You might have an idea of what life insurance is. But if you were asked to define life insurance, could you do it? What if you needed to describe the different terms, provisions or types? What exactly is life insurance good for? How long does it last? Who needs it? It seems complicated, but the answers are fairly straightforward.
Life insurance provides a tax-free lump sum of money to your loved ones in the event of your death, allowing them to continue toward their financial goals. It’s a value asset that gives you peace of mind that they’ll be taken care of even when you aren’t around.
In this life insurance 101 guide, you’ll learn:
How does life insurance work?
Life insurance is easy to understand once you know what questions you should be asking. If you understand the common components of an insurance policy, how to apply, the different types of policies and the costs involved, you’ll know how to get the right coverage for your family.
What are common features of life insurance?
No matter what type of policy you buy, life insurance consists of these four components:
The person who owns the life insurance policy. Typically, if the policyholder dies, the death benefit is paid out, but it’s possible to take out a policy on someone else.
The person, people or institution(s) that receive money if the policyholder dies. There can be more than one beneficiary named on the policy.
The money paid monthly or annually to keep a policy active (or “in-force”). If you stop paying premiums, the policy lapses.
The money paid out upon the event of the policyholder. Life insurance goes into effect as soon as you make your first premium payment, meaning you’re eligible for the death benefit as soon as the policy is in force.
Insurance companies always pay the death benefit, except in specific circumstances where they aren’t obligated to like:
- The policyholder outlives their term life policy
- The policy lapses or is canceled
- The death occurs within two years of the policy being in-force and the insurance company finds evidence of fraud on the application
How do you apply for life insurance?
The life insurance application usually takes four to eight weeks from start to finish, but you can complete the process in just seven steps. Here’s how it works:
1. Get free quotes. Comparing rates from different insurance companies allows you to make sure you’re getting the most affordable policy. You never have to pay for life insurance quotes. (You can compare quotes from over a dozen life insurance companies with Policygenius.)
2. Choose your policy. Take into account cost, customer service and the average application time.
3. Fill out an application. You can fill out your application online or call a licensed expert to get help. Either way, you’ll need to answer some basic income and health information.
4. Take a medical exam. As part of the underwriting process, you may need to take a medical exam that’s similar to a basic physical. The exam is free, and a technician will come to your home or workplace on your schedule.
5. Complete a phone interview. An insurance agent will ask you a few lifestyle and health questions.
6. Wait for approval. An underwriter will take all of the information collected to decide on a final premium rate, which should be similar to the quotes you received.
7. Sign your policy. After you sign your policy and send in your first premium payment, your policy will be in-force.
For more information, learn exactly what you need to do when applying for life insurance.
What are the different types of life insurance?
Not all life insurance policies are created equally. How long the policy lasts, the cost and extra provisions depends on the type of coverage. Broadly speaking, life insurance is divided into two different types: term and permanent.
Term life insurance
Term life lasts for a predetermined period of time, known as the term. When the term is up, the policy expires. This is usually the most affordable type of life insurance, and lasts only as long as you need it to cover debts and provide for beneficiaries.
Learn more about term life insurance.
Permanent life insurance
Permanent insurance doesn’t have an expiration date and lasts for as long as the policyholder pays the premiums. Permanent policies also have a cash value component that acts as a sort of investment vehicle that can be borrowed against. The cash value portion, along with fees, raises the price of permanent policies compared to term. Permanent life insurance policies include whole, variable, universal and variable universal life.
Learn more about the types of life insurance.
Whole vs. term
Most shoppers have to decide between term and the most popular type of permanent life insurance, whole. Term life is the right choice for a majority of people because it’s affordable and straightforward. However, whole life, with its cash value and permanent status, can be useful for people with complicated finances. A licensed expert can help you decide which is the best option for you.
Learn about the differences between term vs. whole life insurance.