Term and permanent solve different problems
Almost every life policy is a variation on two ideas. Term insurance covers you for a set number of years and pays only if you die within them. Permanent insurance covers you for life and usually builds a cash value you can borrow against.
Term costs far less for the same death benefit, because most term policies never pay out. That is not a criticism: it is what makes it efficient for a temporary need such as the years while a mortgage is being paid and children are at home.
| Term | Permanent | |
|---|---|---|
| Covers you for | A set number of years | Your whole life, if premiums are paid |
| Cost for the same death benefit | Much lower | Much higher |
| Builds cash value | No | Usually |
| Typical use | Mortgage, income replacement, years with dependants | Estate planning, final expenses, lifelong need |
Source: Florida Department of Financial Services consumer guidance
A method rather than a multiple
The common advice to buy ten times your income is a starting point, not an answer. A more honest method is to add up what the money would actually have to do.
Take the debts that would survive you, including the mortgage. Add the income your household would need replaced and for how many years. Add future obligations you intend to fund, such as education. Then subtract what already exists: savings, existing cover, and any group policy through work. What remains is the gap.
Group cover through an employer is worth checking rather than assuming. It is often a multiple of salary, it usually ends when the job does, and it is rarely enough on its own.
What the questions are for
Underwriting is how the insurer prices the risk. Expect questions about age, height and weight, tobacco use, medications, family history and sometimes a brief medical exam or a records check.
Answer them accurately. A policy issued on incorrect information can be contested during the first two years, which is precisely when a family would be relying on it. Being declined by one insurer is also not the end: underwriting standards differ, and a condition that is a problem for one carrier is often routine for another.
The death benefit is generally not taxed
A life insurance death benefit paid to a named beneficiary is generally not taxable income to that beneficiary. That is one of the few genuinely simple things about this subject.
Estate tax is a separate question from income tax, and large policies owned by the insured can interact with it. That is a conversation for a tax professional rather than a general guide.
Frequently asked questions
Is term or whole life better?
Neither in the abstract. Term is far cheaper for a temporary need such as the mortgage and child-raising years. Permanent costs more but covers you for life and builds cash value, which suits a lifelong need such as final expenses or estate liquidity.
How much life insurance do I need?
Add the debts that would survive you, the income your household would need replaced and for how long, and future costs you intend to fund. Subtract savings and any existing cover, including group cover at work. The remainder is the gap.
Is a life insurance payout taxable?
A death benefit paid to a named beneficiary is generally not taxable income. Estate tax is a separate question that can apply to larger policies depending on ownership, and that is worth asking a tax professional about.
Can I be declined for life insurance?
Yes, and underwriting standards vary between carriers, so a decline from one is not a decline from all. Guaranteed issue policies exist that ask no medical questions, at a higher price per dollar of cover and usually with a waiting period.
Sources
This guide explains officially published rules and figures. It is not an insurance quote and not an eligibility determination. Only HealthCare.gov, Medicare.gov, Social Security or the carrier can determine your eligibility and your actual price.
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