replacing a policy, consider the following:
- New policies generally take longer to accumulate cash values and pay dividends.
- The two-year trial period begins again with the new policy.
- If switching to a new policy means you take early withdrawal from a permanent life policy, surrender charges could reduce your cash value.
- You will probably need to answer questions about your health or have another medical exam.
It is illegal for an agent to replace a policy just so the agent can earn a new commission. If you think an agent has improperly replaced your policy or persuaded you to replace it, file a complaint with us.
Financial implications of having life insurance
Having life insurance can affect your taxes and financial situation. Talk to an attorney or financial advisor to understand how this may affect you. Here are some things you should know:
Medicaid
The cash value of a policy is considered an asset when determining whether you are eligible for Medicaid. Proceeds from a loan using the policy as collateral could also be considered an asset.
Taxes
The cash value of a life insurance policy generally accumulates tax deferred. This means you don't pay taxes until later, if at all. Withdrawals of cash value are generally not subject to taxes until the amount of the withdrawal exceeds the total insurance premiums paid on the policy.
The law considers the death benefit to be reimbursement for the beneficiary's loss, not income. Beneficiaries rarely have to pay federal income taxes or estate taxes on the payment of life insurance death benefits.
If you do not name a beneficiary, or if your beneficiary is deceased, the company will pay the death benefit to the insured's estate. Your heirs may have to pay taxes on the money they receive from your estate.
Bankruptcy
A policy's cash value and death benefit are usually exempt from:
- creditors.
- claims in bankruptcy proceedings.
- seizure, confiscation or other legal process.
Selling your life insurance policy
Sometimes you may need to sell your life insurance policy to get cash. A life insurance policy is an item of personal property. You can sell it just like any other property, however, there are special regulations.
If you are terminally ill, you can sell your life insurance policy to a life insurance settlement provider. To do this, your doctor must certify that you have two years or less to live. You do not have to pay taxes on the proceeds from a life insurance settlement.
You may also want to sell your policy if you outlive your retirement savings and need to pay living expenses. You will probably have to pay taxes on the money you make from the sale.
How much money can I sell the policy for?
The life insurance settlement provider pays a percentage of the policy's death benefit. For example, a settlement provider might pay $75,000 for a life insurance policy that will pay $150,000 when the insured dies. Sales amounts typically range from 10 to 75 percent of a policy's death benefit.
Prices vary, so talk to several clearance providers. Settlement providers generally consider the following factors to determine how much to pay for a policy:
- Your life expectancy. Settlement providers will pay more for policies if you have a shorter life expectancy. Most settlement providers will not purchase a policy unless you are 65 or terminally ill.
- Your policy's insurance premiums . Settlement providers assume all future payment obligations for the policy's insurance premiums, so they will pay more for policies with lower insurance premiums.
Proceeds from a life insurance settlement could affect your eligibility for benefits from Medicaid or other government programs. The income may not be exempt from bankruptcy or creditor proceedings. Before entering into a life insurance settlement, consult an attorney or financial advisor.
Life insurance settlement providers and brokers must register with us. For a list of registered life insurance settlement brokers and providers, call our Consumer Help Line.
Are there other alternatives to get money for my policy?
- If your policy has cash value, you may be able to cash out. When you cash out a policy, you cancel it and get the money that has built up in the cash value.
- Many lenders can offer you loans using your policy as collateral. If you fail to repay the loan, the death benefit amount will be reduced.
- A policy with a provision to accelerate death benefits will pay you in advance all or part of the death benefit before you die. You must have a terminal illness, a specific illness, or an illness that requires long-term care.
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