The key terms, defined
A few words come up in every life insurance conversation. Knowing them makes the rest of this guide, and any policy you read, much easier to follow.
- Policyowner: the person who controls the policy, pays the premiums and can change the beneficiary. Often, but not always, the same person as the insured.
- Insured: the person whose life is covered. The death benefit is paid when the insured dies.
- Beneficiary: the person, trust or organization that receives the death benefit. A contingent beneficiary receives it if the primary beneficiary has died.
- Death benefit (face amount): the amount the policy is designed to pay.
- Premium: what you pay to keep the policy in force, monthly or annually.
- Underwriting: the insurer's review of your health, habits and history to decide whether to offer coverage and at what price.
- Cash value: a savings-like component inside many permanent policies. It grows over time according to the policy's terms and can sometimes be borrowed against.
- Rider: an optional add-on that changes what the policy does, such as waiving premiums after a disability or paying part of the benefit early during a terminal illness.
Term vs. permanent life insurance
The National Association of Insurance Commissioners (NAIC), the organization of state insurance regulators, describes term life as coverage "intended to provide lower-cost coverage for a specific period," and cash value policies as ones "you can keep it for as long as you need it" (NAIC: Life Insurance).
Term life
You choose a coverage amount and a term, commonly 10, 20 or 30 years. If you die during the term, the policy pays. If you outlive the term, coverage generally ends unless the policy lets you renew or convert. Term fits temporary responsibilities: the years children are at home, a mortgage balance, a business loan. See our term life page for the mechanics, and what happens when a term policy expires.
Whole life
Whole life is designed to last for your lifetime with level premiums and a cash value that grows according to the contract. Premiums are generally higher than term for the same death benefit because the policy is built to pay out eventually and to carry cash value. Our whole life page covers how it generally works.
Universal and indexed universal life
Universal life adds flexibility in premiums and death benefit. Indexed universal life (IUL) credits interest based partly on a market index, within caps and floors set by the policy. A 0% floor is not the same as "no loss": policy charges still come out, and an illustration is not a promise. Read our indexed universal life page before considering one.
A simple way to choose
Ask what the money is for. A need that ends (income while kids grow up, a mortgage) usually points toward term. A need that lasts for life (final expenses, a lifelong dependent, an estate plan) may point toward permanent coverage. Many households use both. Our term vs. whole comparison tool and the term vs. whole life article go deeper.
How much coverage to consider
There is no single right number. The NAIC notes that "some insurance experts suggest that you purchase five to eight times your current income," but it also says working through your own situation gives a more accurate amount (NAIC).
A practical way to build your own estimate is to add up what would need to be paid or replaced:
- Debts: mortgage balance, car loans, credit cards, any co-signed loans.
- Income: how many years of your income the household would need, and how much of it.
- Future goals: education, care for a parent or a child with special needs.
- Final costs: funeral, burial or cremation, and medical bills not covered by health insurance.
Then subtract what is already in place: savings, existing policies, and any group coverage through work. Group life often ends or shrinks when you leave a job, which is why we wrote is employer life insurance enough. Our life insurance needs calculator walks through these steps for you.
How underwriting and pricing work
Underwriting is how the insurer decides whether to offer a policy and at what price. Depending on the policy, it can include an application with health questions, prescription and medical records checks, motor vehicle records, and sometimes a paramedical exam with blood and urine samples.
The factors that commonly affect premiums are age, health history, tobacco or nicotine use, the coverage amount and term length, and any riders you add. Some policies use faster, data-driven review without an exam; others ask only a few questions (simplified issue) or none (guaranteed issue) in exchange for smaller benefits and higher cost per dollar of coverage. Approval is never assured, and each carrier weighs conditions differently.
If you have a health condition, it is still worth asking. Our answers on life insurance with diabetes and life insurance with a heart condition explain what underwriters typically look at, and how long underwriting takes sets expectations on timing.
Beneficiaries and taxes
Naming beneficiaries carefully is one of the most important steps, and one of the most often skipped. Name a primary and a contingent beneficiary, keep them current after marriage, divorce, births and deaths, and think twice before naming a minor child directly, since a minor generally cannot manage the money on their own. Our South Dakota beneficiary rules answer and beneficiary checklist cover the details.
On federal income tax, the IRS says that, generally, "life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them." Interest paid on the proceeds is taxable, and different rules apply when a policy was transferred for value (IRS: Life insurance and disability insurance proceeds). Estate tax and state rules are separate questions; ask a tax professional about your situation.
Riders, living benefits and cash value
Riders let you shape a policy. Common categories include waiver of premium, accelerated death benefits that may pay part of the benefit early for a qualifying terminal, chronic or critical illness, a child term rider, and return of premium on some term policies. Definitions, triggers and costs vary by policy. Our living benefits page explains how accelerated benefits generally work.
Cash value in a permanent policy can usually be borrowed against. A loan reduces the death benefit if it is not repaid, and an unpaid loan that grows too large can cause the policy to lapse. Read how life insurance policy loans work before treating cash value as a savings account.
Before you buy: a South Dakota checklist
These steps come from the NAIC's buying tips and the South Dakota Division of Insurance, the state regulator for insurance companies and agents (dlr.sd.gov/insurance).
- Check the agent's license. Use the Division's license look-up and verification service.
- Check the company. The NAIC suggests confirming with your state insurance department that the insurer is authorized in your state and reviewing its financial strength ratings (NAIC: Tips for Buying Life Insurance). The Division lists companies licensed to sell insurance in South Dakota.
- Compare similar policies. The NAIC recommends comparing like-for-like policies from different companies.
- Understand what you sign. Do not buy a policy you do not understand. Keep the policy, illustration and any booklets together.
- Pay the company, not the agent. The NAIC advises making your check payable to the insurance company.
- Be careful replacing a policy. Dropping an existing policy for a new one can be costly early on; compare both side by side first.
- Review every few years. Revisit coverage when income, debts or family change.
If something goes wrong, you can file an insurance complaint with the Division or call it at 605.773.3563. If a family member has died and you think there may be a policy you cannot find, the NAIC's Life Insurance Policy Locator helps beneficiaries search for lost policies.
How Big Sioux Life can help
We are an independent agency in Sioux Falls serving all of South Dakota, so we can compare policies from the carriers we represent rather than one company's product line. We can walk you through term and permanent options, what underwriting may look like for you, and how riders change a policy. Availability, features and premiums vary by carrier and are subject to underwriting. If you want a starting point on cost, our term life in South Dakota guide shows how age, term and amount interact.