Not everyone needs life insurance. In general, life insurance is a good idea if you have family or others who rely on you financially. To decide the amount that’s right for you, consider your debts, the amount of income your family must replace, and whether they’ll have bills or other expenses.

 

Your life insurance company will make payments after your death to the person you name in your policy. This person is called your beneficiary. You can name more than one beneficiary. Your beneficiaries can use the money to pay bills and living expenses, pay off debts, pay for college, and other things. Some types of life insurance also build savings you can use during your lifetime.

 

Learn more: Do you need life insurance? | Watch: Life insurance in one minute

 

How do I get life insurance?

 

You can buy life insurance from an insurance company, agent, or broker. Brokers sell insurance for multiple companies.

 

Insurance companies use a process called underwriting to decide whether to sell you a policy. This often includes passing a medical exam and answering questions about your health, job, and habits. A company can refuse to sell you a policy if it considers you a high risk because of your health or other reasons.

 

Some employers and groups – like churches, unions, and other associations – offer group life insurance to their employees and members. The underwriting criteria for group life insurance isn’t as strict. You usually don’t have to answer questions about your health. As a result, you might be able to get group life insurance even if you aren’t able to buy directly from an insurance company.

 

How much does life insurance cost?

 

The cost depends on your age, health, and risk factors. They’re usually lower for younger people. A company can charge you more if you have health conditions, smoke, or have risky hobbies like skydiving or rock climbing.

 

Your premium will also depend on other things, including the amount of coverage and policy features you choose.

 

For group policies, risk is based on the whole group, not on one person. The cost is usually cheaper than for a policy you buy directly from an insurance company.

 

Learn more: Retirement ahead? Think about your insurance.

 

Types of life insurance

 

There are two main types of life insurance: term life 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 for one year, or anywhere from five to 30 years or longer. You choose the length of the term. Term life policies pay a lump sum, called a death benefit, to your beneficiaries if you die during the policy’s term. The policy ends at the end of the term, unless you pay to extend it.

 

Term policies aren’t meant to provide coverage for your entire life. Most people who buy term life policies want coverage for only a period of time, such as while they’re raising a family or have children in college.

 

Premiums will stay the same for the entire term. They’ll go up if you renew at the end of the term. This is because your new premium will be based on your age when you renew, not when you originally bought the policy. To help avoid higher premiums later, consider buying a policy with a longer term.

 

Most companies offer term life insurance only up to a certain age, usually 70 or 80.

 

Key features of term life policies

 

The two most common features of term life policies are convertibility and renewability. They make it easier to get a different type of policy or keep the one you have.

 

Convertibility lets you exchange your term policy for a permanent life policy without having to take a medical exam or answer questions about your health. This can be helpful if your health gets worse after you buy a term policy. Converting a policy will raise your premiums. Companies usually allow you to convert term life policies only for a time, typically until you turn 65.

 

Renewability lets you extend your policy for additional terms, regardless of your health and without having to take a medical exam.

 

What is permanent life insurance?

 

Some permanent life insurance policies let you build savings over time. You can withdraw from, invest, or borrow against these savings. You can also use it to pay premiums.

 

A portion of each of your premiums is put into an account, known as the cash value. The cash value grows at either a fixed or variable interest rate. (Fixed means the interest rate never changes and variable means it can.) Some policies tie the growth to indexes, such as the S&P 500, or to sub-accounts you choose. The sub-accounts are invested in stocks, bonds, or both. Your cash value could go up or down, depending on the performance of your sub-accounts.

 

It takes a policy years to build a cash value. You might have to pay a surrender fee if you withdraw the money early. And if you withdraw more money than you paid in premiums, you’ll probably have to pay taxes on it. If you withdraw the entire cash value, the company might cancel your policy. If that happens, the coverage will end, and it could affect your taxes.

 

Premiums for permanent life insurance are higher than for term life. That’s because of the savings feature and because you're buying coverage for a longer period.

 

You might want to talk to a financial adviser before buying permanent life insurance.

 

Types of permanent life insurance

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The two most common types of permanent life insurance are whole-life insurance and universal life insurance.

 

Whole-life insurance stays in effect for your entire life unless you cash the policy in or stop paying premiums.

 

Some whole-life policies might pay out each year (called a dividend). You can get the dividend in cash, add it to your policy's cash value, or use it to pay premiums. Dividends aren't guaranteed. Your dividend could be lower than the company’s projection. Before you buy a policy, ask the company for a history of its projected dividends versus paid dividends.

 

Universal life insurance stays in effect until the maturity date, which is usually age 95 or 100, as long as you have $1 or more in cash value. At the maturity date, coverage ends and you get the cash value.

 

Universal life insurance is more flexible than whole life. You can change the amount of your premiums and death benefit. But any changes you make could affect how long your coverage lasts. If your premiums are lower than the cost of insurance, the difference is taken from the cash value. If the cash value reaches zero, your policy could lapse.

 

The company will send you a report each year showing your cash value and how long the policy might last. The estimate is based on the cash value amount, the cost of insurance, and other factors. Review it carefully. You might need to pay more in premiums to keep the policy in effect until the maturity date.

 

Most universal life policies earn a guaranteed minimum interest rate on the cash value. Variable universal life policies depend on the performance of the sub-accounts you choose. Agents who sell variable life insurance in Texas must have a federal securities license and a state insurance license.

 

Some universal life policies have a no-lapse guarantee. If your premium payments aren’t enough to cover the cost of insurance, the no-lapse guarantee keeps the policy in effect. You must pay your premiums on time for the guarantee to apply.

 

Watch: Universal life: Your policy may be evaporating