Life Insurance 101: The Ultimate Guide To Life Insurance

Tom Griffiths

Mar 11, 2021

•  4 min read

1.

What is Life Insurance?

2.

How does life insurance work?

3.

Who needs life insurance?

4.

Who are my beneficiaries?

5.

What does life insurance cover?

6.

What if my employer provides life insurance?

7.

What does life insurance cover?

8.

Types of life insurance

9.

Types of term life insurance

10.

Types of permanent life insurance

11.

Buying life insurance

12.

How much life insurance do you need?

DIME Method

13.

How long should my life insurance coverage last?

14.

How much does life insurance cost?

15.

What’s the turnaround?

16.

How to choose the best life insurance company

17.

Final thoughts

Tom Griffiths

Mar 11, 2021

•  4 min read

Life insurance can seem confusing and overwhelming. All the terms, dollar amounts, and decisions can make anyone’s head spin.

Don’t worry. At Bello, we keep it simple.

We’ve created this guide to break through the insurance jargon and complicated formulas. Life insurance is an important part of your financial plan. In this guide you’ll learn more about life insurance, helping you get the right financial protection for the people you love.

What is Life Insurance?

Life insurance is a contract you and the life insurance company create. You agree to pay premiums (monthly or annually) and the insurance company agrees to pay your beneficiaries in a lump sum if you pass away during the contact.

It is meant to minimize the financial stress your loved ones experience upon your passing. The death benefit should be enough to support your loved ones, including paying the mortgage and other living expenses. When you purchase a life insurance policy for yourself, those who depend on you (spouse, children, or other relatives) are gaining the benefits. Without it, how will they carry on financially when you’re gone?

How does life insurance work?

It’s simple. You pay premiums, the life insurance company provides coverage.

If you pass away whilst insured, your beneficiaries (the people who will receive the payout) file a claim with the life insurance company. The life insurance company asks for a death certificate, and after receiving it, they pay the amount you were covered for in a lump sum. Most people receive it within a few days or weeks, depending on the insurance company and their process.

When deciding on life insurance, you’ll have to choose the type of policy you want, the term (how many years the policy will be in place), and the coverage (the payout amount).

If you’re unsure - that’s okay, with this guide you’ll be an expert in no time!

Who needs life insurance?

The purpose of life insurance is to protect those who depend on your income. So who needs life insurance? Almost everyone. But there are a few exceptions:

First, if no one relies on your income for financial support, you may not have a need for life insurance. Two examples of this are:

  • Retirees – you no longer depend on work for income. Plus, you probably aren’t supporting kids.
  • Children – children do not normally have a large portfolio of assets or have anyone depending on them; therefore, dependent children do not have a need for life insurance.

Second, if you’re independently wealthy then you are known as “self-insured”. If you were to pass, you have enough money in savings and investments that your loved ones would have financial security.

If you are in one of these camps, life insurance becomes less of a necessity and more of a personal preference.

Here’s the shortlist of people who should get insured:

  • Breadwinners – you provide the income for your family. Life insurance can replace it.
  • Homeowners – covering the mortgage leaves your loved ones with a place to live with the peace of mind that they don’t have to figure out how to pay for it. Don’t forget about taxes, insurance, and regular upkeep.
  • Stay-at-home parents – just because you don’t make an income doesn’t mean you’re not worth anything. Your ‘services’ like childcare, food preparation, and housekeeping are expensive. Your loved ones need those services when you’re gone.
  • Couples – married couples, or anyone in a long-term relationship may want to provide for their significant other (and children) upon their passing.
  • Special-needs parents – special-needs children often need support much longer than 18 years. Who will care for your child? Who will pay for his/her needs?
  • Anyone leaving a legacy – whether you want to leave behind a family legacy that’s passed down for generations or for charity, life insurance proceeds are a great way to do

Who are my beneficiaries?

You’ll hear a lot of terms, but beneficiaries are one you’ll hear the most. Who are they and how do they affect your life insurance?

Your beneficiaries are who you choose to leave your life insurance proceeds to. Most commonly chosen are children, spouses, and parents; however, anyone can be your beneficiaries and only you can choose them. Most policies allow you to change your beneficiaries too, so don’t feel like you’re locked in for the next 30 years.

What does life insurance cover?

The funds your loved ones receive are usually tax-free. They can use them for any needs too.

A few common examples:

1. Income replacement for the daily cost of living
The primary goal of life insurance is to replace your income in your absence. This helps your loved ones live the life they’re used to without financial worries on top of grieving their loss.

2. Mortgage payments and housing payments
If you have a mortgage, you may want life insurance to cover the balance (at a minimum). This ensures your loved ones have a place to live even without your income. If you don’t own a house, you may want to provide money for the rent so they can eliminate the worries of housing.

3. Pay off consumer debt
According to BankRate, consumer debt is at $14.2 trillion with Americans carrying an average personal debt of $92,727. Consumer debt increases expenses and leaves less disposable income. If you have consumer debt, consider including the amount in your life insurance proceeds, allowing your beneficiaries to pay it off and have more financial security.

4. Cover the cost of services
“Services’ for your household can include: childcare, cooking, cleaning, laundry, and more. Think of the cost of replacing those services. For example, the average live-out nanny salary in the U.S. is $44,200 per year or $22.67 per hour. Your life insurance proceeds could cover these costs, ensuring your children have the necessary care while your significant other does the ‘other’ daily chores and/or makes a living.

5. Pay for a child’s college education
The average in-state student attending a public 4-year institution spends $25,615 for one academic year.

6. Set up a trust fund for children
If you want your children to have money set aside for them when they reach a certain age, you can set it up with your life insurance, funding the trust fund with the proceeds of your insurance policy.

7. Funeral expenses
The average funeral in the US costs $$7,640 (Source: National Funeral Directors Association). Life insurance proceeds can cover this cost, eliminating the financial burden on your family members during their time of grief.

8. Final medical expenses
In addition to your funeral or burial expenses, you may have final medical expenses to cover. Your loved ones can use the life insurance proceeds to cover this financial burden, rather than taking it from your estate.

9. Leave a lasting legacy
There is more to life than just paying the bills. Life insurance is not an investment. It’s meant to replace your income. But that income should help ensure that your children and spouse live comfortably for the rest of their lives. Some families also have other responsibilities/things they want to do, such as taking care of parents that life insurance can help cover.

What if my employer provides life insurance?

Many employers offer life insurance. It’s often free as a part of your benefits. If it’s free— take it, but don’t stop there.

Group life insurance typically offers only a low coverage amount; $15,000 - $20,000. That’s nowhere near enough to cover your final expenses or to protect your family.

Supplementing with your own life insurance is important because when you move jobs your life insurance policy may not move with you.

Here’s why it makes sense to get life insurance outside of the workplace.

The average time that a person stays with an employer in the U.S. is 4.1 years. When you move on from your current job, if your life insurance isn’t portable, you will lose your coverage.

During this time, you’ve grown older (and wiser hopefully!). Typically the older a person is the higher price they pay for life insurance. You also don’t want to risk losing the ability to get life insurance due to any health changes. Any health complications before getting a new life insurance policy are known as “pre-existing conditions” which can lead to increased prices or even being declined altogether.

What does life insurance cover?

Standard life insurance policies cover almost all deaths unless your premiums lapsed or failure to disclose certain types of information on your application

  • Natural causes – Most policies cover ‘natural deaths.’ For example, a heart attack, stroke, or even old age.
  • Suicide – This is a tricky one. Most policies have a two-year waiting period. If you commit suicide within the first two years – no coverage. If it happens after the exclusionary period, most companies cover it.
  • Accidents – For example, dying due to a work incident or a car accident
  • Murder – Most policies cover death by murder unless the beneficiary played a role in the homicide.

Types of life insurance

You’ll hear many terms when you shop for life insurance, but term and permanent life are the two most common.

What’s the difference?

Term life insurance is good for a term. You pick the amount of years that you want coverage for. Once the term is up, the policy expires. Unless you renew or buy a new policy, you no longer have coverage. But that’s okay. If you timed it right, you either won’t need it or can renew.

Permanent life insurance is, you guessed it – permanent. The most common is Whole Life. It lasts for your lifetime. It’s a lot more expensive for the exact same coverage and a lot more complicated.

In some cases, you only pay until a certain age – but old age, like 95-years old.

Permanent life insurance has two parts. A death benefit, just like term life insurance and a cash value.

The cash value part of the policy is what increases the cost. The cash value depends on the chosen policy.

Types of term life insurance

Level-term

Your premiums, coverage, and everything about your policy stays the same for the term. For example, if you take out a 15-year term with a $100 premium and $100,000 coverage, you pay $100 a month for 15 years. If you die in year two, your loved ones get 100,000. If you die in year 14, your loved ones get $100,000.

Renewable term

Everything stays the same except your term and premiums after an initial period. A renewable 5-year term, for example, has fixed premiums for five years. It works just like the level-term policy. After five years, you can renew the same coverage for another five years. No medical exam or underwriting needed. But, your premiums increase according to your older age.

Return of premium

This policy is for those who want to receive their money back if they outlive their policy. You pay for this benefit though by paying higher premiums. Plus, you can’t cancel the policy early or you forfeit the premiums.

Types of permanent life insurance

Permanent life insurance is more complicated and expensive for the same coverage. Here’s an overview.

Whole life

The death benefit lasts for your ‘whole life’ or as long as you pay premiums. The cash value is like a savings account. You have a guaranteed rate of return – savings account interest rates. Some companies also pay dividends that you can cash in, reinvest, or use to pay your premiums.

Universal life

The death benefit lasts for your ‘whole life’ like whole life insurance, but you can increase your death benefit throughout the policy. Universal life policies earn money market rates of interest. The cash value can cover your premiums when it’s high enough.

Variable universal life

This policy offers the same benefits as universal life but without the guaranteed rate of return. You invest your cash value. This may mean greater returns. It may also mean total losses. There is no ceiling or floor.

Indexed universal life

If a total loss doesn’t sit well with you (who likes that?) indexed universal has a floor and ceiling. You invest your cash value but minimize your losses and your gains.

Buying life insurance

Now that you know the basics of life insurance you will want to pick a policy that suits your specific situation. Deciding you need life insurance is one of the most important and best decisions you can make. Now you must decide which policy is right.

What type of life insurance do you need?

Pro tip: many financial experts (Dave Ramsey, Jess Rose, and Suze Orman to name a few) recommend term life insurance in almost every case. This is because you can get the same coverage for a fraction of the price. Read our term vs. perm for a more detailed breakdown.

How much life insurance do you need?

DIME Method

Debt and final expenses – Think about the large debts you’d leave behind (not your mortgage) and add to it your estimated funeral expenses.

Income – Go back to your term. How many years do you want to provide coverage for your family? Multiply your current income by that number. If you don’t work, estimate the cost of the ‘jobs’ you do and multiply it by the same number.

Mortgage – Look at your mortgage’s outstanding balance and add it to the equation.

Education – Estimate the cost of covering your child’s education from today through college.

Add these numbers together and you have a good estimate of your coverage amount needs.

How long should my life insurance coverage last?

Think about the long-term. What are you covering? Do you need coverage for 10 years or longer? Do you need coverage for as long as 30 years or something shorter?

If you pass away while the policy is in effect, your beneficiaries receive financial compensation to get them through. If you outlive it, that’s great – you won’t care that your policy expired as your life is more important than an insurance policy, right?

If you have kids, you may want a policy that lasts through their childhood and into early adulthood, possibly up to age 18 or 21, if your child pursues higher education.

If you have a mortgage, you may want coverage until the mortgage ends, as that’s usually one of the largest expenses.

Many people insure themselves for at least the number of years until they retire. One of your main goals is to replace your income.

For example, if you’re 35 years old, have young children, and a 30 year mortgage, you may consider a 25, or 30 year term. This will end as your children become adults, your house is paid off, and you are close to retirement age—so you and your spouse should have a nice retirement nest egg.

Reasons you may want to consider a longer term

  1. If you are planning on having a child soon, whether your first child or additional children
  2. Your income and expenses increase
  3. You can secure low prices if you are young and healthy

How much does life insurance cost?

Term Life insurance probably isn’t as expensive as you think. Many people avoid it because they think it’s unaffordable. It’s only unaffordable if you don’t understand it or don’t understand what you need.

Plug in the coverage you think you need. If the premiums are too high, play with the numbers. There’s a right life insurance policy for everyone.

Your life insurance cost is usually based mostly on your age, gender, health history, family health history, and smoking status. We’ve broken down the cost of life insurance for you here.

It’s okay to pick insurance based on price → Bello has already done the time consuming difficult part for you. We’ve curated and vetted the best insurers so that you can compare all in one place.

My wife got life insurance at 29 years old, after the birth of our first son and after purchasing our first home. She picked up a $500k policy for xx years for $XXX

What’s the turnaround?

You can apply for life insurance and wait months for an answer. We recently got quoted 4-8 weeks by one of the largest life insurance brokers in the U.S.

Or… you can apply online and get a much faster answer, some as fast as a few days. Technology and accelerated underwriting make it a lot easier to get answers fast.

When you have to go through an agent, go back and forth with phone calls, and complete a paper application, then you’re waiting months and wasting precious time.

Look for an insurance company that offers instant pre-approvals and fast underwriting turnarounds for the best results.

How to choose the best life insurance company

Choosing the right life insurance company can seem overwhelming at times. That’s why we created Bello. We offer only the best insurers (that we use ourselves), who offer a hassle-free online application, with instant decisions, often with no medical exam needed.

How do you know who’s good and who isn’t?

You need to trust that they will be around to payout if needed. Check AM Best ratings. Look for strong ratings. This signifies financial strength which is an indication of their ability to pay out claims.

Talk to us. We can walk you through how to purchase life insurance, the claims process, and even the underwriting process.

How long does it all take? What are the underwriting requirements? Who do you call when you have questions?

Final thoughts

Life insurance is one of the most important aspects of your financial plan. It's a great way to make sure your family is taken care of and secure your legacy.

However, the process of buying traditional life insurance has not changed much in the last 20 years—and can take up to. 4 - 8 weeks. A typical experience includes a whole bunch of sales calls and pitches for various products that you know nothing about.

Here's the good news… That's why we started Bello. It's never been easier to compare life insurance without the sales pitch (your voicemail will thank us).

We've partnered with the best 'digital' insurance companies where you can easily apply online and get a super fast decision, often without a medical exam. It couldn't be easier or faster.

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Tom Griffiths

Tom is the Founder of Bello and life insurance expert. He built Bello to make life insurance simple to understand and even easier to get.

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