Understanding Life Insurance—and Getting the Best Policy
“Having life insurance ensures that you won’t leave your loved ones with a financial burden,” says Jennifer Fitzgerald, cofounder and CEO of Policygenius, an online insurance and financial services company. But more than that, the insurance money “can be used to buy a home or go to college.” In other words, getting life insurance isn’t something to ignore or put off.
The broad strokes are pretty simple: You pay a premium to an insurance provider, and—sorry this is grim—when you pass away, the provider pays a tax-free lump sum to your beneficiaries (while the policy is active). It’s the nuances that get tricky and complicated. There are different policies, what beneficiaries to name, the best time to buy, and a lot of other grey areas to consider. So we asked Fitzgerald to unpack it for us.
A Q&A with Jennifer Fitzgerald
Life insurance is ideal for anyone who has people who rely on them financially, like a spouse or children. If you have family members who would need to find a way to pay for a home, college, retirement, or other bills if they didn’t have your income, it is best to consider life insurance.
There are two main types of life insurance: whole life insurance and term life insurance. The biggest differences are how long the two types of policies last and how they’re paid out after the policyholder dies.
A whole life insurance policy, as the name implies, is for a person’s whole life, as long as they’re still paying the premiums. It’s good if you don’t want to guess how long you’ll need the policy, which is often ideal for people nearing retirement who still have dependents. This type of life insurance has a death benefit as well as a cash value component. As you make premium payments over time, the death benefit will shrink and the whole life policy will consist entirely of the cash value. And when you die, this cash value becomes the death benefit, which is what gets paid out to your beneficiaries. There’s no practical difference here—if you die, your beneficiaries get paid a certain amount of money, regardless of where it comes from. But if the policy fully matures, which can take several decades, there is some interest accumulation on the cash you’ve paid into the policy. It’s important to note that this type of policy can be up to six to ten times more expensive as term life insurance for the same death benefit amount.
Term life insurance lasts for a set period of time, usually between five and thirty years, and is usually determined by how long you’ll have dependents. The insurance will pay out if the policyholder dies during the term, as long as they were still paying their premiums. If the term ends and the policyholder is still alive, the insurance coverage simply ends. If the term estimate was right, this will be fine; you likely won’t have a mortgage to pay off or dependents, and you may even have enough savings to cover any of your financial needs. With term life insurance, the insurance company doesn’t have to insure you when you’re at an age when you’re more likely to die. That often means less risk for the insurance company, and therefore they can make this type of insurance more affordable and appealing to consumers. And if you change your mind later on, most term policies allow you to convert them into a whole life policy.
It’s important to speak to an insurance agent or financial advisor to determine whether a whole life policy or a term policy is the best option for you.
Age is a major factor in determining your life insurance rate, which is set when you sign your policy and won’t change as long as it lasts. Because of this, every year you put off buying life insurance means an increase in the amount you’ll pay for it. For example, people in their forties can see rate increases of 5 percent to 8 percent each year they wait to buy life insurance. Those in their fifties may pay as much as 12 percent more in life insurance premiums each year they delay.
Your medical history is another factor insurance companies use to determine your rate. This is done using a process called underwriting, which includes a medical exam to get a read on your current health and to find out about your lifestyle choices, like if you are a smoker or have any dangerous hobbies (like skydiving).
Each situation is different, but there are main factors to consider—the ages of your family members, how much of your income each needs to survive, and what big expenses you’ll face in the future, like your mortgage or college tuition. You’ll also want to consider how much you can afford to pay each month for a policy. Policygenius offers a free life insurance calculator that can easily help you get an idea of how much coverage you really need based on your individual situation (and even give you an idea of what it might cost).
For most people, term life insurance is going to be the best option, as it offers the financial protection they want without being overly expensive. Of course, there are going to be people for whom whole life insurance is better. Policygenius has free resources to help each consumer figure out the right type of policy. We have an insurance checkup tool that helps you find out what insurance you need and what you don’t. Plus, after doing the checkup, you’ll get a custom checklist with clear next steps to make the process easier.
There is no exact right age or time frame. It comes down to whenever you have someone who depends on your income to survive. Once you’re in that situation, it will be easier to figure out how long they’ll be relying on you, so you can decide whether term or whole is right for you. This way, you’ll get the best rate while not spending before you have to.
And I mentioned before, age is a major determining factor in how much you’ll pay for your policy. Therefore, it would seem that buying a policy as soon as you need one would be the way to go.
Most people choose their spouse as their beneficiary, as they’re the ones who will need the life insurance payout if something happens to you. In fact, there are nine states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—that have community property laws that make it illegal to name someone other than your spouse as your beneficiary if you get the policy after getting married. Alaska has community property laws, too, but you and your spouse have to opt in to them. (It’s important to check your state laws or speak with a financial planner familiar with your state laws to know the specifics you need to consider.)
Beyond that, you really can name anyone as your beneficiary—children, nonrelatives (like a business partner or friend), organizations (like your business, your alma mater, a church, a nonprofit or charity, etc.), and even pets. Listing minor children as beneficiaries isn’t recommended, as it will be very difficult for them to receive the money. Life insurance carriers can’t pay out death benefits to anyone who hasn’t reached the age of majority, which is eighteen in all states except Alabama and Nebraska, where it’s nineteen.
If you name a minor child or children as your beneficiary, it may be better to name a trust. This way, your appointed conservator for the trust can receive and disburse the money on your behalf. This makes it easier for your kids to access the life insurance proceeds if necessary.
No matter whom you choose, make sure you keep your beneficiary updated as the years go on. It’s easy to do—just call to your life insurance company and fill out some paperwork.
A lot of people have life insurance through their employer and then take out an additional policy to supplement their coverage. Beyond that, there are times when it might make sense to have multiple life insurance policies. For example, if your situation changes—if you have another child or get another mortgage—it could make more sense to buy another policy than to adjust the coverage on your current one. You could also have multiple policies if part of your financial plan involves the ladder strategy, which is where you stack several term life insurance policies that expire as you pay down your obligations. The idea here is that you’ll pay lower premiums over your policies’ lifetime than if you just had one premium. It’s a good idea to talk with a financial planner before taking on this strategy.
Because there is no one-size-fits-all insurance policy or provider, you should definitely comparison shop to find different offerings and figure out which one makes the most sense for you. An independent insurance broker represents multiple insurance companies, whereas some agents work for one specific insurance company. It’s best to shop the market with an independent broker. A good broker will ask smart questions to make sure they understand your needs so they can match you with the best policy for you. Think of them as your insurance advocate.
One of the biggest misconceptions is that term life insurance gets more expensive as you age, which is true before you apply, not after. Meaning if you buy a policy at forty-five, it’s going to be more expensive than if you had bought it when you were twenty-five. But once you’ve locked in a rate, it won’t change. Instead of paying less early on and raising your rates as you age, insurance companies average out the amount so you pay the same amount for your entire term.
There’s been the shift from the traditional insurance agent, who sold policies face-to-face at the kitchen table, to digital platforms, like Policygenius, where the consumer can do a lot of the insurance-shopping process on their own. It’s an exciting change because it makes insurance and financial protection much more accessible to everyday consumers.
Jennifer Fitzgerald is the CEO and a cofounder of Policygenius, an online platform offering all types of insurance, including life, disability, health, auto, home, renters, pet, and travel. It also offers financial-planning and personal-finance resources. Fitzgerald started Policygenius in 2014 with Francois de Lame. Prior to that, she was a management consultant at McKinsey & Company. She is one of only four female founders in fintech to raise more than $50 million in funding. Fitzgerald graduated from Columbia Law School and Florida State University.