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Understanding Life Insurance

(July 2017)

(En Español)

Life Insurance Basics | Who Needs Life Insurance? | Types of Life Insurance | Other Types of Life Insurance | Individual versus Group Policies | Modifying your Coverage | Settlement Options | Know Your Rights | Buying Life Insurance | Shopping Smart for Life Insurance | Financial Implications of Owning Life Insurance | Replacing Your Policy with a New One | Life Settlements | Annuities | Get Help from TDI

Life insurance provides money to help your beneficiaries pay their bills and other living expenses after you die. Some policies can also provide benefits while you’re alive.

Not everyone needs life insurance. To decide whether life insurance is a good choice for you, consider your age, your assets, and whether anyone depends on you for support.

Before you buy insurance, make sure the agent and company are licensed to sell insurance. To learn whether an agent or company is licensed, call the Texas Department of Insurance Consumer (TDI) Help Line at 1-800-252-3439. You may also view agent and company information using the Agent Lookup or Company Lookup features on the TDI website.

Life Insurance Basics

People buy life insurance for many reasons, including:

  • ensuring that their beneficiaries have enough money to maintain their standard of living,
  • paying burial expenses and outstanding debts, and
  • meeting the requirement for business loans.

Beneficiaries are the people you designate to get the money from the life insurance policy after you die. The money is called a death benefit and is typically tax free to the beneficiary.

You may designate one or more beneficiaries. If you designate more than one, you must decide how to divide the money. You may also choose a secondary or contingent beneficiary to receive the money if the primary beneficiary dies before you. You may also designate an institution as your beneficiary.

Life insurance isn't an investment. An investment is a financial risk -- you might make money but you also might lose some or all of your money. Life insurance has some financial risk, but it pays a guaranteed death benefit if you pay your premiums.

Whole life, universal life, and variable life insurance can build a cash value you can use while you’re alive. Although you can use this money for retirement income, agents and companies may not call life insurance an investment or retirement income source. If an agent or company tries to sell you a life insurance policy as a good investment, be wary. Also, don't confuse life insurance with annuities. People often buy annuities for retirement because they can provide steady income over a long period.

Insurance companies use a process called underwriting to decide whether to sell life insurance to someone and how much to charge them. The company will consider these factors to decide the premium to charge:

  • your age,
  • gender,
  • medical condition,
  • whether you use tobacco, and
  • your hobbies and occupation.

Younger people and people in good health, who don't use tobacco, and who don't have a hazardous job or hobby will have lower premiums because the company expects these policyholders to live longer. People who are older, have health problems, use tobacco, or have a hazardous job or hobby will pay more.

Companies may charge you a higher premium or decide not to sell you a policy because of your potential risk. If a company won't sell you a policy, keep shopping. Underwriting guidelines vary by company. You might find coverage with another company.

Who Needs Life Insurance?

People who have others who rely on them financially should consider life insurance. You might want enough insurance to pay your debts and to provide your beneficiaries with some income. Consider your circumstances and the quality of life you want your dependents to have when deciding whether to buy life insurance and how much you should buy.

Ask yourself these questions to help you decide if life insurance is right for you:

  • Do you need to replace your income to provide for your spouse, children, or other family members?
  • Do you have debt, such as a mortgage, credit cards, student loans, or other debt?
  • Do you want to help your children pay for college?
  • Will your family need money to pay for your funeral costs or the cost to settle your estate?
  • Do you have a large estate that could be subject to state or federal estate taxes?
  • Do you own a business that’s financially dependent on you or someone else?
  • Would you like to leave money to a charity?

If you answered yes to these questions, consider buying life insurance.

Buying Life Insurance for You or Someone Else

You may buy a life insurance policy for yourself or for anyone who gives you permission and agrees to the company's underwriting process. The person who buys the policy is the policyholder or owner and usually pays the policy premiums.

People usually buy life insurance for themselves to provide money for a spouse, dependent child, or other family member. Sometimes, you might want to buy a life insurance policy on someone else and name yourself as the beneficiary. For example, if you’re divorced and get child support, you might want to buy a life insurance policy on your former spouse to make up for losing child support if your ex-spouse dies.

Creditors may buy life insurance on people they loan money to. The policy would pay the balance of the loan if the person dies before it’s repaid. Businesses sometimes buy policies to cover the lives of employees or partners who are important to the company.

Provide for charitable organizations by buying life insurance coverage and making them the beneficiary to your life insurance policy.

Zero premium life insurance

TDI urges consumers to proceed with caution if they're asked to participate in what is commonly called a "zero premium life insurance policy." The policies are most often sold to people between the ages of 65 and 85. In these arrangements, the policy is owned by a stranger and the consumer receives a lump sum payment or the consumer's beneficiaries receive a portion of the death benefit. These nontraditional products in the stranger-owned life insurance market are also called "estate maximization plans" or "no cost to the insured" policies.

If you enter into one of these contracts, be sure you:

  • understand the contract and your obligations, 
  • know the company you are applying with,
  • are careful about disclosing confidential information,
  • consider the tax consequences,
  • understand that the policy might count as an asset when determining eligibility for public benefits, and
  • make sure the people involved in your transaction are licensed and registered by TDI. 

Types of Life Insurance

There are different types of life insurance: term life, permanent life, a combination of the two, and accidental death and dismemberment.

Term Life Insurance

Term life policies are typically cheaper and less complicated than permanent life policies. There are two types of term life policies, annual renewable term and level term:

  • Annual renewable term is a one-year term where the premium adjusts each year based on your age when you renew your policy.
  • Level term is sold with term periods of five, 10, 15, 20, 25, 30, or more years. The premium is the same during the period of the term. Some level-term policies guarantee that the premium won't change, but other policies only guarantee that the premium won't change for a few years even though the term may be for a longer period. It's important to read the policy to know how long your premium is guaranteed to be the same.

Term life insurance policies typically only provide a death benefit. If you die during the term, your beneficiaries get the death benefit. Term policies rarely include a cash value or a savings component and aren't designed to provide coverage for your entire life.

Term life insurance provides inexpensive coverage during a time when many people need it most, such as when they're raising a family, paying off debt, or going to college.

Term life can be a good choice for young families with children. You might need coverage only until your children are adults and are earning their own income.

Term Life Features

The two most common provisions of most term life policies are the convertibility provision and the renewability provision.

Convertibility means you can exchange the policy for permanent life insurance of equal value without taking a medical exam or going through any underwriting. This means you could transfer a policy without having to answer questions about your health or medical history.

Converting a policy will increase your premium because permanent coverage usually costs more than term life. Convertibility can be an important feature if:

  • your health worsens after you buy the term policy,
  • you can't qualify for another life insurance policy, or
  • you want to own a policy for your lifetime that builds cash value or savings.

Companies usually only allow policyholders to convert term life policies for a period of time, typically before they turn 65.

Renewability means you may extend the policy for additional terms, regardless of your health and without having to pass a medical exam. This can be another advantage of term life coverage. Most companies offer term life insurance only up to a certain age, usually 70 or 80.

Premiums generally go up at each renewal term. Annually renewable premiums can get high for people past middle age. If you're paying high annually renewable premiums, consider another type of term coverage, such as level term.

Term Life Payouts

Term life insurance is typically paid out in one of three ways:

  • Level term coverage pays a death benefit that remains the same over the term. For example, a 20-year level term policy with a $100,000 death benefit will always pay $100,000, whether the insured dies in the fifth or 15th year. Depending on the policy, your premium for level term coverage will either remain the same or increase at a scheduled rate.
  • Decreasing term coverage pays a death benefit that decreases over the term at a scheduled rate. For example, a 20-year decreasing term policy may begin with a $100,000 death benefit that decreases by $5,000 per year. If you die in the 11th year, the policy pays $50,000. Decreasing term coverage can be a good option for parents since a child's need for financial support typically decreases as the child gets older. A disadvantage of decreasing term coverage is that its convertibility value also decreases each year. Premiums typically remain about the same over the term. Mortgage life insurance is a version of this type of term life insurance.
  • Increasing term coverage pays a death benefit that increases over the term at a scheduled rate, which is often linked to inflation. For example, a 20-year increasing term policy may begin with a $100,000 death benefit that increases by 5 percent of the face value per year. If you die in the 12th year, the policy would pay about $155,000. Premiums typically increase each year relative to the benefit increase.

Permanent Life Insurance

Permanent life policies usually have higher premiums because they provide coverage for your entire life and have other features and benefits. The main feature of most permanent life insurance is a cash value or savings component that grows over time and may be withdrawn, invested, or borrowed against during your lifetime. You can also use it to pay for future premiums to keep the policy during your retirement years.

Your initial premiums for permanent insurance are typically higher than for term life. There are two main reasons for this. First, the policy likely has a cash or cash value savings feature, and second, you're buying coverage for a longer period of time based on your current age. Generally, the premiums on a whole life policy never change. Universal life or variable life insurance premiums may change over time because the cost of insurance usually gets higher as you get older. Be sure you understand how your premiums might change over time.

If you buy a permanent policy when you're young and continue the policy into middle age, your premium will likely be lower than a term life policy bought when you're older. This is true even if the death benefit is similar.

A portion of each premium is placed into an account – known as the cash value – that grows over time. The amount may grow at a fixed interest rate for whole life or universal life policies. It may be tied to indexed interest rates in an indexed universal life policy. In a variable universal life policy, the cash values may increase or decrease if the sub accounts you select increase or decrease based on their underlying performance. These sub accounts are invested in stocks, bonds, or both and are subject to their own expenses.

A policy might allow you to withdraw from the cash value, use it as collateral for a loan, or use it to make future premium payments. Sometimes, if you withdraw the cash value, the company will cancel the policy. If that happens, the coverage will end and it might affect your taxes.

When you die, beneficiaries get the policy's death benefit. Depending on the policy, your beneficiary may get the death benefit and the cash value.

It might take a few years for a policy to build a cash value. The policies might also apply a surrender fee if you withdraw the money early. You might also be liable for income taxes on the money you withdraw from the cash value that exceeds the premiums you paid.

Consider your needs before deciding which type of life insurance is best for you. Buying a permanent life insurance policy and surrendering it early might not be a good financial decision.

Types of Permanent Life Policies

The two most common variations of permanent insurance are whole-life insurance and universal life insurance, also known as flexible premium adjustable life insurance.

Whole-life insurance remains in effect for your entire life unless you cash the policy in or stop paying premiums. The policy is guaranteed renewable so you never have to renew the policy. Premiums are fixed at the age you buy a policy. Therefore, your premium will be lower the younger you buy.

Some whole-life policies are participating. This means the insurance company might pay an annual dividend to policyholders. You can usually get the dividend in cash, add it to your policy's cash value to buy additional death benefits, or use it to pay future premiums.

Dividends aren't guaranteed. Some policies don't pay dividends at the company's projected rate and others might be higher than the projection. Ask for the company's history of projected dividends versus dividends actually paid before buying a policy.

Universal life insurance allows you to choose the amount of coverage, the amount of your premium, and the cash value you build. This policy also provides flexibility to change your premium payments and to make withdrawals or take a loan against the cash value. Remember that any changes you make may affect your coverage. The interest rate your cash value earns might get higher or lower over time based on the interest rate markets. The underlying expenses and charges could also change, which could affect future premium amounts or the longevity of your life insurance coverage. The policy may remain in force until the maturity date, which is generally age 95 or 100 if you have $1 or more in cash value. At the maturity date, coverage ends and you get the cash value. Because of the flexible nature, review the policy annually. Ask for an inforce illustration to make sure the policy hasn't changed. If it has, adjust the policy premiums or death benefit amounts to allow it to continue to the maturity date.

Some universal life policies pay a guaranteed rate of return. Others are variable universal life policies whose value depends on the performance of the sub accounts that an insured selects, which are invested in stocks, bonds, or other investments. Agents who sell variable life insurance in Texas must have a federal securities license and a standard state insurance license. The rules and policy terms for flexible premium policies are complicated. Talk to a life insurance professional to understand a policy before you buy it.

A universal life policy will allow you to change the amount you pay for the premium, the death benefit, or the cash value. Any adjustment you make will affect one or both of the other areas. For example, increasing your payment will increase either your cash value, death benefit, or both.

Many universal life policies give you the option to lower your premium payments below the amount needed to pay the cost of the insurance. Any shortfall in the payment versus the cost of insurance will be deducted from the cash value. Be careful to review your policy if you make a lower premium payment because, if the cash value reaches zero, you must pay the full cost of insurance or the policy will lapse. The company must send you an annual report with your cash value amount and how long the policy might last based on the cash value, cost of insurance, and interest rate credited to the cash value. Review the report regularly to monitor the future duration of the policy.

Some universal life policies have a secondary guarantee, or a no-lapse premium benefit. The primary guarantee is the premium payment to cover the cost of insurance. If the primary guarantee isn't enough, a secondary guarantee keeps the policy from lapsing even if the cash value is zero. However, the no lapse premium is typically a fixed amount that must be paid to maintain this no-lapse benefit.

For another explanation of how universal life insurance policies work, watch TDI's video about universal life policies.

Comparing the Major Types of Life Insurance

Permanent Life
Term Life Whole Life Universal Life
Premium Low initially but may increase with each renewal. Higher initially than term life. Normally doesn't increase because it's based on your age at the time the policy is issued. Flexible premium payments.
Protects you for… A specified period. Your entire life if you keep the policy. A flexible time period, which may be your entire life.
Policy Benefits Death benefits only. Death benefits, possibly a guaranteed cash value and a loan value. Death benefits (that may include a cash value), possibly a cash value, and a loan value.
Advantages Ability to buy more coverage for a lower premium. Generally fixed premium amount. Cash value accumulation. You may have loan options for the cash value. More flexibility with your payments. Cash value is credited with current interest rates.
Disadvantages Premium increases with age. No cash value. May be expensive to cover a short-term need. Usually little to no cash value in the first few years. May be expensive to cover a short-term need. The payment isn't guaranteed. Low interest rates can affect cash value, which may increase the premium payments.
May be renewable or convertible to a permanent life insurance policy. May pay dividends. May provide a reduced paid-up policy. Partial cash surrenders permitted. Partial withdrawals are allowed. Increase and decreases to coverage amounts may be allowed

Other Types of Life Insurance

These types of life insurance provide only specific coverages or are sold in unique circumstances:

Credit life is a type of policy that lenders offer and borrowers buy to pay the balance of a loan if the borrower dies before repayment. A bank or lender might require you to buy a credit life policy as a condition of a loan.

If you already have a life insurance policy, you might not need credit life. You might instead agree to assign some of the death benefits to the lender to repay the loan balance.

Credit accident and health coverage pays the balance of the loan if you get sick or injured and can't repay the loan. A creditor who requires this coverage will usually add the cost of the premium to your loan payments.

You might have to go through underwriting for credit life insurance. Texas law prohibits lenders from requiring that you buy credit life or credit accident and health insurance for some loans. Here are some restrictions:

  • A lender may not require credit life or credit accident and health coverage as a condition of any home loan. Instead, the lender may require you to buy a mortgage guaranty policy, a type of coverage that protects a lender from default under more general circumstances.
  • A lender may not require you to buy credit life and credit accident and health coverage for any loan of more than 10 years.
  • A lender may not charge a loan recipient more than the company's premium for the coverage or otherwise profit by requiring the coverage.
  • A lender may not require you to buy coverage from a specific company.

Prepaid funeral insurance is a special type of policy to pay for funeral services in advance. An advantage of this insurance is that it locks in the cost of the funeral at current prices.

Funeral insurance can be expensive compared to other types of life insurance. The premium amount might exceed the death benefit. Also, many policies won't pay the full funeral expenses if you die before paying a required amount.

A regular life insurance policy or savings may be a better way to pay funeral costs. Shop carefully before you buy funeral insurance.

Home service life, or industrial life, is usually sold door to door. Some home service life policies can be a good deal, but many offer low death benefits, build cash value at a low rate, or have high premiums.

Individual versus Group Policies

Individual life insurance is bought by individuals and insures the life of one or more people in a single policy. This coverage gives you the most choice because you're free to shop among companies to find the policy that best meets your needs. Many companies sell individual policies with the features you need.

Individual policies usually have strict underwriting guidelines because the company's risk is based on one person. Younger people in good health usually pay less for coverage than those who are older or have high risk factors. A company might not sell a policy to someone considered a high risk.

Group life insurance is bought by employers, governmental entities, and other organizations, such as professional organizations, unions, churches, and fraternal groups, and insures a group of people under a single contract. State and federal laws restrict the companies' underwriting criteria for group policies. If you don't qualify for an individual policy because of age or health reasons, group life coverage might be a good option.

Any organization that sponsors a group life policy must make it available to all members of the group regardless of age or health status. It is against the law to require group members to buy a policy as a condition of membership. Group life insurance may be sold as term life, whole life, or universal life coverage.

Modifying your Coverage

Policy riders and endorsements are additional policy benefits you might add to a policy to expand the coverage, usually for an additional premium. Some of the most common endorsements are:

  • Additional term insurance adds term life coverage to a whole life or universal life policy. For instance, if you need $500,000 worth of total coverage, you could buy a $100,000 permanent life policy with a $400,000 additional term insurance rider. As you make more money, you could convert the term rider into the universal life policy or buy an additional whole life policy at your current age.
  • Guaranteed insurability ensures that you can buy additional coverage from the company, regardless of your age or health condition. These factors may still determine your premium rate. You usually must buy the additional coverage by a specified date or life event, such as retirement or before reaching age 50.
  • Accidental death provides a death benefit if you die because of an accident. Sometimes, an accidental death provision in your policy will pay double. Restrictions might apply.
  • Disability waiver of premium covers the premium for you if you meet the policy's definition of disabled. This rider is typically only available to people younger than 60.
  • Accelerated death benefit option prepays some or all of the death benefit while you are still living and are diagnosed with a terminal illness, specified disease, or a long-term care illness. People often buy this rider to help pay for the care you need at the end of your life. The rider typically requires a doctor to confirm that you can’t perform certain tasks, called activities of daily living, such as bathing, dressing, or eating
  • Spousal rider provides term insurance coverage for your spouse. Essentially, this rider combines two policies into one.
  • Children's rider provides term insurance for your children. Most companies require the child to be at least 14 days old, and coverage typically lasts until the child turns 21 or 25.

Settlement Options

Companies usually pay the death benefit as a single lump sum, but there are other settlement options. Either you or your beneficiary chooses how the death benefit will be paid. Common settlement options include:

  • Interest option. The death benefit remains with the insurance company, and the company pays the interest to the beneficiary regularly.
  • Fixed period. The company pays the death benefit at regular intervals, with interest, over a chosen period of time.
  • Life refund. The insurance company pays a set monthly amount to the beneficiary for the remainder of his or her lifetime. Under this option, it's possible for the beneficiary to receive more than the policy's stated death benefit if he or she lives longer than expected.

Know Your Rights

Prompt Payment of Death Benefits

Insurance companies must pay the proceeds of the life insurance policy to the beneficiary within two months of receiving proof of death and verifying the beneficiary. For an individual life policy, the company must also pay interest on a death benefit from the time the company receives the proof of loss statement to the time the company accepts the claim and offers to pay the death benefit.

Missing a Premium Payment

Most policies have a 31-day grace period after your premium's due date, during which you may pay the premium with no interest charged and still have coverage. If you die during this period, your beneficiary receives the death benefit minus the premium owed.

If Your Policy Lapses

To reinstate a lapsed policy, the company may require you to pay the overdue premium with interest. If you had a loan against your cash value when the policy lapsed, the company may also require you to pay any unpaid interest and reinstate the loan. Most companies will reinstate a policy within a five-year period, but may require you to answer additional health questions or take another medical exam.

Buying Life Insurance

When you apply to buy a life insurance policy, the company will consider your risk factors. Based on the information you provide, the company will decide whether to sell you a policy and what to charge you. This evaluation is called underwriting. You’ll probably have to fill out a health questionnaire. You might also have to provide medical records, take a physical exam, or complete a financial questionnaire.

Contestable Period

It's important that you complete the entire application accurately. Life insurance policies have a two-year contestable period. If you die within this period, the company may investigate the cause of death and review the information you provided on the application. If the company learns that you gave inaccurate information or withheld information, it can deny payment of the death benefit. This might be the case even if the information is unrelated to the actual cause of death. If a company denies payment, it must refund the premiums you paid into the policy.

Most companies won't pay the death benefit during the first two years of the policy if the cause of death is suicide. If the company doesn't pay the benefit because of suicide, it will return the amount of the premiums paid.

Once your policy has been in effect for more than two years, however, the company must pay the death benefit regardless of the cause of death. The only exception is if you don’t pay your premiums. The company may not use information you disclosed truthfully to deny payment.

Choosing the Right Amount

There is no formula to decide how much life insurance you need. Some consumer groups recommend buying five to seven times your annual household income, while others recommend 10 times your income during low interest rate environments.

To decide the amount that's right for you, consider the debt you have, the amount of income your family must replace, and whether your survivors will have other expenses to pay, such as college costs or funeral expenses. Also consider whether you want to leave a legacy or gift to your beneficiaries.

It's also important to consider the value of services provided by nonwage earners. For example, a stay-at-home parent's child care and household management should be included.

Shopping Smart for Life Insurance

  • Research the company. An insurance company's financial strength and complaint record can tell you a lot about the quality of service it provides. You can learn a company's financial rating and the number of complaints against it by calling the Consumer Help Line or using the Company Lookup feature on our website. Shop for a low-load (commission) or no-load policy. You might save money, particularly on permanent life insurance, if you buy a policy with low commissions and administrative fees, collectively known as the load. Financial planners who are licensed insurance counselors often sell these policies. Generally, financial planners charge clients a flat service fee. Since low load policies have fewer initial fees, you will also lose less money if you cash out early.
  • Make sure your company and agent are licensed. It is illegal for an agent or company to sell insurance in Texas without a state license. The Texas Life and Health Insurance Guaranty Association pays some or all of most claims for Texas-licensed companies that go bankrupt or become insolvent. If your company is unlicensed and goes bankrupt, your beneficiary might not get the death benefit. You can learn whether a company is licensed by calling TDI's Consumer Help Line or by using the Company Lookup feature on our website.
  • Get quotes from several companies. Each insurance company uses its own underwriting guidelines. One company might sell you a policy at a much lower premium than another. There are two types of life insurance agents, and they earn income through salaries, commissions, bonuses, or a combination of the three.
    • Captive agents sell policies only for the insurance company they work for.
    • Independent agents sell policies for multiple companies. An independent agent should be able to give you premium quotes from several companies during a single phone call or visit.
  • Compare "apples to apples." Be sure the policies you compare offer similar levels of coverage. The more features, options, and benefits a policy provides, the more it will cost. A less expensive policy could have fewer features or a lower death benefit. A more expensive policy might be a better value when you consider the amount of the death benefit per premium dollar charged. Don't choose a policy based on price alone.
  • Use your free-look period. Texas policies will give you a free-look period of at least 10 to 20 days. During this time, you may cancel the policy for any reason and get a full refund. Use this time to read your policy carefully to be sure the coverage is right for you.

Here are some additional tips to help you shop for life insurance:

  • Agents often use charts to show how a policy's cash value might grow. Be sure that the chart also shows a cash value that is guaranteed by the insurance company, and not a financial projection on what the company is currently paying. Projections are based on assumptions and you shouldn't rely on them as a promise of policy's performance. You might earn much less than the projection. Ask your agent for a history of a company's projections versus the actual growth of cash values. The agent shouldn't object.
  • Be careful if an agent tells you that interest or dividends earned on your policy will cause your premiums to disappear during the life of the policy. If interest rates or dividends drop, you may have to pay higher premiums or pay longer than you expected.
  • Some agents also sell retirement investments and student loans. The law prohibits agents from offering discounts on an investment or loan, or offering a gift to encourage you to buy life insurance. If you think an agent has made an improper offer, report it to TDI by calling the Consumer Help Line.
  • Insurance companies sometimes market life insurance policies as retirement savings tools, estate plans, election funds, or mortgage protection. Not clearly identifying a policy as life insurance is a misrepresentation and a violation of the law. If you believe an agent or company has misrepresented a policy, call our Consumer Help Line to report it.
  • A few simple guidelines can help you avoid becoming a victim of insurance fraud:
    • Never pay cash for a policy.
    • Never sign a blank application.
    • Consider the company before you buy insurance over the phone or on the first visit.
    • If you think you need help choosing the right policy for you, have a friend or family member visit the agent with you. The agent shouldn't object.

Financial Implications of Owning Life Insurance


The cash value of a life insurance policy is considered an asset when determining if you're eligible for Medicaid. The earnings from a loan using the policy as collateral might also be an asset in some circumstances. If you're on Medicaid, talk to an attorney or financial adviser to understand any consequences of owning life insurance.


The cash value of a life insurance policy generally accumulates tax-deferred. This means you don't pay taxes on it until later, if ever. Withdrawals from the cash value are generally nontaxable until the cash value exceeds the total premiums paid into the policy.

The law generally considers a death benefit to be reimbursement for a beneficiary's loss, and not income. Beneficiaries rarely have to pay federal income taxes or an inheritance tax on a life insurance settlement.

If a policy doesn't list a beneficiary, or the beneficiary is deceased, the death benefit is paid to the insured's estate. Heirs to the estate may have to pay taxes on the money they received from the estate. If you're considering buying life insurance, talk to an attorney or financial adviser to understand the tax consequences.


Unless a legal exception -- such as fraud -- applies, the cash value and death benefit of a life insurance policy are exempt from:

  • creditors;
  • demands in bankruptcy proceedings; and
  • execution, attachment, garnishment, or other legal processes.

Replacing Your Policy with a New One

Review the price and coverage of your policy every few years to make sure you're still getting a good value and the coverage you need. However, replacing an old insurance policy with a new one is not always a good idea. Consider the following:

  • New policies usually take longer to build cash values and to pay dividends.
  • The two-year contestable period begins again under the new policy. During this period, if you die and the company finds out that you gave wrong information on your policy application, your beneficiary might not receive the death benefit.
  • If changing to a new policy means withdrawing early from a permanent life policy, your cash value might be reduced by surrender fees.
  • You could become underinsured if the new policy doesn't provide the same coverage or benefits as the old one.
  • You will probably have to answer additional health questions or have another medical exam.
  • State law requires agents to give you a notice advising you to carefully consider whether replacing a policy is in your best interest.

If you exchange a policy, your agent might earn a commission on the sale. An agent who persuades someone to switch to a new policy to earn a new commission, without regard to the implications for coverage, is against the law. This is called churning. If you believe an agent has improperly encouraged you to sell a policy to purchase a new one, you may complain to TDI.

Life Settlements

Sometimes you might need to convert your life insurance policy to cash or use some of the money that would have paid the death benefit. People sometimes do this because they outlive their retirement savings or become ill and need expensive care or treatment.

A life insurance policy is personal property. You can sell it just as you would your other property, but there are special rules. You can sell your life insurance policies to an authorized life settlement provider for a percentage of the policy's death benefit.

If you have a terminal illness, you can sell your life insurance policy and get a life settlement, formerly known as a viatical settlement. To do this, a doctor must determine that you have two years or less to live. Under federal law, all earnings from a viatical settlement are tax-free.

If you don't have a terminal illness, you might still be able to sell your policy and get a life settlement. You’ll probably have to pay taxes on the money you earn from a life settlement.

Sale Amounts

The settlement provider will only pay a percentage of the policy's face value. For example, a life settlement provider might pay $75,000 for a life insurance policy that will pay $150,000 when the policyholder dies. There are no laws requiring a certain minimum sale amount. Settlements typically range from 10 percent to 75 percent of a policy's face value.

It's a good idea to talk to several settlement providers because prices vary. Settlement providers usually look at these factors to decide how much to pay for a policy:

  • Your life expectancy. Settlement providers will pay more for policies if you have a shorter life expectancy. Therefore, the sale price for a viatical settlement, as it was formerly known, is usually much higher than that of a life settlement. Most settlement providers won't buy a policy in a life settlement unless you are 65 or older.
  • Policy premiums. Because the settlement provider assumes all future payment obligations, a policy with lower premiums is worth more.

The income you earn from a life settlement could affect your eligibility for Medicaid or other government benefits. The income might not be exempt from bankruptcy or creditor proceedings. Before entering into life settlement, talk to an attorney or financial adviser.

Life settlement providers and brokers (agents who represent policyholders to negotiate settlement transactions) must register with TDI. For a list of registered life settlement providers and brokers, call the TDI Consumer Help Line.

Alternatives to Consider

There are other ways to convert a policy to cash. Here are some other options:

  • If your policy has a cash value, you might be able to cash it in.
  • Many lending institutions may give you a loan using your policy as collateral.
  • A policy with an accelerated death benefits provision or rider will prepay all or some of the death benefit before you die if you are diagnosed with a terminal illness, specified disease, or long-term care illness.


Life insurance companies, agents, and independent agents may sell annuities as a type of investment. Annuities can provide a place to build savings or provide an immediate income.

There are two primary types of annuities: fixed and variable annuities. Each type provides certain features.

  • Fixed annuities have a guaranteed minimum interest rate. The money you invest and your earnings are guaranteed not to lose money.
  • Variable annuities allow you to select sub-accounts that may range from conservative to very aggressive. The earning potential is greater with a variable annuity, but so is the risk. The money placed in a variable annuity isn't guaranteed and you could lose money.

Besides the two primary types of annuities, each annuity may be deferred or immediate.

  • A deferred annuity is generally used to build savings. The money invested grows tax-deferred and is withdrawn , typically during retirement or at death. A deferred annuity has two phases: the accumulation phase, when money is being invested, and the payout phase, when money is withdrawn or paid to the owner and annuitant.
  • An immediate annuity provides a "pension like" stream of income immediately from the money you give the insurance company. You can select to receive payments for a certain period, for the rest of your life, or for the rest of your and your spouse's life. Read your contract and understand what happens to your money in an immediate annuity when you die.

Annuities might not be right for everyone. It depends on your needs and goals. Typically, surrender charges may apply during the first seven to 10 years. Therefore, annuities are usually not good short-term investments.

Many investors buy versions of the same annuity. The buyer's premiums are pooled into a fund that earns profits. In return for an administrative fee, a share of the profits, or both, the company managing the annuity agrees to pay you a return on your investment.

If you are considering buying an annuity, talk to an insurance professional or financial adviser. For more information, read TDI's Understanding Annuities publication.

Get Help from TDI

For insurance questions or for help with an insurance-related complaint, call the TDI Consumer Help Line at 1-800-252-3439 or visit our website.

Visit to shop for automobile, homeowners, condo, and renters insurance, and to learn more about health insurance and your options for coverage.

The information in this publication is current as of the revision date. Changes in laws and agency administrative rules made after the revision date may affect the content. View current information on our website. TDI distributes this publication for educational purposes only. This publication is not an endorsement by TDI of any service, product, or company.

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Last updated: 6/26/2018