Best Life Insurance Companies
It can be overwhelming worrying about what will happen to the people who depend on you when you are gone. Without even considering the often unexpected expense of paying for your funeral and burial, what about outstanding mortgage payments, college tuition fees, and just day-to-day expenses?
Life insurance can help you effectively provide for your family when you are gone, giving them the funds to pay for necessary expenses, and still do the things you planned and dreamed of together.
But effectively leveraging life insurance to protect your loved ones relies on taking out the right policy with the right company. Considering there are hundreds of life insurance companies and thousands of policy options, it can be challenging to know where to start.
In this article, we aim to provide you with all the information you need to approach finding the right policy for you.
We have put together a list of the best life insurance companies in the US, all of which represent a reliable investment.
We have also put together a complete life insurance guide explaining what exactly it is, how it works, and the different types of policies. You’ll also find our top tips for deciding what kind of life insurance you need and how to find the best policy to meet those needs.
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Why Do You Need Life Insurance?
Life insurance is a contract between an individual and an insurance company. In return for paying a regular premium, the life insurance company agrees to pay out a death benefit to the selected beneficiaries upon the covered person’s death.
Why would you want someone to receive a payout upon your death?
Life insurance policies were originally designed to cover costly funeral expenses and provide a safety net and financial support for widows and orphans. The purpose of the policy has since expanded significantly. For example, a policy can help pay off an outstanding mortgage so the property can be left to children, or it can just be a way to leave a nest egg to loved ones.
Generally speaking, life insurance is advisable if:
- The individual has dependents that rely on them financially
- Costs associated with the person’s death, such as funeral costs, are likely to be a burden on others
- The individual has significant outstanding debt, such as a mortgage
About 60% of Americans are covered by some kind of life insurance.
Life Insurance Glossary
There are four essential terms to understand when talking about life insurance.
Premiums – The payments the policyholder makes to the insurance company
Beneficiaries – The people who will receive money when the covered person dies (Beneficiaries are most often direct family members, but they can be anyone. If you have multiple beneficiaries, you will need to decide what percentage each of them is to receive. It is also possible to name a trust as a beneficiary, which can help ensure that funds are used in the way desired.)
Death benefit – The amount of money beneficiaries will receive when the covered person dies
Rider – Additional conditions that can be added to a policy, for example, agreeing to a certain payout if the covered person is no longer able to work
Types Of Life Insurance
Life insurance is generally issued as either an individual policy or a group policy. Individual policies are personal policies that cover the individual, while group policies to be taken out by companies and similar groups to cover everyone within the community.
This article will focus on individual policies, of which there are basically two types.
Term vs Whole Life
Term Life Insurance
Term life insurance is an insurance policy that you take out for a specific period of time, usually 10, 15, 20, or 30 years. If you die during the term of the policy, it will pay out to your beneficiaries. However, if you outlive your policy, the policy has no value and you or your beneficiaries receive nothing.
This type of policy is generally used to cover a fixed-term period of risk, such as the period of a mortgage or loan. The policy can feel more like care insurance for a mortgage than traditional life insurance.
Because insurance companies don’t pay out on the majority of these policies, the companies often offer low premiums. Generally speaking, term life insurance policies can cost about a tenth of whole life insurance policies.
For example, a 30-year-old looking to secure $500,000 will pay around $3,000 a year into a whole policy but only $300 a year into a 30-year term policy.
Decreasing Term Life Insurance
Decreasing term policies work in the same way as a standard term policy, except that the death benefit that will be paid out decreases over time. This kind of policy is appropriate if the insurance is in place to protect a mortgage or loan, which will also decrease over time.
The benefit of these policies is that they are the cheapest option on the market.
Whole life insurance policies, often called permanent life insurance policies, are policies that you pay into for your whole life. As long as you keep up with your premiums, they are guaranteed to pay out after your death.
Traditional whole life insurance is the simplest. You agree to a fixed rate with the insurer, pay your premium for the duration of your life, and your beneficiaries receive the agreed sum on your death.
While this is a secure policy, it can be problematic if you pay into the policy for a very long period of time.
Imagine a 30-year-old woman who pays into one for 50 years. If she dies at age 80, she has paid $150,000 into the life insurance fund over the years, which has been invested to produce the $500,000 payout.If she invested in a low risk 5% fund, she could get the same return on investment in half the time that she has been paying into her life insurance.
In addition, the amount of money that she thought would be appropriate to cover expenses 50 years ago might not pay for very much today’s money.
That is not to say that traditional whole life insurance policies are not good policies. They do cover you for the unexpected. But while it is ideal for covering end-of-life expenses like funeral expenses and inheritance tax, it is not always the best way to invest to leave a legacy.
The following policies are a variation of whole life insurance.
Universal Life Insurance
Universal life insurance is a form of whole life insurance, but it adds flexibility by matching a standard whole policy with an investment account.
While a portion of your premium goes towards your standard life insurance, some of it also goes into a cash-value account. You own this money, and you can borrow or withdraw it if needed. But if you don’t touch it, the money goes to your beneficiaries on your death.
This can be a good approach if paying your insurance premiums is leaving you worried that you might fall short elsewhere. In exchange for paying a slightly higher premium, you get the flexibility that you can withdraw money if you need it.
However, it should not be treated as an investment, or example for cash that you might withdraw on retirement, as management fees will be much higher than on a standard savings account.
Variable Universal Life
A variable universal policy is the same as a universal policy, except that the money in your cash-value account gets invested on your behalf.
Much like a mutual fund, you decide the level of risk that you are willing to take, and then the life insurance company invests the money on your behalf.
It is a risk, as while you might significantly increase your cash value, you can also lose part of your investment. And again, you face the same problem that management fees are much higher than you will find with other investment accounts.
This is a low payment, low payout version of the traditional whole policy While the death benefit can be used for anything (as is the case with all life insurance policies), it is usually designed to cover immediate expenses such as outstanding medical bills and funeral costs.
The average funeral costs around $10,000, and our 30-year-old woman could expect to pay around $15 a month for this coverage. So, if she lives for 50 years, she will have paid about $9,000 in premiums.
Final expense policies are generally low risk, so the final payout often isn’t much more than you have invested. If you just want to ensure that you have enough put aside for your family to pay for essential expenses, that is great. But if you want to grow your investment, you may want to look for a higher risk policy or other form in investment.
Life Insurance For Couples
Many couples that have joint finances and responsibilities also look at investing in life insurance jointly. There are policies available that allow you to cover two people on a single premium.
When it comes to the death benefit, you have two options.
Joint (First-To-Die) Life Insurance
The first way is a “first-to-die” policy, which is usually called a joint policy. It pays out to the surviving partner when the first one dies.
This is not necessarily recommended over getting two separate life insurance policies. It does not take into account a difference in income between the two spouses. Also, the surviving partner will probably still need a policy of their own when they die.
Survivorship (Second-To-Die) Life Insurance
The other way to approach a joint policy is a “second-to-die” option, called a survivorship policy. This policy pays out only when the second partner in a relationship dies.
This type of policy is generally taken out to cover inheritance tax when assets pass from the couple to their children.
Term vs Whole Life Pros And Cons
These are the most important differences between term and whole life insurance policies that are worth considering when deciding which is right for you.
The first and most obvious difference between the two policies is how much they cost. As seen in our example of a 30-year-old woman seeking $a 500,000 policy, her whole insurance policy will cost her $3,750 per year, while a 30-year term policy can cost $300 per year. So she would be paying more than 10 times as much for a whole policy.
Security Of Investment
But, when it comes to the security of the investment, whole life insurance policies are better. With a whole life policy, it is guaranteed to pay out, so you get something in return for your investment. With a term policy, if you outlive your investment, you may receive nothing, so all the money you invest over 10, 20, or 30 years can be lost.
Of course, term life insurance is the kind of policy you pay into hoping that it will never be drawn on, and that is why the premiums are so much cheaper.
Whole life insurance policies are also more flexible. With a term policy, once you have made your policy, it is pretty much set in stone. You can sometimes convert to a whole policy for a big hike in your premiums, and it is not really that different from taking out a new policy.
With a whole policy, you do have options. For example, you can get an investment policy that sees the premium your beneficiaries will receive grow over time. This can be important for long-term policies considering how quickly the cost of living increases.
For example, in 2016, the average car cost $25,500, while 30 years earlier, in 1986, it cost only $12,660.
You also have the potential flexibility of being able to borrow from your investment. While this can be a lifesaver in times of financial trouble, older people can also do this to improve the quality of their lives when they are no longer concerned with looking after their dependents.
What’s Not Covered
Several causes of death are not covered by standard life insurance policies (as anyone who has ever watched television will know). Generally excluded are:
- Suicide or death as a result of hazardous activities
- Death due to involvement in criminal activities
- Death due to natural disaster
- Death in childbirth
This last exclusion in particular seems strange, as it feels like a time when loved ones will need financial support the most. If you do want to include any of these causes of death in your policy, for example for a woman of childbearing age or someone with a dangerous job, they can be included using riders, but expect premiums to rise.
Also, beneficiaries cannot receive death benefits if they are found to have killed the policyholder.
How To Choose The Right Policy
Choosing the right policy depends on what you need and your budget, so there is no easy answer to the question of what policy is right for you.
However, it is worth bearing in mind that you can have more than one policy, so you don’t need to put all of your eggs in one basket.
A whole policy, whether traditional, universal, or variable, is best for covering things that relate to the end of your life, no matter when that will be. It would cover things like your funeral costs, medical bills, and funds to cover inheritance tax.
However, life insurance is not necessarily the best way to accumulate funds for an inheritance. Other types of investment can accumulate those funds faster.
Of course, the benefit of life insurance is that it is not impacted by inheritance tax, whereas a cash gift would be. But this only becomes a problem when considering relatively large inheritances. New Jersey has the lowest estate tax exemption level as $675,000. In Hawaii and Delaware, the estate tax doesn’t apply until your estate is worth more than $5.4 million. You can see your state’s estate tax level here.
So, when choosing whether to invest in whole life insurance to leave a legacy, you need to look at the tax implications, and as well as comparing different life insurance policies, look at other potential investments.
You can then complement your whole policy with much cheaper term life insurance policies to cover periods of risk. For example, you could get term life insurance to cover the cost and period of your mortgage or the cost and period of another important debt.
Similarly, you could have a term policy to cover your income until retirement or cover the funds that you will need to put your kids through university until they reach a certain age.
These term life insurance funds won’t pay out unless you actually die during the term period, but you won’t be spending much on premiums and the theory is that you will not need the money outside of that term.
Making A Claim
For beneficiaries to make a claim on the policy they will have to contact the insurance company, which is unlikely to be aware of the covered person’s death.
They should contact the insurance company with valid identification and a certified copy of the death certificate. As long as there are no question marks around the payout, the death benefit is usually delivered within a week.
For this reason, it is important to advise beneficiaries about the policy, either in person or in a last will and testament.
What Is Not Covered By Life Insurance?
Most life insurance policies will exclude certain forms of death from their coverage. These commonly include death due to self-inflicted injuries or hazardous activities and death due to sexually transmitted diseases. Death by these causes can be included in the policy by using a rider but will raise premiums.
How Often Should You Change Life Insurance?
All insurance policies should be reviewed on an annual basis and assessed in light of changed circumstances such as the birth of a child, divorce, a change in financial situation, and so forth. You should always reassess whether your coverage meets your needs.
Can You Have More Than One Policy?
You can have multiple life insurance policies. It is not uncommon to have a permanent policy to cover end of life costs and a shorter-term policy to cover more immediate needs, such as a mortgage.
While it is not always pleasant to contemplate our own mortality, we do need to consider how our death will affect those we care about. While money is only a small part of that equation, it is not nice to think of leaving bereft loved ones struggling financially as well.
Investing in life insurance is a way you can pay a little bit now to ensure that your family has a financial safety net when you do pass on.
The key to choosing the right life insurance is realistically assessing what kind of financial gap you want to fill with the payout and then finding a reputable life insurance cover that offers a policy that meets your needs.