How Long Do You Have to Have Life Insurance Before You Die? (2024)

Let’s say you buy a life insurance policy that has kicked in immediately or after a waiting period, and you meet your unfortunate demise a day, month, or several years later. Will your beneficiaries receive the entire amount? Broadly speaking, yes.

So, how long do you have to have life insurance before it pays out? If you have, say, a 25-year term life policy, then your loved ones are usually covered for 25 years. If you have an active permanent life policy, the entire death benefit is generally in place during your lifetime.

There’s a significant cost difference between term life and permanent life insurance, though. Stay tuned.

Life Insurance Basics

Life insurance is meant to protect a spouse or partner, children, or other family members upon your death. It is intended to replace your income and avoid a large financial loss while paying the costs of a funeral or a memorial service.

When it comes to life insurance plans, there are two main types: term life and permanent life. Both kinds of insurance are sold by the majority of life insurance companies.

No matter which type you have, when you die, your beneficiaries or the executor of your estate will need to file a claim with the insurance company in order to receive the death benefit. The payout may come in one lump sum or in another form, depending on the insurance company.

How Does Term Life Work?

Term life insurance is often viewed as more cut and dried than permanent life insurance. Policy owners make regular monthly payments during the term. The insurance company pays a death benefit — or the amount of the coverage — if the policy owner dies during the term.

Term life insurance covers a set period, such as 20 or 30 years.

The coverage can range from $25,000 to several million dollars, depending on the insurer and your financial needs and plans. If the insured dies after the time period chosen, the insurance company will not provide the payout.

The intent of term life insurance is to ensure that your financial responsibilities are taken care of in case of an illness or tragedy. A policy can support the financial needs of children, help a stay-at-home parent find their footing, or cover a mortgage, credit card bills, or other outstanding debt.

Parents may decide to buy term life insurance while their children are younger and before they go to college or establish careers. Some people might also choose term life insurance because it typically costs less than permanent life insurance. Others may opt for term life because they believe they’ll be self-insured when the term ends or because they want to protect certain assets, such as paying off a mortgage.

What Is Permanent Life Insurance?

Unlike term life, permanent life insurance provides coverage for a lifetime. For example, when you purchase whole life insurance, a common kind of permanent life, the policy remains in effect for the rest of your life unless you cancel it or miss payments. Beneficiaries receive the death benefit after the insured passes away.

Permanent life insurance can be more complicated because there is a “cash value” included in the policy. These financial products are seen as a combination of insurance and savings.

One of the main differences between term life and permanent life insurance is the amount of the premium, or the money that you pay each month to maintain the policy. Permanent life insurance is usually more expensive than term life insurance because it provides longer coverage.

Recommended: 8 Popular Types of Life Insurance for Any Age

What to Consider When Choosing a Policy

There are several things to evaluate before you purchase either term or permanent life insurance. Examining the options will help you decide which type of insurance will meet your financial needs the best.

Waiting Periods

A waiting period is the length of time the insured person must wait before some or all of their coverage kicks in. Some life insurance companies will make policies effective immediately or as soon as the first payment is made.

Waiting periods were created to avoid fraud and are one way that insurance companies protect themselves. If the insurance company does not have a waiting period, the policy is likely to be more expensive than one that requires someone to wait.

When applying for any life insurance policy, it’s best to ask if there is a waiting period and whether any exceptions exist. Then, once a policy is issued, it’s smart to confirm the details.

Cost of Premiums

One major factor in weighing term life and permanent life insurance policies is the monthly premiums. Typically, term life insurance costs less — often much less — than permanent life insurance, even though the coverage amount is the same.

The difference is that permanent life insurance has a cash value component. If you need to take out a loan, you can use that money as collateral based on the interest rate given in a policy. The cash value part of a permanent life insurance policy generally grows tax-free, though in some cases withdrawals, loans, and surrenders may be taxed.

Permanent life insurance has a cash value component and costs more than term life.

One main difference between term life and permanent life is that if you live beyond the term that you chose, no money is paid out. Term life insurance policies have no cash value.

Recommended: How to Buy Life Insurance in 9 Steps

Making the Right Choice

Choosing between term life and permanent life insurance policies can be difficult. While permanent life insurance policies have a savings portion, the “cash value” is invested by the insurance companies and they choose what assets they want to invest in.

Other criteria that may help you make a decision are whether you are married or not, if you have children and how old they are, if you think your salary will increase over time, and how much debt you have, such as your mortgage, other loans, and credit card bills that would need to be paid off if you died.

Changing a Current Policy

You may already have a life insurance policy, but life circ*mstances can change rapidly. Some life insurance companies might allow you to either increase or decrease the amount of coverage.

Permanent life insurance policies tend to be more complicated, and changes may mean that you will have to pay administrative fees.

Most permanent life policies have a surrender charge, which is subtracted from the top of your cash value if you end, or surrender, the policy. Surrendering a policy means giving it up. You’ll receive the cash value, minus any fees. By canceling the life insurance policy, your heirs will receive nothing from it when you die.

The Takeaway

Life insurance can help protect your family from the financial impact of your death. Term life insurance provides coverage for a set amount of time. If the insured person dies during that time, their beneficiaries receive the entire payout. Permanent life, on the other hand, provides lifelong coverage and comes with a cash value. Beneficiaries receive the payout after the insured dies. As you consider policies, be sure to note the costs involved.

If you’re shopping for life insurance, SoFi has partnered with Ladder to offer competitive life insurance policies that are quick to set up and easy to understand. You can apply in just minutes and get an instant decision. As your circ*mstances change, you can easily change or cancel your policy with no fees and no hassles.