Life insurance, explained plainly
Life insurance pays money to the people you name when you die. The right kind and amount depend on who relies on you, for how long, and what you can comfortably pay. Here are the main types, with the tradeoffs first.
A few terms first
- Death benefit
- The amount the insurer pays when the insured person dies.
- Premium
- What you pay the insurer to keep the policy in force, usually monthly or yearly.
- Beneficiary
- The person, trust or organization you name to receive the death benefit.
- Underwriting
- How the insurer decides whether to cover you and at what price, based on your age, health and other factors.
- Cash value
- An amount that builds inside some permanent policies. You can borrow against it or withdraw it, with conditions and costs.
How much life insurance do you need?
One common starting point is the DIME method. It adds up four things your family would need to cover if you died:
- Debt, other than the mortgage, plus final costs.
- Income: how much of your income your family would need, for how many years.
- Mortgage: the balance left on your home.
- Education: what you want set aside for your children.
Then you subtract what you already have, such as existing coverage and savings. The calculator below shows every input and the math. It stores nothing and asks for no contact details. It is a starting point for a conversation, not a quote.
Life insurance needs calculator (DIME)
Educational estimate, not a quote.
DIME adds up Debt, Income to replace, the Mortgage and Education costs, then subtracts coverage and money you already have. Everything stays on this page; nothing is saved or sent.
How the estimate adds up
| D: Debts | $0 |
|---|---|
| I: Income $0 × 0 years | $0 |
| M: Mortgage | $0 |
| E: Education | $0 |
| Total needs (D + I + M + E) | $0 |
| Minus coverage already in place | $0 |
| Minus money set aside | $0 |
| Estimated coverage need | $0 |
Enter your numbers above to see an estimate.
Educational estimate, not a quote. DIME is a rule of thumb. It leaves out things like inflation, taxes and Social Security survivor benefits, and it says nothing about which kind of coverage fits. A licensed agent can walk through your actual situation with you.
Term life insurance
Term life insurance covers you for a set number of years, the term. Common terms run 10, 20 or 30 years. If you die during the term, your beneficiaries receive the death benefit. If you outlive it, the coverage ends and nothing is paid.
The tradeoffs:
- It builds no cash value. When the term ends, you have nothing to show for the premiums except the years of protection.
- Renewing after the term, if allowed, usually costs much more, because you are older.
- If your health changes, buying new coverage later may be expensive or unavailable.
What you get:
- More death benefit for each premium dollar than permanent coverage, for the years you choose.
- A premium that usually stays level for the whole term.
- On many policies, a conversion option: the right to switch to a permanent policy without new health questions, within a set window.
Term often fits when the need has an end date: children growing up, a mortgage being paid down, or years of income until retirement.
Permanent life insurance
Permanent life insurance is designed to last your whole life, as long as premiums are paid as required. Most permanent policies also have cash value.
The tradeoffs:
- For the same death benefit, premiums are much higher than term, especially in the early years.
- Policies have internal costs and often surrender charges in the early years. Cancelling early can mean getting back far less than you paid.
- Loans and withdrawals from cash value reduce the death benefit. Unpaid loans can cause a policy to lapse, which can also create a tax bill.
- They are more complex. You should understand exactly what is guaranteed and what is not before you buy.
Whole life
Whole life has a level premium and a death benefit for life. The cash value builds on a schedule set out in the policy. Some whole life policies may also pay dividends, which are not guaranteed.
Universal life
Universal life gives you more flexibility over how much and when you pay. The insurer credits interest to the cash value and deducts the cost of insurance and other charges from it. That flexibility cuts both ways: if too little is paid in, or credited interest is lower than expected, the policy can lapse unless you pay more. Some universal life policies are built mainly for a lifetime death benefit with little cash value. Others, including indexed universal life, credit interest using a market index formula with caps and other limits, similar to the limits on fixed indexed annuities.
What permanent coverage can do: provide a death benefit no matter when you die, which can matter for final costs, leaving money to heirs, funding a trust your attorney sets up, or a lifelong dependent.
We describe permanent policies by what the contract guarantees. We do not sell them on projected cash value growth, and you should be wary of anyone who leads with that.
Final expense insurance
Final expense insurance is a small whole life policy meant to cover funeral costs, medical bills and other expenses at the end of life. It is usually bought by people later in life.
The tradeoffs:
- Per dollar of coverage, it costs more than a larger, fully underwritten policy would for a healthy person.
- Guaranteed issue policies ask no health questions, but usually have a waiting period, often the first two or three years, during which a death from illness pays back only the premiums plus some interest rather than the full benefit.
- The death benefit is small. It is meant for final costs, not to replace income.
What you get:
- Coverage that lasts for life with a level premium.
- Simplified issue options that ask health questions but require no medical exam, and can pay the full benefit from the start if you qualify.
- Money your family can use quickly, without waiting on an estate to settle.
Mortgage protection
"Mortgage protection" is not a special kind of insurance. It is usually a term life policy sized and timed to your mortgage, so your family could pay off or keep paying the home loan if you die.
Some points that are easy to miss:
- Who gets paid matters. A personal term policy pays your beneficiaries, and they decide how to use it. Mortgage life insurance offered through a lender typically pays the lender directly, and its benefit often shrinks as your balance does.
- Some term policies offer living benefits, riders that let you use part of the death benefit early for certain serious illnesses. These riders have their own rules and can reduce what your family receives.
- Consider the whole picture. Your family may need more than the mortgage balance. The calculator above helps you see the full amount.
If you have received mail urging you to respond about mortgage protection, it is usually a marketing piece, not a notice from your lender. You are under no deadline.
Questions to ask any agent
- Why this type of policy, and not term (or not permanent)?
- What part of what you are showing me is guaranteed, and what is not?
- What happens if I miss a payment, or want to pay less later?
- Are there surrender charges? For how many years?
- Does this term policy have a conversion option? Until what age or year?
- Is there a waiting period before the full death benefit is paid?
- What do you earn if I buy this?
- What is the insurer's financial strength rating, stated in full, and as of what date?
We answer these in writing, alongside side-by-side options. Before you apply, also check who you name as beneficiary. Our estate coordination page explains why.
Questions are free.
Book a 20-minute conversation, or send us a question by email. No cost, no obligation, and we never sell your information.