Key Takeaways

  • You should choose life insurance based on your long-term financial needs and goals.
  • Some factors — such as your age, gender and health — determine how much you pay for life insurance.
  • Different types of life insurance policies can be used to achieve different long-term needs and goals.
  • Multiple, independent agencies rank the customer service and financial well-being of different insurance companies.
  • There are five steps toward determining the best life insurance for you.

What Is Life Insurance?

Life insurance provides peace of mind knowing your loved ones will not inherit unwarranted financial burdens when you die.

You agree to pay premiums to an insurance company, and in exchange, the company agrees to pay your beneficiaries a lump sum if you die.

The death benefit goes to the beneficiaries named in the life insurance policy. This may be the policyholder’s heirs. Or, if the policyholder took out a life insurance policy on another party — a family member or business partner, for example — the death benefit can be paid to the policyholder.

Certain kinds of life insurance policies offer a cash value component, which can be used to supplement your income after your retirement. Riders can also allow you to use the money from your policy for long-term care if you need it later in life.

Life insurance is a key part of a well-rounded financial plan. The more financial responsibilities you take on in life, the more important life insurance can be to protect your loved ones in the event of your death. Careful consideration should be taken with a qualified advisor to choose the right type of insurance for your situation.

How Does Life Insurance Work?

The contract you sign with the insurance company requires you to make monthly premium payments to the company. In exchange, the company agrees to pay a lump sum payment for a certain amount upon your death.

When you die, the lump sum death benefit goes to your beneficiaries who can spend the money any way they choose.

The company essentially determines the amount of your premium payments based on a formula. The formula estimates your life expectancy and how much the company will earn by investing your premiums over the course of your remaining lifetime — or the term of the policy.

Different policies may use different methods or have different requirements. You may be required to take a medical exam to make sure you are in good health. You may have to pay higher premiums — or be denied coverage — if you engage in risky activities such as skydiving. There may also be limits on payouts in the event of suicide.

Types of Life Insurance

There are two primary types of life insurance — term life and permanent life insurance. Term life insurance is a policy issued over a specific period of years — typically 10, 20 or 30 years. Permanent life insurance is a policy that does not expire.

Each type may be better suited for different people’s needs and goals. Shopping around and comparing premiums can help you find the most affordable life insurance to meet your needs and goals.

Good Candidates for Term Life Insurance

Term life insurance can give peace of mind to young parents raising children. It provides a safety net for your family to cover large debts — such as mortgages — should something happen to you.

You only purchase it to cover a specific period of time — say until your kids are grown or the mortgage is paid off. But it can also apply to any stage in your life if you’ve taken on debt that would be a financial burden to your beneficiaries if you were to die before it’s paid off.

Permanent Life Insurance

There are two types of permanent life insurance — whole life and universal life. Unlike term life — which expires after the number of years in the term, permanent life continues to cover you for as long as you continue paying premiums.

Permanent life insurance includes a cash value component. This means part of your premium payments grow — tax-deferred — over time.

Permanent life insurance may be better suited for someone wanting to build cash value over time or wanting to leave behind a sum of cash for their survivors.

Term Life vs. Whole Life vs. Universal Life

While all three types of life insurance provide financial security for your loved ones in the event you should die, each has different qualities you should consider for your needs.

Comparing Term Life, Whole Life and Universal Life Insurance


  • Provides coverage for a specific number of years.

  • Once the term is over, there is no longer any coverage.
  • Premiums remain the same over your lifetime.

  • Cash value grows at a specified rate.

  • Death benefit is guaranteed.
  • Typically less expensive. 

  • Death benefit, cash value and premiums can vary.
PREMIUMS Can vary — typically cheaper than whole or universal coverage. Fixed over the lifetime of the policy, but typically more expensive than term life. Can vary over the lifetime of the policy, but typically more expensive than term life.
COVERAGE PERIOD Specific term, typically 10 to 30 years depending on the policy. Permanent lifetime coverage. Permanent lifetime coverage.
  • Death benefit provides income protection for beneficiaries.
  • Death benefit protections.Provides tax-deferred cash accumulation by building cash value.

  • Allows for tax-advantaged wealth preservation.
  • Death benefit protections.

  • Tax-advantaged wealth preservation and transfer to your heirs.

It’s possible to buy multiple life insurance policies — allowing you to achieve different goals with different types of policies. But many of these goals may be accomplished by adding riders to a basic policy or investing money elsewhere.

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Top Life Insurance Companies

There are several different ways to rank life insurance companies. When shopping for a life insurance policy, it’s important to look at the company’s history and industry ratings.

There are five different independent agencies that publish annual ratings on life insurance companies. Each agency uses pluses and minuses, or a numerical measurement to gauge the quality of the companies.

Life Insurance Rating Agencies

  • A.M. Best
  • Fitch
  • Kroll Bond Rating Agency (KBRA)
  • Moody’s
  • Standard & Poors

Each has its own rating scale and standards. They may not rate all the same companies and may come to different conclusions on any one insurance company. It’s important to compare two or more of these ratings when comparing companies.

You shouldn’t rely on what an insurance company says about its own ratings but look for the actual rating from the rating agency itself.

It can be wise to consider companies with a long history and solid financial reputations. You want a company that can weather changes in the economy since you are making a lifetime commitment when you buy life insurance.

Top 5 Largest Life Insurance Companies in the United States

(OUT OF 1,000)
Northwestern Mutual $14.27 8.93% A++ 790
New York Life $13.26 8.3% A++ 794
Metropolitan $11.47 7.18% A+ 802
Prudential $10.64 6.66% A+ 779
Mass Mutual $10.04 6.29% A++ 809

While the largest companies tend to have long, successful histories, it’s worth looking at smaller, lesser-known life insurance companies as well.

Read More: How To Use Life Insurance While Alive

How To Buy Life Insurance in 5 Steps

There are several ways to buy life insurance — and five simple steps to help you determine how to get the kind of life insurance that’s right for you.

Where To Buy Individual Life Insurance

  • Directly from a life insurance company — you can often buy insurance directly online from or through an office that represents the company exclusively (called captive agents).
  • Through an independent insurance agent — licensed professionals who sell insurance products from several different insurance companies.
  • Through an insurance broker — licensed professionals who don’t represent insurance companies but work with you to find the best policy for your needs. They do not sell policies, but work as a middleman and typically are paid by the insurance company for connecting them to you.

You may also be able to buy group insurance through your employer if your job offers it. Group policies tend to be cheaper than individual policies and you don’t have to pass medical exams to qualify. Group policies are often considered supplemental life insurance policies and you may want to consider how they work alongside a separate individual life insurance policy.

Step 1: Decide Whether You Need Life Insurance

Not everyone needs life insurance. Consider four conditions before committing to a policy:

  1. Do you have someone who depends on you financially?
  2. Will your estate have enough money to cover debts and taxes if you were to die?
  3. Will you leave behind enough money to cover your funeral and burial costs?
  4. Do you want to leave behind an inheritance or gift to charity?

If the answer to any of these questions is “yes,” then buying life insurance could be worth it to you.

Step 2: Define Your Financial Goals To Determine the Best Life Insurance for You

Lay out a clearly defined goal for how your life insurance will be applied. This will also help you determine how much life insurance you need.

If you simply want a death benefit for a short time and are looking for low premiums, you may want to consider a term life policy.

But if you want a death benefit that will be there decades from now, or a policy that can build savings to give you an extra source of income in retirement, you should consider a whole or universal life policy.

Step 3: Determine if You Want or Need Riders

Riders are add-on benefits to the basic life insurance policy you purchase. These can expand your coverage. Some may add cost to your premium.

Common Life Insurance Riders

  • Guaranteed insurability rider — allows you to buy additional coverage within a specific period without additional medical examinations.
  • Accidental death rider — typically doubles the death benefit if you die in an accident (also called a double indemnity rider).
  • Waiver of premium rider — waives your premium if you become permanently disabled.
  • Long-term care (LTC) rider — provides monthly payments to cover long-term care at a nursing home or for in-home services in the event you need it.

Step 4: Shop Around and Decide How To Pay

You’ll need to compare life insurance quotes on several different policies once you’ve decided on your goals and the type of coverage you want.

Premiums and coverage vary between different insurance companies and even within different policies offered by the same company.

Also consider whether you want to pay your annual life insurance premium all at once or in installments — such as monthly or quarterly. Finally, make sure the policy you decide on meets both your budget and financial goals.

Step 5: Tell Your Beneficiaries About the Life Insurance Policy

Make sure your beneficiaries know about the policy in case anything happens to you. Put the paperwork in a safe and secure location and make sure your loved ones can find it.

If you have specific wishes for how part or all of the death benefit is to be spent — such as donations to charity — make sure those instructions are clearly spelled out.

Read More: What Is & Isn’t Covered by Life Insurance

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How Much Does Life Insurance Cost?

The national average for a healthy 35-year-old, male non-smoker buying a $500,000, 30-year term life policy would pay $34.71 per month, according to an estimate by online insurer Quotacy.

But there are several factors that could affect the price for you. Basically, anything that may shorten your life expectancy can increase your premiums — or prevent you from buying a life insurance policy.

Factors That Affect Life Insurance Premiums

  • Age — this factors into how long you will live and pay premiums.
  • Family medical history — a history of critical or chronic illnesses in your family may also increase your premiums.
  • Gender — women typically have longer life expectancies than men.
  • Height and weight — some insurers may use your body mass index (BMI) as an indicator of your health and life expectancy.
  • Occupation and hobbies — if you have a high-risk occupation or take part in extreme sports, you may face higher premiums.
  • Smoking or non-smoking — non-smokers tend to be healthier and live longer than smokers.
  • Your medical history — poor health or chronic illnesses may increase your premiums.

Ideally, you should purchase life insurance when you are young and healthy to get the best deal, but you may be able to purchase life insurance throughout much of your lifetime.

Read More: Life Insurance Costs

How Much Life Insurance Do You Need?

Before buying a policy, you should know exactly how much life insurance you need. There are several questions you should ask yourself to get an idea of how much money your beneficiaries will need if anything happens to you.

Questions To Determine How Much Life Insurance You Need

  • What financial obligations — mortgages, auto loans, other debts — will your family inherit?
  • How much will your family’s long-term goals — college education, spouse’s retirement — will your family still have?
  • How much of the family income will disappear without you?
  • Who else besides your family depends on your income?
  • How will your family cover your potential medical, funeral and burial expenses?
  • How much can you afford to pay for life insurance?
  • How much will the family need to cover estate or other taxes?

Remember that your age, responsibilities and financial situation will change over time. Take this into account especially if you are buying life insurance to cover contingencies over several decades.

You may want to consider updating or adding to your policy in the future. You should talk to your agent, broker or other insurance professional about your options when you first buy insurance.

Read More: Strategies for Buying Life Insurance

Life Insurance Alternatives

There are two common alternatives to life insurance — annuities and self-funding.

Annuities are actually a life insurance product. Like a life insurance policy, you make monthly premiums — or fund them with a lump sum payment. The type and amount of annuity you purchase determines the future payments from the annuity.

You have the potential for guaranteed lifetime income with an annuity, leaving the money to your beneficiaries or using it to pay for long-term care should you ever need it.

Self-funding simply involves creating a savings account to put money aside for the future. The account can be structured to maximize return on your investment. But it can be complicated to make sure the money in the account goes to the beneficiaries you intend to receive it.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: April 1, 2024