Straight answers about life insurance

You pay premiums to an insurance company, and when the insured person passes away, the company pays a death benefit to the beneficiaries you named. The death benefit is generally not subject to federal income tax for the beneficiary.

Anyone who has people depending on their income or who has debts or final expenses someone else would have to cover. That often includes spouses, parents of young children, homeowners with a mortgage, and business owners. If no one relies on your income and you have no debts, you may need much less coverage or none at all.

A common rule of thumb is 10 to 15 times your annual income, but a better method is to add up what your family would need: replacing income for a number of years, paying off the mortgage and other debts, covering final expenses, and funding goals like college. Then subtract any coverage and savings you already have.

Possibly. Group life insurance through an employer is often only one or two times your salary, and it usually ends when you leave the job. It is a good starting point, but it may not be enough, and it may not be there when you need it most.

Term insurance covers you for a set period, such as 10, 20, or 30 years, and usually has the lowest premiums, but it ends when the term does. Permanent insurance is designed to last your whole life as long as the premiums are paid, and it includes a cash value component, but it costs more.

Both are types of permanent insurance. Whole life typically has fixed premiums and a set death benefit, with cash value that grows at a rate set by the company. Universal life offers more flexibility in premiums and death benefit, and its cash value is tied to the interest or index crediting method of the policy. Guarantees are backed by the claims-paying ability of the issuing insurance company.

Cash value is a savings component that builds inside many permanent policies. You may be able to borrow against it or withdraw from it, but doing so can reduce the death benefit and may have tax consequences, especially if the policy lapses. It is not the same as a retirement account, and it grows slowly in the early years.

It is a smaller permanent policy designed to cover funeral costs, medical bills, and other end-of-life expenses so your family is not left with the bill. Coverage amounts are usually modest, often with simplified approval.

Riders are optional add-ons to a policy. Examples include access to part of the death benefit if you become terminally ill or chronically ill, waiving premiums if you become disabled, and adding coverage for a child. Some riders cost extra and some are built in, so ask what is included.

The biggest factors are your age, health, and tobacco use, along with the type of policy, the amount of coverage, and the length of the term. In general, the younger and healthier you are when you apply, the lower your rate, so waiting usually costs more.

It depends on the policy. Fully underwritten policies often require an exam or health records. Simplified-issue policies ask health questions but usually skip the exam. Guaranteed-issue policies ask no health questions, but they have lower coverage limits and typically pay a reduced benefit during the first two years.

You still may have options. Different companies evaluate health conditions differently, so one company might decline you while another approves you at a fair rate. As a broker, I can compare options from multiple companies, and simplified-issue or guaranteed-issue policies may be available.

In many cases, yes. Age limits and prices vary by company and product, and premiums are higher at older ages. Final expense and other simplified policies are commonly used by people in their 50s, 60s, and 70s.

The policy can lapse and the coverage can end. Most policies have a grace period, often about 30 days, to catch up on a missed payment. Permanent policies with cash value may have options to keep some coverage in force, so contact the company or me before letting a policy lapse.

The beneficiary is the person, people, or organization that receives the death benefit. You can name a primary and a backup (contingent) beneficiary. It is generally best to avoid naming a minor child directly, because a court may have to get involved, and a trust is sometimes used instead. Review your beneficiaries after any major life change.

Generally, the death benefit is not subject to federal income tax for the beneficiary. There are exceptions, such as interest paid on a delayed payout, and a very large estate may be subject to estate tax. A tax professional can speak to your situation.

During the first two years of a policy, the insurance company can review the application if a claim is made. That is why it is important to answer every application question completely and accurately.

Many term policies include a conversion option that lets you switch to a permanent policy without a new medical exam, usually within a set time period. It is worth asking about before you buy.

Permanent life insurance can leave a legacy to your family, and the cash value may provide a source of funds later in life, though using it reduces the death benefit. It is not a replacement for retirement savings. See the Retirement Income Planning FAQ and the Trusts & Wills FAQ to see how these pieces fit together.