How much life insurance do I need?

The best approach here is to total your current and future obligations (mortgage, loan debt, college tuition, etc.) and subtract your liquid assets (the amount of money in your savings and retirement accounts); the result is how much insurance you’ll likely need. Want an even simpler approach? A common rule of thumb is to use a multiplier (10 to 15 times) of your annual salary. If you make $100,000 a year, for example, you’ll need a minimum of $1 million in coverage.

Are life insurance proceeds taxable?

In general, you aren’t required to report life insurance proceeds to the IRS (meaning they’re tax-free). Any interest received is taxable, however, and should be reported accordingly.

How long does it take to receive a life insurance payout?

While exact timing varies, it generally takes 14 to 60 days after your insurance carrier receives a death claim to receive a payout.

When should I buy life insurance?

While it’s generally smart to buy life insurance when you’re in your 30s (as policies are less expensive for young, healthy individuals), personal circumstances also come into play here. For example, if you own a home, are married, and/or have kids, life insurance quickly becomes a necessity.

Should I Buy Term Life or Permanent Life Insurance?

If loved ones depend on you for financial support, it’s imperative you properly prepare for corresponding repercussions should you face a terminal, critical, or chronic illness or pass away. Though life insurance provides one of the easiest ways to accomplish this, choosing the right type for you is a challenging task—especially since the marketplace offers a significant number of policy options and countless features therein. In this post, we’ll review your life insurance options to help you decide which is the best fit overall.

Types of life insurance

Life insurance falls into two primary categories: “term” and “permanent.”

Term life insurance

Term life insurance is the simplest, most affordable form of life insurance, lasting for a specific amount of time—often up to 30 years—and typically paying designated beneficiaries only if you pass away during this term (meaning they won’t receive any death benefits if you outlive the policy). In this case, the death benefit is paid out as a lump sum or an annuity (often monthly). According to recent Policygenius.com data, term life policies account for 40% of all life insurance policies purchased.

Permanent life insurance

Alternatively, permanent life insurance is an umbrella term for life insurance policies that don’t expire and thus pay out regardless of when you pass. They often also feature a savings component—funded by a portion of your premiums—that allows you to build or “accrue” cash value and access funds while you’re still alive. Permanent life insurance policies are generally much more expensive than their term counterparts due to the aforementioned features.

Types of term life insurance

Term life insurance often comes in various forms. Three of the most common include level premium, increasing term, and decreasing term. Here is an overview of each…

Level term life insurance

Premium payments remain fixed (or "level") for the entire policy term—typically 10, 20, or 30 years—in a level term life insurance policy, meaning the amount you pay each month or year doesn’t increase as you age or the policy progresses. If the insured person dies during the term, the policy pays a guaranteed death benefit to beneficiaries. If the term expires and the insured is still living, meanwhile, coverage ends—usually with no payout or cash value.

Decreasing term life insurance

A decreasing term policy is a type of term life insurance where the death benefit gradually decreases over the life of the policy—usually in regular intervals—while the premium typically remains the same. This is often used to cover financial obligations that reduce over time (e.g., a mortgage or other loans) to ensure the payout matches the outstanding debt. Decreasing term life insurance policy premiums are often lower than those for a level term policy.

Increasing term life insurance

An increasing term policy is a type of term life insurance in which the death benefit increases over time—typically per a predetermined rate or in line with inflation—though premiums may also rise as coverage grows. These policies are designed to provide greater financial protection per expectations regarding future needs or costs (e.g., inflation or growing family expenses). Increasing term life insurance policy premiums are often higher than those for a level term policy.

Types of permanent life insurance

Permanent life insurance features several options spanning whole life, universal life, variable life, and variable universal life insurance policies. Let’s dig into each one…

Whole life insurance

Whole life is the most common type of permanent life insurance, offering a guaranteed death benefit that’s paid out no matter when you die and premiums that stay the same over time—meaning you’ll pay the same amount month over month. Whole life policies also boast a cash value component (funded from a portion of premium payments) known to earn a fixed interest rate that grows on a tax-deferred basis; so you won’t pay income taxes on the growth of your cash value until you make a withdrawal.

Universal life insurance

Universal life policies (also called “adjustable life insurance”) are more flexible than whole life policies since they allow you to raise or lower your premium payments within specific limits and adjust your death benefit as your needs change. You can sometimes use money saved with the policy’s savings component to pay your premiums, for example, provided enough is available. You can also lower your premiums by reducing your death benefit or increase your benefit by paying higher premiums—meaning you may not need to buy a brand-new policy if your needs change. Universal life insurance is often less expensive than whole life coverage, the savings portion of these policies typically earning a money market rate of interest (not guaranteed).

Indexed universal life insurance

An indexed universal life insurance policy mimics a universal life policy, the main difference being the fixed money market interest rate and policy’s cash value changing based on stock market index performance (e.g., the S&P 500 orNASDAQ 100).

Guaranteed universal life insurance (GUL)

Guaranteed universal life insurance (GUL) policies behave similarly to term policies in that the term ends whenever the policy matures—but they do allow you to select coverage up to any specified age rather than per a set term of 15, 20, or 30 years. While GUL policies generally offer a cash value component, they aren’t designed to build cash value and therefore won’t generate enough of a return to serve as a worthwhile savings option. GUL policies are thus typically the most cost-effective form of permanent life insurance.

Variable life insurance

Variable life insurance policies resemble whole life policies but differ in that policyholders can decide how to invest the cash value component of the policy. A variety of options—including stocks, bonds, and money market mutual funds—can help increase (or reduce) the value of the savings component within your policy.

Variable universal life insurance

With variable universal life insurance, meanwhile, you’ll enjoy the features of both a variable and universal life policy (as the name implies): choosing how to invest the cash value in your account, with premiums and death benefits that can fluctuate

How much does life insurance cost?

When it comes to how much you'll pay for term life insurance, several key factors come into play: the coverage amount, length of your term, and (most importantly) your life expectancy. The younger and healthier you are, the less you'll pay. Gender also matters; women typically pay less than men because they tend to live longer. Smoking status, your overall health and occupation, and even your hobbies can all tip the scales when it comes to your premium. To paint a clearer picture, let’s dive into some real-life examples based on age and gender.

How much term life insurance costs

Policygenius.com reports that a healthy 40-year-old male can snag a $500,000 20-year level term policy, on average, for $515.28 per year.A female of the same age and health profile, meanwhile, would pay $423.24. Fast forward to age 50, and those averages climb to $1,230 for males and $939.48 for females.

How much permanent life insurance costs

According to PolicyGenius.com, a healthy 40-year-old woman pays an average of $7,266 per year for a $500,00 whole life insurance policy while a man pays ~$8,844. Turn 50, and those numbers jump to $11,484 for women and $13,614 for men.

Universal and variable insurance

Universal and variable universal life insurance are a little different with costs that aren’t fixed, meaning you can adjust your premiums as your needs change over time.

Guaranteed universal life insurance

For the same $500,000 coverage noted above, guaranteed universal lifemonthly rates can cost healthy 40-year-old females $3,576 a year and males with a similar profile $4,056 (to age 121; you can choose your age, with GUL policies commonly maturing between age 95 and 121). For 50-year-old females, average premiums increase to $5,616 ($6,300 for males). Guaranteed universal life (GUL) insurance offers another twist. For that same $500,000 in coverage to age 121, a healthy 40-year-old woman might pay $3,576 per year while a man pays $4,056. Those premiums climb to $5,616 for 50-year-old women and $6,300 for men of the same age.

Life insurance riders

Riders are optional life insurance policy add-ons that let you customize your coverage with extra features and benefits. Think of them as special upgrades, tailored to fit your lifestyle and provide added peace of mind. Here are some of the most popular types of riders…

Accelerated death benefit riders

An accelerated death benefit rider is like a safety net, letting you tap into your policy’s benefits (i.e., “living benefits”) if you’re diagnosed with a terminal, critical, or chronic illness. An accelerated death benefit rider can offer financial relief for you and your loved ones when you need it most, but keep in mind that any amount you receive will reduce what’s paid out later. There are several types of accelerated death benefit riders, as follows.

Terminal illness rider

A terminal illness rider allows you to receive a portion of your life insurance death benefit if your documented life expectancy is 2 years or less (typical time period and per a physician’s diagnosis).

Critical illness rider

A critical illness rider applies if you’re diagnosed with a major health condition such as cancer, a heart attack, or paralysis—helping to ease financial worries when life takes an unexpected turn. It usually activates if you can’t do at least two everyday activities (bathing, dressing, eating, or moving around) on your own.

Chronic illness rider

A chronic illness rider helps cover expenses if a long-term health condition makes daily life difficult. As with a critical illness rider, it kicks in if you need help with basic tasks so you can focus on your well-being instead of worrying about bills.

Long-term care rider

Long-term care riders—triggered for individuals who need help with two or more “activities of daily living” (ADLs)—are also available to help pay for long-term care expenses and are often the most expensive riders tacked onto a policy.

Guaranteed insurability rider

Guaranteed insurability riders allow you to buy additional coverage at specific ages or for life events (e.g., marriage, the birth of a baby, or a home purchase) without the need for a new medical exam.

Return of premium (ROP) rider

A return of premium rider provides a refund of premiums paid if certain conditions are met, typically if the policyholder outlives the policy term or the benefit remains unused.

How to choose between term and permanent life insurance

First and foremost, term policies are a great option if you need coverage and are seeking the most affordable premiums. You should also consider a term policy if you need coverage for a specific period of time (e.g., when paying off a mortgage, putting kids through college, shouldering costs for a wedding, or replacing income).

Permanent life insurance policies, meanwhile, are best suited for those seeking coverage for a longer duration or for as long as they live (if you can afford corresponding premiums). Packed with various features, permanent policies are also sometimes desirable for those seeking flexibility and often a viable option for those looking to further diversify a large investment portfolio via a life insurance policy.

Options for undecided individuals

If you’re still unsure of which type of life insurance you’ll need, know that a convertible term policy may make sense as a permanent policy conversion option; you also wouldn’t need to requalify in this case as a permanent policy is predicated on your original health rating. You can also enjoy added flexibility with some permanent life policies that allow you to add a term rider during years when you have greater financial obligations. Anyone still unsure should remember they can always employ both types of policies if they so choose.

In sum: term vs. whole life insurance

Choosing between term and permanent life insurance policies ultimately boils down to your own personal objectives. As most heftier financial obligations likely subside over time and its premiums are much lower, the former type typically suffices for most people.

Still have questions about which life insurance solution is best for you? Schedule a FREE discovery call with one of our financial advisors to get them answered

FAQs

The best approach here is to total your current and future obligations (mortgage, loan debt, college tuition, etc.) and subtract your liquid assets (the amount of money in your savings and retirement accounts); the result is how much insurance you’ll likely need. Want an even simpler approach? A common rule of thumb is to use a multiplier (10 to 15 times) of your annual salary. If you make $100,000 a year, for example, you’ll need a minimum of $1 million in coverage.
In general, you aren’t required to report life insurance proceeds to the IRS (meaning they’re tax-free). Any interest received is taxable, however, and should be reported accordingly.
While exact timing varies, it generally takes 14 to 60 days after your insurance carrier receives a death claim to receive a payout.
While it’s generally smart to buy life insurance when you’re in your 30s (as policies are less expensive for young, healthy individuals), personal circumstances also come into play here. For example, if you own a home, are married, and/or have kids, life insurance quickly becomes a necessity.

About the author
The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.

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