What is life insurance, and how does it work?
Life insurance is a crucial part of a complete financial plan. Learn how it works, the different types and whether you need coverage.
You’ve probably heard that you need life insurance but aren’t quite sure what it is, what the pros and cons are, or where to start. Luckily, you’re in the right place.
Life insurance is an important aspect of a complete financial plan — up there with emergency savings, retirement contributions and paying off debt. For most people, helping to financially protect loved ones in the event of premature death is of crucial importance. And, the best part? It doesn’t have to be expensive.
In this article:
How does life insurance work?
A life insurance policy is a contract with an insurance company that helps financially protect your family if you pass away. You pay a monthly life insurance premium, and, if you pass away while coverage is in place, the life insurance company pays a lump sum (called a death benefit) to the beneficiary or beneficiaries you designate.
Depending on how your beneficiaries choose to use it, the life insurance policy’s death benefit can help them pay for things like funeral costs, help meet the costs of day-to-day living or be put toward future expenses.
Do I need life insurance?
Most likely. Most of us need this type of financial protection.
The majority of adults need life insurance to help pay for debts like a mortgage or student loan, help replace lost income if you’re married or have children, to offer some stability to your company if you’re a business owner, or to provide a safety net for other dependents. It can also be a nice thing to help relieve financial stress on your loved ones during an already difficult time.
The question you have to ask yourself is whether or not you have people who rely on you financially. If the answer is yes, then purchasing life insurance is a good idea.
Common types of life insurance
Three common types of life insurance are term, whole and universal.
Term life insurance
A term life insurance policy provides coverage over a certain period of time (the coverage term), usually 10, 15, 20, 25, or 30 years, for a fixed monthly premium. If you pass away after this period and you have not extended your coverage, your beneficiaries will not receive your death benefit. This type of policy is usually an affordable option and provides a layer of financial protection in the years it may most be needed — while raising children, or for the number of years of your mortgage obligation, for example.
Whole life insurance
Whole life insurance is a type of permanent insurance, which means that it provides coverage for life, no matter how long you live, as long as you make your life insurance premium payments on time. This insurance product also includes a growing cash value on a tax-deferred basis that can increase your beneficiary’s ultimate payout over time and provide a cash value amount you can borrow against.
Bear in mind, however, that access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance that the policy will lapse, and may result in a tax liability if the policy terminates before you die. Permanent life insurance policies are significantly more expensive than term life insurance, but the additional features can appeal to those who foresee a need for coverage over their entire lifetime.
Universal life insurance
Like whole life, universal life insurance is another type of permanent insurance, meaning it is designed to last one’s entire lifetime and offers flexibility so that you can, within certain limits, decide how much premium to pay (as long as there is enough value in your policy to cover the cost of insurance and administrative costs).
Sometimes known as “adjustable life insurance,” you have the choice between a fixed death benefit, like term life, or an increasing one. You can also change premium amounts, adjust your coverage amount, or use the cash value to help pay your life insurance premiums.
Which type of life insurance is right for me?
For people looking to put an adequate amount of coverage in place affordably, term life insurance is often a sound choice. Term life insurance offers you options so you can choose a coverage term length (typically 10, 15, 20, 25 or 30 years) for when you may need it the most – like while your children are young or while you are still paying off your home and saving for retirement.
You might be surprised to learn, for example, that a 35-year-old man in excellent health could get a 20-year, $500,000 Haven Term policy, issued by MassMutual or its subsidiary, C.M. Life, starting at $20.72 per month.
More permanent life insurance policies — like whole and universal — can be expensive for a policyholder or may result in people purchasing less coverage in order for the premium pricing to fit into their budget. However, for those who want lifetime coverage and can afford higher life insurance premiums, these cash value policies can accumulate money that can be used however you want.
How much life insurance do I need?
A common rule-of-thumb is that you should have term life insurance coverage equal to 5 to 10 times your annual salary. But while that is a good starting point, the exact amount of life insurance coverage you need depends on your personal circumstances.
If you have a large mortgage or you want to provide for your kids’ college education, you might need a larger policy, and perhaps a longer term. Alternatively, if you’re a stay-at-home parent, a multiple of your annual salary may not be enough. You’ll need to consider what expenses your spouse might need to pay in your absence, like childcare and home upkeep.
However, these answers only tackle the coverage amount. If you are considering term life insurance, the duration for your coverage term is another consideration.
Typically, a prospective policyholder will select a term for the time period when they think they’ll need coverage the most, such as until your children are out of the house, when large debts will be paid off, or until you plan to be self-insured through retirement and other savings.
The easiest way to help make sure you have the right amount of coverage for you is to use an online life insurance calculator to get a personalized estimate.
How much does life insurance cost?
Life insurance policies are priced based on the amount of coverage you want, type of coverage, the length of that coverage and what the insurance company sees as your risk of death during the coverage period. Usually, a term life policy will be the most affordable option.
For example, a 35-year-old woman in excellent health can buy a 30-year, $500,000 Haven Term policy starting at $35.40 per month. A 20-year term for that same woman starts at $20.32 per month. You can get a sample quote for your coverage needs here.
When determining your pricing, one of the most important factors is your current health. In addition to your current health, your medical history, family medical history, lifestyle choices and income are also considered. Smokers, for instance, will pay significantly more for life insurance than non-smokers. People with very high-risk hobbies, like BASE jumping, might not be able to get coverage at all.
Once you are approved for coverage, you must make regular payments to keep your contract active. Health issues that arise after your policy is in effect can’t change the price or terms of your policy.
Remember: The best life insurance pricing is usually achieved the younger and healthier you are. So, if you know you need coverage, the best time to buy it is now. Plus, today’s life insurance is cheaper than ever before.
How to get life insurance
Applying for and purchasing dependable term life insurance can be very simple. In fact, you can apply online and, if approved, start coverage today with solutions like ours at Haven Life.
You’ll fill out a brief form about you, including your gender, age, weight, whether or not you smoke and some other medical history. Then, you’ll receive an instant decision on if you’re eligible. In some cases, you will not need to take a medical exam, so you could have your final rate and coverage started immediately.
(Keep in mind: It’s very important to be honest when completing the application. The issuance of the policy or payment of benefits may depend upon the answers given in the application and their truthfulness.)
If a medical exam is needed, you can take it at a time and place of your convenience. At Haven Life, we aim to make taking a medical exam as simple as possible. A trained paramedic will come to a place of your choosing. You can expect him or her to review your family’s medical history, measure your blood pressure, height and weight, and collect blood and urine samples.
Life insurance for your peace of mind
With an intangible product like life insurance, it’s easy to question if it’s worth it.
While there’s no monetary value you can put on peace of mind, for many, knowing you have financial protection in place for your family is everything.
About Chelsea Brennan
Chelsea Brennan is the founder of Smart Money Mamas, a personal finance blog that focuses on family finance, investing, and reducing money stress. Chelsea is an ex-hedge fund investor whose work has appeared in a wide array of publications, including Forbes, Business Insider, and more.
Read more by Chelsea Brennan
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Read more
Our disclosures
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
Read our disclosures
You might also like
Get our most-read stories, twice a month
Oh my gosh. I am finally writing a review after a week of daily begging from Haven Life. Pretty good experience overall but it is life insurance. So a bit of a pain and not very transparent as to what is affecting rates. I got a good policy approved in under a month which is great. My rate was surprisingly high. I have several mild health issues but taken together they probably provide cover to rate my higher risk. I am pretty sure I could have gotten (and may still) a better rate if I had gone the traditional route. But that is even more invasive and time consuming. I am giving a 3 because of rate and lack of reasons for rate and because – it is life insurance – which in my experience is never very pleasant.
it takes some time for approval. It took almost 30 days from the date lab work was drawn before I got approval.
I filled out the application on Sunday afternoon, and was fully approved before noon on Monday. I was initially told that I would need a medical exam, but in the process, it was determined that I didn’t actually need a medical exam to be approved. So, this was a welcome surprise. Also, the initial quote I was given (before completing the application) was only about $15 off from the final approved premium. The Haven Team communicated with me regularly thoughout the application process and promptly answered my questions. Overall, this was an extremely smooth, efficient, and pleasant experience. My family and I are thrilled to have this affordable policy that will last 30 years, onto my 70s. Thank you, Haven!
Easy application process and great rates compared to other insurance companies I considered. The health screening portion was a bit long and I kept getting follow up questions for medical history related to my wife and not myself.
Easy to apply I just got approved last week so haven’t had to make any claims or anything like that (as this is a life insurance policy, guess that’s a good thing lol). But what put Haven Life at the top of my list was their intuitive website and easy application process. All done online and then the physical exam was done in my home! Very easy process.
