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Your complete guide to life insurance and how it works

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By

Nupur Gambhir

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

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This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.

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By

John Voelker

John Voelker

Underwriter, Founder and President of Voelker Underwriting Services

John Voelker is the founder and president of Voelker Underwriting Services. He has more than 30 years of experience in underwriting and the life insurance and financial services sector. He’s also a fellow of the Life Management Institute and a member of the Risk Appraisal Forum and Association of Home Office Underwriters.

Updated|12 min read

Life insurance is an affordable way to provide financial support to the people you love after you die. It can be relatively straightforward, but understanding how it works will help you get a policy that's right for you. Whether you're just getting started and wondering what life insurance is, or you have questions about the ins and outs of your policy, our library of explainers has what you need. And for any life insurance questions you want to talk over with a real person, our experts are always here to help you out.

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01

What is life insurance & how does it work?

Life insurance provides financial protection for the people you care about. You pay a monthly or annual

premium

to an insurance company, and in exchange the company pays a tax-free lump sum of money to your

beneficiary

if you die while the policy is active. You can customize your life insurance policy to fit your family’s needs by choosing the type of policy you buy, the number of years you want it to last, and the amount of money paid out.

So what does life insurance cover? Your beneficiaries can use it to cover many types of expenses, including:

  • Co-signed debt, including student loans

  • Mortgages

  • College expenses for your kids

  • Living expenses for your family

  • Home labor expenses (cooking, cleaning, etc.)

  • Burial expenses

  • Estate taxes that your heirs must pay for other assets

  • Medical expenses

  • Charitable contributions

To get this money after you die, your beneficiaries will fill out a death claim form and submit it to the insurer. Once the insurer approves the claim, your beneficiaries get the funds to use however they want.

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How does term life insurance work?

Term life insurance provides the most straightforward coverage. It's active for a set period, usually 10 to 30 years, and pays out a death benefit to your beneficiaries if you die while the policy is active. That's it — no frills, just simple financial protection for the people you care about. Term is the most common type of life insurance.

A mother and daughter clasp hands while smiling at a breakfast table

How does whole life insurance work?

Like term life, whole life insurance pays out to your beneficiaries when you die, but it has more bells and whistles. For starters, it’s active for your entire life, so your beneficiaries are guaranteed to get a death benefit. It also comes with a savings component called the cash value, which can be used to supplement your nest egg and diversify your investment portfolio.

How do other types of insurance work?

Most people just need a straightforward term or whole life policy, but there are other types out there, too. Most of these policies are catered towards niche financial planning needs, such as a specific investment plan or people who can't get traditional coverage.

→ Read more about the other types of life insurance

What’s in a life insurance policy?

To fully understand your life insurance policy, there are a few terms you need to know. No matter what type of policy you buy, life insurance consists of these five components:

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Insured

The person covered by the policy. When they die, the life insurance company pays out the death benefit.

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Policyholder

The person who owns the life insurance policy and pays the premiums to keep it active. Usually the policyholder and the insured are the same person, but occasionally they are different.

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Beneficiary

The person, people, or institution(s) that receive money if the insured dies. There can be more than one beneficiary named on the policy.

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Premium

The money paid monthly or annually to keep a policy active (or “in force”). If you stop paying premiums, your policy will be canceled by the insurer.

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Death benefit

The amount of money paid out upon the death of the insured. Life insurance becomes active as soon as the first premium is paid, so policy beneficiaries can receive the death benefit right away.

→ Learn more about policies with our Life Insurance Glossary

02

Why is life insurance important?

Most Americans don’t have enough emergency savings to last three months, [1] let alone enough to cover their family’s expenses for years to come. That’s where life insurance comes in — you can protect your family even if you don’t have $1 million in the bank. Life insurance provides a contingency plan for as little as $20 to $30 a month, and ensures your family isn’t left scrambling for funds after you’re gone.

→ Read more about why life insurance is important

More about the benefits of life insurance

Life insurance does more than just offer peace of mind and financial security. It can be used as a tool to minimize tax liabilities and protect your financial assets.

Is life insurance worth it?

Life insurance is a pivotal part of any financial plan. Over the course of a policy, it costs exponentially less than the amount your loved ones would receive if you died.

Read more to see if life insurance is worth it for you

What are the benefits of life insurance?

The tax-free payout (and the financial security that comes with it) is the biggest benefit, but there are other advantages, such as the option to use your policy as a savings account.

Read more about the benefits of life insurance

Is life insurance a good investment?

If you're a high-earner who has maxed out your investments, you can add whole life insurance to your portfolio. But for most people, it's an insurance product first and foremost.

Find out if life insurance is a good investment for you

03

Who needs life insurance?

Anyone with financial obligations should get a policy. Life insurance does more than just provide money for everyday living expenses. It can pay for estate taxes, provide money for college, cover outstanding debts, build generational wealth, and pay for your funeral (which can cost upward of $7,000).

People who need life insurance include:

  • Income-earning parents: Parents provide financial support for their kids, paying for things like food, housing, and college tuition.

  • Stay-at-home parents: Stay-at-home parents care for children, clean, cook, and do other work that would cost money to replace.

  • Spouses or domestic partners: If you share expenses, having a life insurance policy ensures your partner won't be liable for double what they can afford.

  • Students with co-signed student loans: If you die, any unpaid debts fall to the co-signer.

  • People with a mortgage: Life insurance can cover your mortgage payments so your family doesn't lose their home.

  • Caregivers: Leaving behind a life insurance policy ensures that your family will be able to afford continued care.

  • High-net-worth individuals: If your family would be on the hook for estate taxes after you die, they can use the life insurance money to cover those taxes.

→ Read more about who needs life insurance

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04

How much life insurance do I need?

When you buy a policy, you’ll need to decide on a coverage amount — how much your beneficiaries will receive as a death benefit. As a general rule, our experts recommend you get about 10 to 30 times your income in coverage.

To calculate a more precise figure, you can use the DIME method, which tallies up your outstanding Debt, annual Income for the number of years that you'll provide for your family, the amount left on your Mortgage, and the cost of your children's Education. That number is a good starting point, but you may need less or more depending on personal factors such as other savings or whether you're supporting older family members.

→ Read more about how much life insurance you need

05

How much does life insurance cost?

How much you pay for life insurance depends on your health profile and how much coverage you’re buying. A healthy adult in their 30s can expect to pay under $30 a month for a $500,000 policy that lasts 20 years. Buying life insurance does get more expensive as you get older, but there’s always a way to get coverage that fits into your budget.

Getting life insurance as soon as possible is the best way to get the most affordable policy. It also protects you from any health changes that could increase your rates. Other factors, like working in a dangerous occupation, having serious medical conditions that run in your family, or smoking, can impact your rates, too. A Policygenius agent can advocate on your behalf to get you the best rates for your profile.

→ Read more about how much life insurance costs

Average term life insurance rates by age, March 2022

Age / Sex

$250K

Coverage Amount

$500K

Coverage Amount

$1M

Coverage Amount

25 years old

Female

$14.26

$21.17

$33.82

25 years old

Male

$17.22

$27.01

$44.90

35 years old

Female

$16.63

$25.62

$42.97

35 years old

Male

$18.95

$30.44

$52.06

45 years old

Female

$29.04

$48.13

$87.20

45 years old

Male

$35.72

$61.05

$113.45

55 years old

Female

$61.79

$109.49

$209.07

55 years old

Male

$85.40

$152.22

$286.33

Methodology: The chart above reflects rates, as of March 2, 2022, for male and female non-smokers in a Preferred health classification with a 20-year term length. Rates are based on the monthly Policygenius Life Insurance Price Index. Prices in the index are determined by internal actuarial rate tables for 10 life insurance carriers that offer policies through the Policygenius marketplace: AIG, Banner Life, Brighthouse, Lincoln Financial, Mutual of Omaha, Pacific Life, Protective, Prudential, SBLI, and TransAmerica.

Life insurance calculator

You don't have to wait until you hop on the phone with an agent to get a sense of what to expect. Check out our free cost calculator to estimate how much a policy will cost you. Once you have an estimate, you can compare quotes from insurance companies to find the policy that's right for you.

→ Read more about using our life insurance calculator

More about the cost of life insurance

Life insurance is different for everyone, and how much coverage you need or how much you’ll pay won’t be the same as your friends, family, or even your spouse. Read more about life insurance costs so you know what to expect when you apply.

06

More questions about life insurance, answered

Our library of expert-authored articles covers just about every question you might have about life insurance — along with some you might not have known you had.

How do you find the right life insurance for you?

To set up the right financial protection for your family, you'll want to make sure you get the right life insurance policy with the right amount of coverage.

How do you find coverage that fits into your budget?

Life insurance won’t do any good if you can’t pay for it. Policies are customizable so they can fit into your budget.

Read more about finding affordable life insurance

How does your lifestyle affect your coverage?

People in riskier occupations, such as pilots, may have to pay more for coverage. But some insurers will offer you better rates than others.

Read more about how your job affects insurance rates

How much life insurance coverage are you eligible for?

The amount of life insurance you can get depends on your actual income and assets — also known as evidence of insurability.

Read more about evidence of insurability

How long should my life insurance coverage last?

It’s important to get a policy with coverage that lasts for as long you need it so that your family has a sufficient safety net.

Read more about how to determine your coverage length

Who should you name as your beneficiaries?

Your beneficiaries are the most important people in your policy. If you don’t list the right people, they never may see the life insurance payout that you paid for.

What is a beneficiary?

Your life insurance policy’s beneficiary is the person or organization designated to receive the death benefit when you die.

Read more about life insurance beneficiaries

What are contingent beneficiaries?

Naming a backup beneficiary is vital in case your primary beneficiary cannot accept the life insurance payout. Without one, the money goes to your estate.

Read more about contingent beneficiaries

How do you read a life insurance policy?

Learn about all the important parts of your life insurance policy, from the declarations page to your beneficiary and beyond.

Read more about what's what in your life insurance policy

Can you name a child as your beneficiary?

Insurance companies legally can't pay the life insurance death benefit to minor children, so if you want to financially protect them, list a trust or your spouse instead.

Read more about naming a child as your beneficiary

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What are the best life insurance companies?

Finding the best life insurance company for your situation is just as important as choosing the right policy. We’ve narrowed it down for you, picking the best companies for different needs.

What are the best life insurance companies?

The best company for you will depend on your specific background and goals, but our list of the best companies is a good place to start.

Read more about our picks for the best life insurance companies

What are the best companies for no-medical-exam policies?

Some no-med-exam policies are better for people who are young and healthy, while others are better for people who need high death benefit amounts.

Read more about the best no-medical-exam life insurance companies

What are the best companies for smokers?

Smokers and former smokers pay more for life insurance, but some companies offer better premiums than others.

Read more about the best life insurance companies for smokers

What are the best companies for people with diabetes?

Even though diabetes is common, insurers take it very seriously. The best life insurance company for you depends on the type of diabetes you have.

Read more about the best life insurance companies for diabetics

How do you buy life insurance?

Getting life insurance doesn't have to be complicated. Starting off knowing what to expect makes for a more seamless application process.

What is the process for buying life insurance?

Buying life insurance is a big move, but our step-by-step directions break it down into a manageable process.

Read more about how to buy life insurance

What should you expect from the phone interview?

The first step in applying for life insurance is the phone interview: You’ll be asked about your medical history, family background, and lifestyle.

Read more about the life insurance interview

What is the life insurance medical exam like?

The medical exam is one of the most important parts of the life insurance application process. It’s usually quick and easy.

Read more about the life insurance medical exam

Can you get life insurance without the medical exam?

Many healthier applicants can get affordable life insurance without the medical exam. Instead, insurers look at your previous medical records.

Read more about no-medical-exam life insurance

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How does life insurance fit into your financial plan?

Life insurance is a financial tool that can be used to build tax-deferred wealth for you and your heirs. The ins and outs of maximizing your benefits can get tricky, but we’ve got you covered.

Is life insurance tax-deductible?

Private life insurance policies are not tax-deductible, though there are some exceptions, like when you pay for someone else’s policy.

Read more about life insurance and deductions

What are life insurance retirement plans?

Life insurance can be used to supplement your retirement plan, but this strategy is best for those who have maxed out other accounts.

Read more about life insurance retirement plans

Is life insurance taxable?

Your beneficiaries get the death benefit tax-free. But there may be tax implications if you’re using your policy for other reasons, like estate taxes.

Read more to learn when life insurance is taxable

What are life insurance trusts?

Putting life insurance money into a trust can decrease your taxable estate — but there are tax implications.

Read more about life insurance trusts

What extras can you add to your life insurance policy?

Most life insurance policies have optional extras that come at an added cost. These additions to your policy can make your coverage more comprehensive, but some aren’t worth the higher price tag.

What is a term conversion rider?

Term conversion riders are usually a free add-on to your policy that allow you to convert your term policy into permanent coverage.

Read more about converting a policy from term to whole

How do child riders work?

Child riders cover the unthinkable and pay for funeral expenses or missed work if you lose a child.

Read more about how child riders on life insurance work

What is an accelerated death benefit rider?

If you become terminally ill, you can use some of the life insurance payout to cover your medical expenses.

Read more about accelerated death benefit riders

Are there other life insurance riders?

There are many add-ons you can tack on to your life insurance policy. Here's how to figure out which ones you actually need.

Read more about other types of life insurance riders

References

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Policygenius uses external sources, including government data, industry studies, and reputable news organizations to supplement proprietary marketplace data and internal expertise. Learn more about how we use and vet external sources as part of our

editorial standards.
  1. Bankrate

    . "

    Emergency Savings Survey July 2021

    ." Accessed November 11, 2021.

Author

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

gray linkedin icon link

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Expert reviewer

Underwriter, Founder and President of Voelker Underwriting Services

John Voelker

Underwriter, Founder and President of Voelker Underwriting Services

gray linkedin icon link

John Voelker is the founder and president of Voelker Underwriting Services. He has more than 30 years of experience in underwriting and the life insurance and financial services sector. He’s also a fellow of the Life Management Institute and a member of the Risk Appraisal Forum and Association of Home Office Underwriters.

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