Life Insurance Cost Guide

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Life insurance is a financial product designed to protect your family. It gives them a tax-free cash payment if you die while the policy is in effect.

It’s a critical part of financial security, and there are a few main reasons why you should consider buying it:

Your family can use the proceeds to replace your income in the event of an unexpected death. It protects your loved ones from falling into poverty. It can also be used to pay for final expenses, like funeral and burial costs.

It can even provide an inheritance for your family, allow them to avoid taxes, or generate a substantial gift to a charity.

These policies can also function as a strategic asset for wealth preservation. Certain types of policies generate cash value, which can be tapped to provide a loan, purchase more coverage, or offset premiums.

What Kinds of Policies are There?

There are four main types of life insurance on the market: term, permanent, blended, and group.

  • Term is by far the most common. It provides coverage for a specific period, i.e., 20 or 30 years. The premiums never change, meaning the cost stays level the entire time the policy is in force.  This type also comes with policy riders, for example letting you purchase additional options later, or giving you the right to convert the policy into permanent.
  • Permanent, also called whole life, is designed to stay in force for the rest of your life. Unlike term, permanent never expires, even if the insured develops a fatal health condition. This makes permanent policies considerably more expensive.
  • Blended policies combine elements of term and whole life. Over the course of this type, dividends are applied to convert the term component into permanent. The premiums might go up or down depending on how the company performs, and in general these types of policies become more expensive as time goes on. However, they also provide the most amount of death benefit proceeds for the least amount of money in the early years. Prices will vary depending on the type of policy.
  • Group options also deserve special mention. Usually made available through an employer, this type provides coverage for little to no out-of-pocket expense to the worker. Instead, companies usually offer it as a standard benefit, covering all employees. Check with your HR department; there’s usually no out-of-pocket expense for group policies.

What can Life Insurance do for me?

The proper products can provide financial security for you and your family in several different ways:

1. Provide for your spouse and children: payments can replace your lost income in the event of your unexpected death.

2. Pay off the mortgage: The proceeds can take care of the monthly housing payment in your absence.

3. Supplement your retirement: The cash value benefit of whole life can serve as a cushion for volatile markets.

4. Leave an inheritance: Your heirs will be grateful to the legacy you leave behind.

5. Give a large gift to a charity: If your family is already financially secure, good products can generate a sizeable gift to your charity of choice.

6. Pay for final expenses: Funerals can be expensive, but a thoughtful policy can take the burden off your loved ones.

7. Replace earned income: Some policies let you tap into the death benefit before you actually pass away.

8. Pay off debt: Certain types of debt, like for businesses, remain after your passing.

9. Take care of estate taxes: Tax-free proceeds can be used to pay the government’s estate tax bill.

10. Provide peace of mind: Most importantly, these products can provide you peace of mind that your family will be secure after you are gone.

How Much does Life Insurance Cost?

Lots of companies have online tools letting you compare prices for different types of term options, but permanent and blended products usually require working through a financial representative. To keep things simple, we researched quotes as a non-smoking 30-year old male in excellent health looking for a 20-year level term policy with a death benefit of $250,000.

  • TransAmerica provided the cheapest quote we could find at $11.83/month
  • HavenLife, which is part of MassMutual, comes in at $13.83/month.
  • State Farm would cost $18.70/month.
  • Prudential was significantly more expensive at $33.98/month.

What’s the Best Kind of Policy?

Here’s a table breaking down the components of of each type. You can consider which aspects are pros and which are cons for your situation:

Type Cost Expires Cash Value Receives a dividend
Term Less Expensive After a specific
term
No No
Permanent More expensive In force for your entire life Yes Yes
Blended Depends Depends Yes Yes
Group Less Expensive
(possibly free)
Ends with your employment No No

What Else to Consider

There’s no right answer for what type of product you should buy. Everybody’s financial situation is different, and your needs are specific to your circumstances.

Let’s start with the basics. Suppose you have a family of four, two children and a spouse. If you were to unexpectedly pass away, how much money would they need to maintain their current standard of living without making significant adjustments? The answer: anywhere from 7- to 10-times your current annual income. In that case, if you make $100,000 a year, look for an option providing a death benefit from $700,000–$1,000,000.

You can search online for life insurance calculators to figure out what’s right for you.

You don’t have to buy only one type of product. There are benefits and drawbacks to owning each type, making it common to own multiple types simultaneously. For instance, you might consider layering term products of different lengths so that, as your financial picture evolves, your benefits change, too. Or you could purchase a level term to provide coverage until retirement at age 65, a small whole life to offset funeral expenses, and some additional 10-year term to top things off in the immediate future.

One of the most important things to consider when purchasing a policy is the financial strength of the company providing it. You might pay into it for five decades before making a claim, and you should have confidence that the provider will still be in business years from now. It’s also hard to switch providers once you make a decision, so consider how easy it will be to do business with the company in the future.

In short, there are lots of different products and many different options. There’s no one-size-fits-all model.

How to get Life Insurance

If you already know exactly what type of product and how much coverage you want, then it’s time to shop around for a quote. There are lots of different sites that say they will compare prices for you, but beware of sites that are really just selling your info to their advertising partners. In the end, your rate will depend on your personal situation, like your health, family history, occupation, and so on. Depending on the amount you need, many companies offer straight-through underwriting, meaning they will insure your life as soon as you apply (or a few business days thereafter). No need for medical exams or in-person consultations.

If you are less sure about what type of product to purchase, or if you don’t know how much death benefit is right for you, then you should consider working with a financial representative. This person will help you determine the products that are the best fit for you, make sure that you fill out the right forms, and keep you updated throughout the entire process. If you purchase a large policy, the entire process might take several weeks and prove to be quite complicated. There are medical history questionnaires, health exams, phone interviews, and background checks. Companies want to make sure you are telling the truth!

Here’s a word of advice for working with professional salespeople: understand how they are compensated. They usually earn a commission for making sales, which could potentially create a conflict between what’s in your best interest and what will give them a higher paycheck. Salesmen do not have a fiduciary duty to you. They are only required to recommend products suitable for someone in your situation, which is an ambiguous requirement. We are certainly not arguing that all (or even most) salespeople have bad intentions, but only recommending that you understand the dynamics at play.

Frequently Asked Questions

- Is life insurance for me?

Buying a policy is a smart financial decision if any of the following apply to you:

Other people rely on your income for their living expenses. Most people see it as a key component of financial security for their families.

You want to preserve your wealth for heirs. Proceeds are tax-free, meaning they can be used to pass wealth from one generation to the next.

You don’t have enough savings to cover funeral expenses. Will your heirs need to use their own money for final arrangements? If so, life insurance is a good way to take of any financial considerations with your burial.

You want to build a tax-free cash cushion for retirement. Permanent products can be a smart, long-term piece of a broader retirement strategy.

- How much do I need?

Figuring out how much to buy depends entirely on your own unique circumstances. It requires asking some uncomfortable questions, specifically, “who would be financially impacted if you died tomorrow?” And, “how long would it take your family to adequately adjust for the loss of your income?” “What are the outstanding financial obligations your family would have to meet in your absence?”

If you are a single adult with no children, renting an apartment, and with no personal debt, you may not need to purchase any product at all.

If you are married, have children, own your own home, and have several loans, financial experts usually recommend taking out enough to replace 7- to 10-times your annual income. That’s generally considered enough for your family to have time to adjust its standard of living to a new reality.

If you have unique circumstances, like a child with special needs, or if you are caring for elderly parents, you might need much more coverage. There really is no one-size-fits-all answer.

- How much does life insurance cost?

The cost of products depends on how risky your life is to insure and the type of you buy.

A 60-year-old who smokes cigarettes, drinks heavily, and skydives on the weekend is much riskier than a 22-year old marathon runner who’s afraid of heights. The cost is directly tied to the underlying risks associated with the insured.

For a 30-year-old man living in Wisconsin with no prior health conditions, a 30-year level term for $500,000 usually costs $30-40/month. A whole life for the same person in the same amount will cost $160-180/month.

Think about it this way: your provider has to generate a profit. They do this by calculating how much money they are going to collect in premiums (what you pay) and how much they are going to distribute through claims (when a policy owner dies). The products are therefore priced according to risk. The shorter the term, the lower the cost. The riskier the insured, the higher the cost. It all just depends on your own situation.

- What type of policy should I buy, term or permanent?

It depends on what you want to get out of it. By far, level term products are the most common on the market today. They are easy to understand, inexpensive and provide large amounts of death benefit coverage.

Permanent life products, although less popular than level term, are still good options if you are interested in using the proceeds for more than just its death benefit. The cash value can function as an ironclad asset backed by the financial rating of the provider.

- What should I consider when naming my beneficiaries?

Make sure to name contingent and secondary beneficiaries. They will receive theproceeds in case you live longer than your primary beneficiaries.

Provide the names of specific people as opposed to simply leaving it to your estate. The proceeds will be made immediately available to your family, for example, as opposed to winding their way through a probate court process.

- What happens if I don’t make a premium payment?

If you have term and don’t make a required premium payment on time, you will typically have a 30-day grace period to catch up. If you still don’t make the payment, many companies will lapse your policy. This means the it will no longer be in force, and you will have to go through underwriting again to be covered.

Permanent life products often work differently. If you have a provision known as an “automatic premium loan,” the company will take out a loan for the premium against the policy’s cash value. You don’t necessarily have to pay the loan back, but it will ultimately come out of the death benefit in the end.

- Can I get life insurance even if I have a pre-existing medical condition?

Yes, but it might cost more. Companies consider a variety of factors when they issue a policy, including your age, occupation, and health. If you have a pre-existing health condition, a company might still issue it, but at a more expensive rate. This allows the company to appropriately price the risk associated with your coverage.

Typical cost is

$15/month

Based on a $250,000 death benefit over a 20-year term for a 30-year-old in good health