Originally published on EarlyPayoff in October 2021. Fully rewritten and updated in October 2026.
Choose the policy first, then the company. Decide how much coverage you need and for how long, pick the policy type that fits that need (for most households with a mortgage and children, that is level term), then compare quotes only from insurers licensed in your state that have strong financial strength ratings and a clean complaint record. The cheapest quote is not always the best one: compare guarantees, conversion rights and riders, not just the first-year premium.
Key takeaways
- Term insurance gives the most coverage per premium dollar. Whole, universal and variable universal life add cash value, with higher premiums and more moving parts.
- Confirm the insurer is licensed in your state and review its closed-complaint record with your state insurance department or the NAIC Consumer Insurance Search.
- State guaranty associations are a backstop if an insurer fails. In most states they cover up to $300,000 in death benefits and $100,000 in cash value, but limits vary by state (NOLHGA, as of Oct 2026).
- In the example below, the quote that was $500 cheaper over 20 years could cost $7,150 more if its premium rose to the guaranteed maximum after year 10.
- Use the free-look period to read the delivered policy, and never cancel an existing policy until the new one is in force.
Step 1: Match the policy type to the job
Before you look at any company, decide what the insurance has to do. If the goal is to replace income and pay off a mortgage while children are young, the need has an end date, and term insurance is built for that. The NAIC’s Life Insurance Buyer’s Guide describes term as lower-cost coverage for a set period, with most term policies having no cash value (NAIC, as of Oct 2026).
Permanent policies (whole, universal and variable universal) are meant to last for life and build cash value. They cost much more per dollar of death benefit at the same age. They can make sense for needs that never expire, such as a lifelong dependent, or for estate planning, but they are a poor fit if the main reason you are buying is to cover a 25-year mortgage. To size the need, work through how much life insurance you need before you request quotes.
| Policy type | Relative cost | Cash value | Flexibility | Best fit |
|---|---|---|---|---|
| Term (level) | Lowest premium for a given death benefit; rises sharply if renewed after the level period | Usually none | Fixed coverage and term; may be convertible to permanent coverage | Income replacement and debts that end on a known date |
| Whole life | Highest; premiums usually fixed on a set schedule | Yes, with guaranteed growth; some policies pay dividends, which are not guaranteed | Low; premiums are due as scheduled | Permanent needs where predictability matters most |
| Universal life | High, but premiums can vary | Yes, credited with interest; may have a guaranteed minimum | You can change premiums within limits, as long as enough is paid to keep the policy in force | Permanent needs for owners willing to monitor the policy |
| Variable universal life | High, plus investment and insurance charges | Yes, invested in subaccounts you choose; can lose value | Flexible premiums and investment choices | Long-horizon owners who already max out other tax-advantaged savings and accept market risk |
Variable policies are also investment products
Variable life and variable universal life are regulated by both state insurance departments and the SEC, and they are sold with a prospectus (SEC Investor.gov, as of Oct 2026). Read it. The charges stack up: mortality and expense risk fees, cost of insurance, administrative fees, fund expenses inside each subaccount, and surrender charges if you cancel or withdraw early.
The bigger risk is lapse. If poor returns or policy loans leave too little cash value to cover the monthly charges, the policy can end with no value and no death benefit. If a loan is outstanding when that happens, you may also owe income tax on it (SEC Investor.gov, as of Oct 2026). Before you buy, Investor.gov suggests checking whether the professional selling it is registered and has any disciplinary history, using its free Check Out Your Investment Professional search.
Step 2: Check the company
A policy is a promise that may not be tested for decades. Three free checks help.
License
Confirm that both the insurer and the agent are licensed in your state. Your state insurance department’s website has a company and agent lookup, and the NAIC’s Consumer Insurance Search lets you find a company by name. Insurers often have several subsidiaries with similar names, so match the exact legal name on the quote or application (NAIC, as of Oct 2026). Every insurer licensed in your state, with limited exceptions, must belong to its guaranty association (NOLHGA), and your insurance department can step in on a complaint against a company it licenses.
Complaints
The NAIC compiles closed, confirmed complaints reported by state insurance departments, searchable by state, company and type of insurance for the past three years (NAIC, as of Oct 2026). Compare several companies of similar size rather than reading one number alone. A large insurer will have more complaints simply because it has more customers, which is why complaint indexes scale complaints to premium volume. Look at the reasons too: repeated complaints about claim delays or denials matter more for life insurance than complaints about marketing.
Financial strength and the guaranty association backstop
Several independent rating agencies grade insurers on their ability to pay claims. Each uses its own letter scale, so compare a company’s rating with that agency’s full scale, and check more than one agency when you can. Ratings can change, which matters more for a 30-year policy than a one-year auto policy.
If a life insurer fails, a state guaranty association, usually the one where you live, steps in, up to limits set by state law. Those limits are a floor of protection, not a substitute for choosing a sound company. If your death benefit is above your state’s limit, the excess depends on what can be recovered from the failed insurer’s assets.
| Benefit | Limit in most states | Examples of higher limits |
|---|---|---|
| Life insurance death benefit | $300,000 | $500,000 in Connecticut, Minnesota, New Jersey, New York, Utah and Washington |
| Life insurance cash surrender or withdrawal value | $100,000 | $300,000 in Arkansas, North Carolina, South Carolina and Wisconsin; $500,000 in Connecticut, New York and Washington |
| Annuities | $250,000 | $500,000 in Connecticut, New York and Washington |
One practical use of this table: if you need $1 million of coverage and live in a state with a $300,000 limit, splitting it across two or three highly rated insurers keeps more of it under the backstop. Check whether your state applies a per-person aggregate cap before you rely on that.
Step 3: Pick the underwriting path
Underwriting is how the insurer decides whether to cover you and at what price. The NAIC guide notes that policies requiring less health information generally cost more and provide less coverage (NAIC, as of Oct 2026).
- Fully underwritten. A full health questionnaire, often a paramedical exam with blood and urine samples, plus medical records and database checks. It takes longer but usually gives healthy applicants the lowest price and the highest coverage amounts.
- Simplified issue. Health questions but no exam. Faster, but the price assumes less is known about you, so it is usually higher for healthy people, and maximum coverage is lower.
- Guaranteed issue. No health questions. Coverage amounts are small and often have a graded death benefit: if you die of illness in the first few years, the policy may pay back premiums or a reduced benefit instead of the full amount. States regulate how long grading can last; Missouri, for example, limits it to three years for most issue ages up to 65 unless the first-year benefit is at least half the face amount (Missouri 20 CSR 400-1.040).
Whatever path you choose, answer every question truthfully. For roughly the first two years a policy is in force, an insurer can contest a claim based on misstatements on the application (Alaska Division of Insurance; NAIC replacement model regulation).
Step 4: Decide which riders you actually need
Riders add, remove or change coverage, and some cost extra (Alaska Division of Insurance, as of Oct 2026). The common ones:
- Accelerated death benefit: pays part of the death benefit early if you are terminally ill or have a specified condition. Early payments can have tax and Medicaid consequences, so ask before you use it.
- Waiver of premium: pays your premiums if you become totally disabled as the policy defines it. Read that definition closely.
- Guaranteed insurability: lets you buy more coverage at set dates without new medical evidence. Useful if you expect your need to grow.
- Accidental death benefit: multiplies the payout for accidental death only. Your family’s need is the same whatever the cause of death, so it is usually better to buy enough base coverage.
- Child or family rider: small term coverage on other family members under one policy.
For term buyers, the most valuable feature is often not a rider at all but the conversion privilege: the right to switch to permanent coverage without a new medical exam. Compare how long it lasts. The details are covered in how to choose a term life policy.
Worked example: comparing two quotes
A 40-year-old nonsmoker in good health wants $500,000 of term coverage for 20 years. Two licensed insurers with similar ratings and complaint records quote these terms. The premiums are illustrative, not real quotes; the method is the point.
| Feature | Quote A | Quote B |
|---|---|---|
| Annual premium | $410.00 | $385.00 |
| Cost per $1,000 of coverage per year | $0.82 | $0.77 |
| Premium guaranteed level for | 20 years | 10 years; years 11–20 can rise to a guaranteed maximum of $1,150 a year |
| 20-year premiums if the rate never rises | $8,200 | $7,700 |
| 20-year premiums at the guaranteed maximum | $8,200 | $15,350 |
| Monthly payment option | $36.90 ($442.80 a year) | $34.65 ($415.80 a year) |
| Implied APR of paying monthly | 17.2% | 17.2% |
| Conversion privilege | Any time during the term, up to age 70 | First 10 years only |
Quote B looks $25 a year cheaper and saves $500 over 20 years if its premium never changes. But its rate is only guaranteed for 10 years. If the insurer raised it to the maximum allowed, Quote B would cost $15,350 over the 20 years, $7,150 more than Quote A. Quote B only comes out ahead if its premium for years 11 to 20 stays below $435 a year, about where it started. Quote B’s conversion right also expires halfway through, when a health change would make it most valuable.
The monthly option is a hidden cost in both quotes. Paying $36.90 a month instead of $410 once a year costs $32.80 more a year, which works out to an implied APR of 17.2%. If you can pay annually from savings, do it. In this example, Quote A is the better buy even though its sticker price is higher.
Step 5: Use the free-look period
After the policy is delivered, you can return it for a full refund within a set window. The NAIC guide says it is usually 10 days after you receive the policy, and the period is generally printed on the first page (NAIC, as of Oct 2026). The length varies by state and by situation. Under the NAIC replacement model regulation, which most states have adopted in some version, a policy bought to replace another comes with a 30-day return right. Some states also set longer periods for certain policy types. Check the face page of your policy for the exact number of days.
Use those days. Confirm the face amount, term, premium, guaranteed period, conversion deadline, riders, owner and beneficiaries match what you applied for. Our guide to how to read a life insurance policy walks through each section.
Replacing an existing policy
Replacing a policy can be right, for example when your health has improved or term prices have fallen since you bought. It can also be a costly mistake. Most states have adopted versions of the NAIC Life Insurance and Annuities Replacement Model Regulation, which requires the agent to give you a signed Notice Regarding Replacement and requires the new insurer to notify your current insurer within five business days (NAIC Model 613).
That notice lists the main risks. You pay new acquisition costs and possibly surrender charges on the old policy. A new contestability period starts, so claims in roughly the first two years can be denied for inaccurate application answers. Suicide exclusions may restart. Premiums will reflect your current age and health. For cash value policies, check surrender charges and tax consequences before you move money. Above all, do not cancel your current policy until the new one is issued and in force (NAIC, as of Oct 2026).
When this approach is a bad idea
- Buying permanent coverage to save money. If you cannot comfortably fund retirement accounts and an emergency fund, a high-premium cash value policy usually crowds out better uses of the money. A lapsed permanent policy, after years of high premiums, is one of the most expensive outcomes in personal finance.
- Choosing guaranteed issue when you could qualify for underwriting. You pay more for less coverage and may face a graded benefit. Apply for underwritten coverage first unless your health rules it out.
- Relying only on employer group coverage. It is often cheap, but the NAIC notes the amount is usually less than you need and may end when you leave the job (NAIC, as of Oct 2026).
- Picking by price alone. As the example shows, a lower premium with shorter guarantees and a shorter conversion window can cost more.
- No one depends on your income. If you are single with no dependents and no co-signed debts, you may not need life insurance at all beyond what your savings can cover for final expenses.
FAQ
Is a life insurance payout taxable?
Generally no. The IRS says death benefits paid to a beneficiary are not included in gross income and do not need to be reported. Interest paid on the proceeds, for example if the benefit is held and paid out in installments, is taxable (IRS, as of Oct 2026). Different rules apply if the policy was sold or transferred for value.
Should I buy through an agent or directly?
Either can work. An independent agent can compare several insurers; a captive agent sells one company’s products. Whoever you use must be licensed in your state, which you can confirm on your state insurance department’s site. Ask how they are paid, since commissions on permanent policies are usually much larger than on term.
What happens if my insurance company goes out of business?
Your state’s life and health guaranty association steps in, often by transferring policies to a healthy insurer. Coverage is capped by state law, commonly $300,000 for death benefits and $100,000 for cash value, though several states set higher limits (NOLHGA, as of Oct 2026). Keep paying premiums during the process so coverage stays in force.
Can I have more than one life insurance policy?
Yes. Many people combine an employer group policy with an individual term policy, or hold two term policies of different lengths. Insurers will ask about existing coverage and limit the total to what your income and finances justify.
How do I check complaints against a life insurer?
Use the NAIC Consumer Insurance Search to find the company and view its closed-complaint reports, or check your state insurance department’s site, which may publish its own complaint rankings. Compare several insurers of similar size, and look at complaint reasons, not just counts.
Sources
- NAIC, Life Insurance Buyer’s Guide, accessed Oct 2026
- NAIC, How to File a Complaint and Research Complaints Against Insurance Carriers, accessed Oct 2026
- NAIC, Consumer Insurance Search, accessed Oct 2026
- NAIC, Life Insurance and Annuities Replacement Model Regulation (Model 613), accessed Oct 2026
- NOLHGA, The Safety Net at Work, accessed Oct 2026
- NOLHGA, How You’re Protected, accessed Oct 2026
- SEC Investor.gov, Investor Bulletin: Variable Life Insurance, accessed Oct 2026
- SEC Investor.gov, Variable Life Insurance, accessed Oct 2026
- NAIC, Model 613 state adoption chart (Fall 2024), accessed Oct 2026
- Alaska Division of Insurance, Life Insurance Considerations, accessed Oct 2026
- Missouri Code of State Regulations, 20 CSR 400-1.040, Policies Providing Graded Death Benefits, accessed Oct 2026
- IRS, Life Insurance and Disability Insurance Proceeds (FAQ), accessed Oct 2026
This article is general education, not individualized financial, tax or legal advice.
