The legal life insurance definition refers to a legally enforceable contract between a policyholder and an insurance provider. In exchange for monthly premiums, the life insurance company promises to pay a specified amount of money to the named beneficiaries when the policyholder dies. Life insurance coverage varies by policy type and can pay for funeral expenses, burial costs, lost wages, and debts. Compare life insurance quotes online before you buy to lock in the best rates.
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UPDATED: Aug 19, 2021
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- Without life insurance, one out of three families will struggle to make ends meet within the first month of a breadwinner’s death
- Metlife is the number one life insurance company, followed by Prudential, New York Life, Massachusetts Group, and AIG
- Term life insurance rates for a 35-year-old cost $30/mo on average
Life insurance is a big business in the U.S. In 2018, Americans bought over 27 million life insurance policies. In California alone, residents paid nearly $357 billion in life insurance premiums. Currently, as of April 2021, the life insurance and annuities industry market size was $886.7 billion.
People with children and those who own homes and businesses are the most likely candidates for life insurance policies. Life insurance covers final expenses and burial fees, replaces a major wage-earner’s income after death, and pays off mortgages creditors to whom money is still owed after death. Some buyers also use life insurance as a way to transfer wealth to their beneficiaries tax-free.
Keeping reading to learn more about where to buy life insurance, the history of life insurance in the U.S., answers to frequently asked questions about the different types of life insurance coverage, and where to get free insurance advice.
If you’re ready to buy life insurance right now, enter your ZIP code above to compare free life insurance quotes from multiple companies in your area.
What are the different types of life insurance?
If you’re shopping for life insurance coverage, you will recognize the three basic types of life insurance policies:
- Whole Life — This is a type of permanent life insurance that is more expensive than term life insurance and provides an accumulated cash value feature during the policy term.
- Term Life — This type of policy provides insurance for a definite period of years and then the contract ends. If the insured person does not die before the end of the term, the company keeps the money and pays no death benefit. Some term policies have a level premium due each year; others have an increasing premium meaning you pay less when you’re younger and more as you age. Some term policies are “return of premium” policies which means you pay the level premium during the term and then, if you are still alive at the end of the term, you get money back.
- Universal Life — This is another type of permanent insurance whose premiums are kept in the same range as term life insurance, but the policyholder accumulates cash value that earns interest.
There are further variations on these types of life insurance, such as Variable Life Insurance that allows the policyholders to invest the policy’s cash value. You also have two Universal Life Insurance options:
- Guaranteed Universal Life policies, which may not build cash value but have lower premiums than whole life, and;
- Indexed Universal Life policies, which earn a fixed return rate on the policy’s cash value.
Another type of life insurance, a burial or final expense policy, is a permanent life insurance policy that pays a small death benefit to beneficiaries which is limited to funeral expenses.
You will also have to option to purchase additional life insurance policy riders that customize coverage for particular situations. Here are eight types of life insurance riders to ask about:
- Guaranteed Insurability Rider
- Accidental Death Rider
- Waiver of Premium Rider
- Family Income Benefit Rider
- Accelerated Death Benefit Rider
- Child Term Rider
- Long-Term Care Rider
- Return of Premium Rider
Riders can be added for an extra premium charge, but the types of life insurance riders available will vary by company. Shop around for life insurance quotes from multiple companies to see who offers the insurance riders you need at the best possible price.
What is the best life insurance?
There is no one-size-fits-all answer to that question. The best life insurance policy is one you select after you look at all the options available in your area and take into account your budget and the assets and family members you are trying to protect.
For example, if you want lower premiums, a term life insurance policy may be best for you. If you want to accumulate cash value with your policy, you will want to check out whole life policies instead. If you just need to cover a small amount for your burial, then you may want to consider a burial policy or final expense policy.
Is it possible to have too much life insurance?
Yes, it is possible. Too much insurance means paying for more coverage than you need to protect your dependents and pay off any debts you have. Most insurance companies place a limit on how much life insurance a person may buy. That limit depends on the insurance company and may range between twenty and thirty times your income.
Is life insurance worth it?
That answer depends on your particular financial situation and if you need to consider protecting your family with life insurance. For example, the average person is probably in a better position to buy a term life policy for a fixed time period with cheaper life insurance rates. If you have additional discretionary income, investing those extra dollars in other investment vehicles, such as 401(k) plans or IRAs, may be the wiser choice.
On the other hand, a person in a high-income bracket may look to a permanent life policy with a cash value feature to save his beneficiaries from paying estate taxes.
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What questions should I ask before I buy life insurance?
As a savvy consumer, you want to ask a few targeted questions before you sign on the dotted line of any insurance contract to ensure you are paying a fair price for the kind of coverage you need. Here are a few key questions to ask before you buy life insurance:
- How much are the monthly premiums?
- Is there a discount for paying an annual premium instead of monthly payments?
- Does the policy have a waiting period after you start paying before the company will pay benefits?
- Does the policy require a medical exam?
- How do your personal health conditions impact your coverage and/or your premium amount?
- Does the company reserve the right to deny benefits in certain circumstances?
- Can the insurance company cancel your policy for non-payment of premiums?
- Does the premium stay the same every year the policy is in effect 0r is it a variable premium?
- How long after your death does the policy pay the beneficiaries?
- How long has the insurance provider been in business and how many policyholders do they have? Research A.M. Best and BBB ratings to find a reputable life insurance company.
- Is the insurance agent licensed?
- How much is the application fee?
- Can a relative or personal representative pay the premiums if the policyholder is no longer able to pay?
- How do I file a life insurance claim?
- Is there an appeals process if the company denies benefits?
- Does the insurance company retain the right to change policy terms even after the coverage goes into effect?
These are just a few of the questions you should be thinking about as you shop around for affordable life insurance companies. To lock in the best life insurance rates, ask if you qualify for any insurance discounts before you buy.
Where can I find affordable life insurance near me?
Life insurance policies are offered by some of the most popular insurance companies in the market, including State Farm and GEICO. Check out the list below to see the best life insurance companies in the U.S. based on A.M. Best ratings, and read the corresponding insurance company reviews to learn more:
- Allstate Insurance
- Banner Life
- Guardian Life
- Haven Life
- John Hancock
- Massachusetts Group
- Mutual of Omaha
- New York Life
- Northwestern Mutual
The best life insurance companies are not limited to this list. Certain providers might not offer coverage in your area, or you may have a local provider that can offer your more competitive life insurance rates. Shop around to see what kind of life insurance policies are available near you.
The easiest way to find the best life insurance company near you is to read insurance company reviews online and compare quotes from multiple companies to see which provider offers the best rates. Use our research tool now to get free life insurance quotes and speak to an agent today. Enter your ZIP code below and get started.
Frequently Asked Questions: Life Insurance
Scroll down to find answers to the most commonly asked life insurance questions:
#1 What is the difference between life insurance and annuities?
This is more of an investment question. Life insurance and annuities are both products sold by insurance companies. Both products allow policyholders to invest money on a tax-deferred basis.
The difference between them lies in how these products pay money to the beneficiaries. Permanent life insurance policies pay a lump sum amount to the insured’s beneficiaries upon the insured’s death. Alternatively, the objective of an annuity is to streamline payments over a person’s lifetime rather than all at once in a lump sum.
In practical terms, that means the person who buys an annuity gives the insurance company a lump sum amount and then the insurance company guarantees a specified stream of income over the person’s life. Qualified annuities invest pre-taxed dollars, while non-qualified annuities invest post-tax dollars.
Whether you decide to invest in a permanent life insurance policy or an annuity product, be aware that they both have high fees. Concerning permanent life insurance, there are upfront fees, such as the sales commission that can absorb up to half of the premium. In addition, there are management fees and administrative fees that can eat into the cash accumulation feature you thought you bought. Annuities also have high upfront commissions and surrender fees that function as penalties for cancellation or early withdrawal of funds.
#2 What is the history of life insurance in the U.S.?
Life insurance traces its beginnings all the way back to the Colonial era. In 1759, the Presbyterian Synods in Philadelphia and New York set up what they called the “Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers”. Episcopalian ministers followed suit ten years later in 1769 with their own version of relief for widows and children of Episcopalian ministers.
From the period 1787-1837, the public had the opportunity to buy life insurance policies from no fewer than 26 companies. None of those insurance companies lasted more than a few years because they sold very few policies during that time period.
Life Insurance in the 19th Century
The following timeline shows the growth of the life insurance industry during the mid-1800s to the turn of the 20th century:
1840 — Life insurance policies sold amounted to about $5 million. New York Life and Trust sold about half of the policies in effect around 1840.
Changes in the law made selling life insurance more popular among the public. In 1840, the New York State legislature changed the insurance laws so that women could own the life insurance contract on their husbands’ lives. The new law also kept the policy amount secure from the husbands’ creditors.
The law also provided that the insurance carriers would pay the funds to the surviving children if the wife died before the husband. Wives no longer had to prove they had a financial interest in their husband’s life in order to receive the life insurance policy proceeds.
The thrust behind the changes brought about by the new laws in New York was followed in 1840 by the Maryland legislature, in 1844 by the Massachusetts legislature, and in 1851 by the New Jersey legislature.
In Connecticut, North Carolina, and Ohio, insurance carriers inserted the protections of New York’s 1840 law into their charters and followed the precepts except the laws that covered the changes concerning to women.
The second biggest motivation for the growth of life insurance companies during this period was the advent of mutual life insurance carriers. American mutual life insurance companies issued their first policies around 1840.
The change to mutual insurance companies came after the financial crisis of 1837. That financial crisis saw insurance companies unable to raise the required capital when organized as stock companies. Mutual companies did not require as much capital because they used the premiums collected to pay death benefits.
1850 — Life insurance policies represented about $100 million and about 48 insurance carriers sold some type of life insurance product.
1865 — Just before the end of the Civil War, Massachusetts passed a law that forbids companies to forfeit life insurance policies for non-payment of premiums. The law required such policies to convert to term life policies and to pay a death benefit for any death that occurred during the term life period.
By the end of the Civil War, life insurance policy sales had increased to about $600 million.
1871 — Those life insurance revenue numbers increased to $2 billion, a mere six years later. By this time, New York and Massachusetts had set up insurance departments to oversee insurance company practices, including the sale of life insurance policies. The new administrative structure appealed to consumers who gained confidence based on how the government required insurance companies to treat policyholders.
1865-1880 — The insurance industry created 107 new insurance companies during this period. In 1880, Massachusetts further protected consumer rights by giving the policyholders the right to a cash surrender of a forfeited policy.
1868-1877 — The Civil War led to a deep economic slump and that slump depressed sales for life insurance companies. Those newly created 107 insurance companies all competed with each other for customers. Between 1868 and 1877, 98 of the 107 new insurance companies closed their doors. Of the 98 companies, 32 absolutely failed and cost policyholders $35 million in unrecovered losses.
To financially survive the 1870s, insurance companies began to issue industrial life insurance policies. Metropolitan Life, John Hancock, and Prudential all began selling life insurance to lower-income workers with lower benefit amounts and cheaper premiums ranging from $.05 -$.65. Industrial life policies did not require a medical examination and companies made it possible to insure the whole family, not just the main wage-earner.
Life Insurance in the 20th Century
The following timeline shows the growth of the life insurance industry during the early 1900s to the 1990s:
1905 –1914 — New insurance companies (288 of them) opened their doors. By the time World War I ended in 1919, life insurance policies rose to $46 billion.
1911 — Equitable Life Insurance Company introduced the first group life insurance policies. Equitable wrote a group life policy for 125 workers at the Pantasote Leather Company. The policy required no medical examinations or individual applications from the workers. The Montgomery Ward Company set up a similar group life policy for its employees.
1917 — The U.S. government provided War Risk Insurance to all active-duty military personnel. Active military members received a $4,500 insurance policy that the U.S. government paid in the event of disability or death. The government also offered low-cost term life and disability insurance with no requirement for medical examination to all active military. By 1919, there were $40 billion of War Risk Insurance policies in effect.
1919 — Group life policies for the industrial segment of the U.S. economy were available from 29 insurance companies.
The 1930s — By the end of the Great Depression, there were 120 million life insurance policies in force in the U.S.
1940 — Congress created the National Service Life Insurance Program (NSLI) to remedy the insurance needs of World War II servicemen. More than 22 million NSLI policies went into effect from the program’s inception on October 8, 1940, until the day the program closed on April 25, 1951.
The 1950s — The life insurance industry gained as much as other industries during the post-World War II “boom” period.
1951 — Over 600 legal reserve life insurance companies maintain reserves equal to the amounts required by law. The insurance company bases its reserves on actuarial principles intended to allow the insurance company to pay all its financial commitments. The number of insurance companies grew to 1,000 life insurance companies by the end of the 1950s.
1955 — Analysts estimated that 80% of men and 62% of women held life insurance policies in varying amounts by this point in time. By the end of the 1950s, $580 billion of life insurance was in force.
1976 — Insurance companies conceived and developed the Variable Life Insurance policies.
The 1980s — Insurance companies conceived and developed Universal Life Insurance policies. In addition, insurance companies developed group policies and variable annuities in response to the law changes resulting from the Tax Reform Act of 1986.
The 1990s — By this time, more stringent standards and more insurance regulations applied to life insurance companies.