Life Insurance: Protect Your Family’s Future

Life insurance is a contract between an individual and an insurance company, where the insurer promises to pay out a lump sum of money to designated beneficiaries upon the insured’s death. This financial protection helps loved ones cover expenses, pay off debts, and maintain their standard of living.

The concept of life insurance dates back to ancient Rome, but modern life insurance policies first emerged in Europe in the late 17th century. The first life insurance company in the United States was founded in 1759 in Philadelphia. Today there are hundreds of life insurance companies offering various products.

There are two main types of life insurance:

  • Term life insurance provides coverage for a set period of time, such as 10 or 30 years. This is the most affordable type and offers protection just for the term length.

  • Whole life insurance provides lifetime coverage as long as you pay the premiums. It has a cash value that accumulates over time that you can borrow against. It’s more expensive than term but lasts your whole life.

Within these two broad categories there are more specific policy types that cater to different needs. Getting the right life insurance is an important financial decision that requires calculating your needs, comparing policy features and costs, and understanding the application process.

How Life Insurance Works

Life insurance provides financial protection for your loved ones in the event of your death. Here’s an overview of some key aspects of how life insurance policies work:


The premium is the amount you pay for your life insurance policy, usually monthly or annually. Premiums are calculated based on several factors, including your age, health status, lifestyle, family medical history, and the amount of coverage you purchase. Typically, the younger and healthier you are, the lower your premiums will be. Premiums often increase as you age.

Cash Value

Some life insurance policies, like Whole Life and universal life, have a cash value component in addition to the death benefit. This means part of your premium goes toward building up cash value in the policy over time. You can borrow against or withdraw the cash value while you’re still living. With term life policies, there is no cash value built up.

Death Benefit Payout

The death benefit is the amount that will be paid out to your beneficiaries when you pass away. This amount is fixed at the time you purchase the policy. Your insurance company will pay out the death benefit to your designated beneficiaries, usually within a month after submitting the claim.

Policy Loans

If you have a permanent life insurance policy with a cash value component, you may be able to take out a loan against the cash value. This allows you to borrow your policy’s cash value while you’re still living, which reduces the death benefit by the amount owed. Loans accrue interest, and if they are not paid back, will reduce the amount your beneficiaries receive.

So in summary, life insurance protects your loved ones financially if you were to pass away. Premiums, cash value, death benefits, and loans are important factors to understand when shopping for and managing a policy. The specific details depend on the type of life insurance product you choose.

Types of Life Insurance

There are several main types of life insurance policies to choose from:

Term Life Insurance

Term life insurance provides coverage for a specific period, or “term”, such as 10, 20 or 30 years. It pays a death benefit only if you die during the term. Term policies are popular because they offer the largest amount of coverage for the lowest cost, and premiums remain level throughout the term. However, term life insurance expires without value if you outlive the term.

Whole Life Insurance

Whole life insurance offers lifetime coverage and builds cash value that you can borrow against or withdraw. The premiums are typically higher than term insurance since they fund the cash value in addition to the death benefit. Whole life insurance has guaranteed premiums, death benefits, and cash values.

Universal Life Insurance

Universal life insurance is a form of permanent life insurance with flexible premiums and death benefits. Part of the premium goes towards the policy’s cash value, while the remainder covers the cost of insurance. You can adjust your premium payments and death benefit amount, although there are limits. Universal life insurance combines aspects of whole and term life insurance.

Variable Life Insurance

Variable life insurance provides permanent coverage like whole life insurance, but premiums are invested in accounts with variable performance, like stocks and bonds. The cash value and death benefit can fluctuate based on the performance of the investments. This involves more risk but allows the cash value the potential to grow more than traditional whole life insurance.

Group Life Insurance

Many employers provide group life insurance as an employee benefit. A group policy covers all employees, and in most cases, coverage ends when you leave the job. Group life insurance tends to be more affordable but usually only provides basic coverage. You can supplement this with an individual life insurance policy.

Considerations When Buying

When purchasing life insurance, there are several key factors to consider that will influence the type and amount of coverage that is right for your needs. Taking the time to carefully evaluate these considerations will help ensure you get adequate protection.


Age is one of the biggest factors in determining your life insurance premiums. When you’re younger and healthier, premiums will be lower since the insurer expects to collect premiums for a longer period of time before a payout is needed. As you get older, rates increase because there is higher risk of illness and death. Getting coverage when young and maintaining it as you age is the best way to keep premiums affordable.


Your current health and family medical history directly impact life insurance rates. Applicants go through medical underwriting where the insurer reviews health records, medical exams and lifestyle information. Those with chronic illnesses or increased risk factors like smoking will pay higher premiums. Maintaining healthy lifestyles can help keep rates down.


Hazardous hobbies, risky careers or frequent travel to dangerous regions can increase your rates. Things like skydiving, rock climbing, motorcycle riding all raise the chances of accidents and claims. Even extensive travel can result in higher premiums. Disclosing your activities allows insurers to accurately assess and rate the risks.


Your income plays a key role in determining the amount of life insurance you need. Consider debts, daily living expenses, future college costs and income replacement to determine an adequate amount. Typically you’ll want 10-20 times your annual income in coverage when young, then tapering down as you age and have fewer financial obligations.


Life insurance helps replace your income for dependents that rely on you financially in the event of your death. This is especially important if you have young children, a non-working spouse, elderly parents or special needs dependents. Consider their ages, expected living expenses, future education costs and unique needs when purchasing enough coverage.


Consider your financial goals and how life insurance proceeds could help fund them if you were to pass away prematurely. Paying off a mortgage, funding college savings, replacing income for retirement are common goals that influence coverage needs. Life insurance provides peace of mind knowing your family’s financial future is secure.

Determining Coverage Amount

Deciding how much life insurance to get can be challenging. Here are some guidelines to determine the right amount of coverage for your needs:

Rules of Thumb

  • Income replacement method: Aim for 10–15 times your annual income in coverage. This approach focuses on replacing your income to maintain your family’s current lifestyle.

  • Needs approach: Calculate specific financial needs like paying off debts, funding college, etc. Add up all the expenses to determine the total amount of coverage required.

  • Percentage of net worth: Get a policy worth 5–10% of your total net worth. This ensures your assets can be passed on and covers estate taxes.

Income Replacement

A common approach is to buy enough insurance to replace your income for X years. Typically, X is based on when dependents will become self-sufficient.

For example, a 30-year-old with young children may aim for 20-30 years of income replacement. While someone closer to retirement may need 10 years or less,.

Aim for the coverage amount that will maintain your current standard of living. Review your take-home pay and monthly budget to estimate the required replacement income.

Achieving Financial Goals

In addition to income replacement, factor in financial goals that life insurance proceeds can help fund. These may include:

  • Paying off mortgage and debts
  • College savings for kids
  • Retirement savings for spouse
  • Estate taxes and funeral costs

Calculate each of these future costs to include in your total coverage target. This ensures your family’s financial plans can still be achieved.

By considering income replacement and funding goals, you can determine the right life insurance amount tailored to your unique needs and situation.

Comparing Providers

When shopping for a life insurance policy, it’s important to compare providers to find the best fit for your needs and budget. Here are some key factors to consider:

Look at Ratings and Financial Strength

  • Check the independent ratings and reviews of insurance companies to see how they stack up. Organizations like A.M. Best, Moody’s, and Standard & Poor’s rate insurers on their financial strength and ability to pay out claims. Only consider companies with strong ratings from these agencies.

  • Review the insurer’s financial statements. Look for companies with solid reserves that can weather economic downturns. Avoid insurers that seem financially shaky.

  • Consider Mutual companies versus Stock companies. Mutual insurers are owned by policyholders so earnings go towards dividends and reserves. Stock companies seek to maximise shareholder returns.

Assess Customer Service Reputation

  • Search online for customer reviews and complaints. Look for consistent praise for helpful service versus systemic issues.

  • Call the insurer to evaluate upfront support. See if you get clear answers from knowledgeable staff in a timely manner.

  • Consider local agents versus direct purchase. Local agents may provide more personalized support while direct buys offer lower prices.

  • Look into ease of contacting reps and processing claims. Good customer service is crucial for your beneficiaries.

Compare Policy Options and Pricing

  • Get quotes from multiple highly-rated insurers. Compare coverage offerings, riders, and sample rates.

  • Look for policies and providers offering the features you want at competitive pricing. Don’t just default to the big brand names.

  • Consider bundled plans versus stand-alone policies. Bundling can simplify management but may limit flexibility.

Policy Options

Life insurance policies often allow you to customise and enhance your coverage through optional riders and benefits. Here are some of the most common policy options to consider:

Disability Rider

A disability rider provides additional benefits if you become seriously ill or injured and can’t work. It will pay out a portion of your death benefit while you are still living. This can help cover costs if you are disabled and unable to earn an income. Disability riders are often relatively affordable additions to a policy.

Critical Illness Rider

A critical illness rider provides a lump sum payment if you are diagnosed with a specified critical illness like cancer, stroke, or heart attack. The payout can be used to cover treatment costs or replace lost income while you recover. Adding this rider provides financial protection in the event of a serious health crisis.

Accidental Death Benefit

An accidental death benefit pays out extra if you die from an accident. It essentially doubles the death benefit. This rider provides extra security for families concerned about the financial impact of an unexpected accidental death. It’s often inexpensive to add.

Guaranteed Insurability

This rider allows you to increase your coverage in the future without additional medical underwriting. It guarantees you can add more coverage at set intervals or life events, like having a child or purchasing a home, regardless of any new health conditions. This ensures you’ll be able to get more protection even if your health declines.

Waiver of Premium

A waiver of premium rider suspends your premium payments if you become disabled and can’t work. It ensures you don’t lose coverage due to inability to pay. This rider provides peace of mind that your dependents will still be protected if you become disabled.

When selecting policy options, consider your individual needs, budget, and goals. Riders can customize coverage, but may increase premiums. Shop policies and discuss options with an insurance agent to find the optimal add-ons for your situation.

Application Process

The application process for life insurance typically involves a medical exam, financial review, and final approval.

Medical Exam

  • When applying for life insurance, most companies will require you to complete a medical exam. This usually involves meeting with a paramedical professional, such as a nurse, who will ask you about your medical history and take basic health measurements like blood pressure, pulse, height and weight.

  • The examiner may also take blood and urine samples that get sent to a lab for analysis. The insurance company uses the exam results to assess your health and medical risks. Those in poor health may pay higher premiums or be denied coverage.

  • Your medical history, including conditions like high blood pressure, high cholesterol, diabetes, heart disease, and cancer, will impact the underwriting process and premiums. The exam provides objective data to inform the insurance company’s decision.

Financial Review

  • In addition to the medical exam, insurance companies will also conduct a financial review as part of the application process. This involves checking your income, assets, debts, and credit history.

  • They want to verify information provided on the application and get a comprehensive view of your financial situation. Factors like your income, net worth, existing life insurance policies, and debts impact the amount of coverage you’re eligible for and the premiums charged.

  • Be prepared to provide documentation to support the financial information reported on your application. This may include W-2s, tax returns, bank statements, and credit reports.


  • After the medical exam and financial review, the insurance company will make a final underwriting decision on your application. They will either approve it as is, approve it with conditions like a higher premium, or deny coverage altogether.

  • The underwriter weighs all the data – your health, finances, lifestyle, family history, and other risk factors – to make this determination. Higher-risk applicants may need to go through additional screening.

  • If approved, you’ll receive a policy outlining your premium, death benefit amount, and other terms of coverage. Once you pay your first premium, your life insurance goes into effect. Some policies have a contestability period, allowing the insurer to investigate any misrepresentations on your application later on.

Ongoing Management

Once you have a life insurance policy in place, there are still a few things to keep in mind going forward:

Review Your Needs Periodically

It’s important to review your life insurance coverage every few years and after major life events. Getting married, having kids, buying a house, or retiring can all impact how much coverage you need. You may need to increase or decrease your policy amount to make sure your loved ones are sufficiently provided for.

Update Your Beneficiaries

When you first get life insurance, you name primary and contingent beneficiaries. These are the people who will receive the death benefit payout. Over time, you may need to change your beneficiaries as your relationships and family structure evolve. Getting divorced, married, or having a child are all reasons to update your beneficiaries.

Consider Policy Changes

As you get older, your insurance needs to change. Term insurance gets more expensive when you renew so you may consider switching to permanent life insurance. If you have permanent life insurance, you may want to pay it up faster or use accumulated cash value for retirement income. Work with your insurer or agent to make adjustments to keep up with your needs.

Ongoing maintenance of your insurance is important to make sure your loved ones are protected. Periodically review your policy, update beneficiaries as needed, and consider adjustments to your coverage. A little time invested routinely can ensure your family is secure financially no matter what happens.

Alternatives to Traditional Life Insurance

While traditional life insurance policies from insurance companies are the most common, some alternatives may work better depending on your situation:

Group Life Insurance

Group life insurance is a policy offered through an employer or association. The policy covers all employees or members, and premiums are often lower than buying individual insurance since the risk is spread across a group. Coverage usually ends if you leave the employer or organization. Group life can supplement an individual policy.


Annuities are insurance products that provide guaranteed income for life in exchange for an upfront investment. With a deferred annuity, you pay a lump sum or series of payments upfront and begin drawing down an income stream at a later date. With an immediate annuity, the income stream starts right away. Annuities can provide income in retirement.


Self-insuring means using your funds to cover costs that would otherwise be covered by insurance. For example, you could self-insure against life events by systematically saving and investing funds each month to create your own safety net. This takes discipline but avoids insurance premiums. Self-insurance works best for those with significant assets/net worth.

While alternatives like these exist, traditional insurance remains the simplest way to guarantee your family is protected financially in the event of your death. Most people find the peace of mind is worth the cost of premiums. Still, exploring all options is wise to find the best fit.

Leave a Comment