No one really wants to think about life insurance, but, at some point — maybe around 1.5 kids and a dog — you invariably will. That’s because life insurance is important: It provides financial cover to your dependents in the wake of your untimely death and provides you with some valuable peace of mind.
But if you’ve spent your life ignoring the need to insure it, well, there’s a good chance you have no idea what type of policy you buy. Here are some insights for figuring the right coverage out.
Life Insurance Basics
There are two basic types of life insurance: term life insurance and whole life insurance. Term life insurance covers you for a set period, ideally while you have dependents that rely on your income. If you die during that time period of time, those dependents receive the policy’s death benefit, an untaxed, lump sum they can use to cover expenses your salary previously paid.
Whole life insurance, conversely, covers you for your whole life (so long as you’re paying your premiums, at least). Your dependents still get the death benefit when you die, but the policy also has what’s known as a cash value component. That’s essentially an interest-earning savings account funded by a percentage of your premiums.
If your eyes start to glaze over at “cash value component,” no need to stress. You’re probably better off buying term life insurance, anyway. Whole life insurance might sound like a good deal (it never expires and earns interest!), but it’s complicated and, more notably, expensive.
Whole life can be useful if you have a high net worth and maxed out other tax-deferred accounts. Otherwise, you’ll get more coverage at a much cheaper rate with a term life insurance policy.
How Much Life Insurance Do I Need?
Some experts suggest purchasing five to ten times your income in life insurance. However, Policygenius recommends using a needs-based approach to determine the right amount of coverage. That means you’ll need to consider your age, salary, current savings and major financial obligations. Those obligations run the gamut, but include child care, income replacement (the cost of your monthly bills, for starters), current debts, funeral expenses and, even, the cost of sending your kids to college.
While everyone’s situation is going to be different, it’s generally a good idea to buy term life insurance that lasts at least five years. That’s because the younger you are, the lower your rates — and premiums rise whenever a policy expires and someone decides to renew it.
Picking a Life Insurer
There are several ways to vet a life insurance company. J.D. Power ranks major insurers via customer satisfaction surveys. The Better Business Bureau provides information about customer complaints and A.M. Best rates insurance companies by their financial solvency. You can also look to a company’s market share to see how many customers they’re serving.
Just remember, each insurer’s underwriting criteria is different. Some life insurance companies are more accommodating to smokers, for instance, while others offer more favorable rates to people with high cholesterol. So, no matter what type of policy and how much coverage you decide to buy, it’s important to shop around. At the end of the day, the best life insurance company for you is the one that gives you the best deal based on your personal history.