Insurance Tips

How does life insurance work?

Learn how to take care of the people you love with life insurance.

Key takeaways:

  • Not everyone needs life insurance, but you should consider getting it if you have people who depend on you for financial support, a mortgage or other debts, a business with employees, or an estate subject to taxes.
  • Use the DIME method to determine how much life insurance you need.
  • The two most common types of life insurance are term and permanent life; an insurance broker can help you find the best option for your needs.


Life insurance is a good way to financially protect your family after you die. But does everyone need life insurance? How expensive is it? What type of life insurance is best?

Let’s take a closer look at life insurance to help you understand the basics.


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What is life insurance? How does it work?

Life insurance gives you the ability to continue taking care of people who count on you for financial support after you die. Because life insurance is a contract, it’s important to understand the terminology.

When you get a life insurance policy, you pay a monthly or annual premium. The person whose life is covered by the insurance policy is called the insured, and the person who pays the premiums is the policyholder. They can be the same person, but it’s not required. For example, you can set up and pay for a life insurance policy for yourself, your spouse, your children, or someone else.

When you set up the policy, you name a beneficiary. This is the person (or persons) who should get the money if the insured dies while the policy is in force. If this happens, the beneficiary will need to make a claim to receive the death benefit. The money, paid in a lump sum, is tax-free and can be used for anything the beneficiary wants.


Who needs life insurance?

You should consider getting life insurance if you have …

  • Children, a spouse or domestic partner, an aging parent, or anyone who depends on you for financial support
  • A mortgage
  • Co-signed debts such as student or car loans
  • An estate that might be subject to estate taxes
  • A business with employees

However, if you’re older and have built enough wealth to take care of the people who depend on you for financial support, life insurance may not make sense for you.


How much life insurance do you need?

You might think that the life insurance you get through your employer is enough to cover your needs. The reality is that most people need more coverage—a lot more, in many cases.

Financial experts recommend using the DIME method to determine how much life insurance coverage you need. You’ll want enough life insurance to…

  • Cover any outstanding Debts
  • Replace your Income for up to 10 years to care for a spouse or any dependents
  • Pay off your Mortgage
  • Fund Education expenses for any child(ren) you leave behind

Total up your DIME to determine how much life insurance makes sense for you. Are you underinsured? Take our short, 2-minute self-evaluation to find out.


Father carrying son on back

How much does life insurance cost?

It’s a misconception that life insurance is expensive; some policies, like term life insurance, can be surprisingly affordable. Your cost for life insurance will depend on several factors, including:

  • Age
  • Gender
  • Coverage amount
  • Overall health (based on a medical exam or family medical history)
  • Policy term (if you’re buying term life insurance)
  • Occupation (in some cases) and lifestyle (such as tobacco use, driving record, etc.)

Since the cost of life insurance differs from person to person, you must request a quote from an insurance company or an insurance broker to know how much it will cost for you.


What types of life insurance are there?

The two most common types of life insurance are term and permanent life insurance.


Term life insurance

Term life insurance is the most popular and usually the most affordable option. It provides coverage for a set amount of time, the “term.” Your annual premiums stay the same throughout the term. If you die while your term life insurance policy is in effect and you’ve made all your premium payments, your beneficiaries can make a claim to receive the death benefit.


Permanent life insurance

Unlike term life insurance, permanent life insurance provides coverage for your entire life, as long as you pay the premiums. Permanent life insurance is more expensive than term life insurance but it can build a cash value over time, which makes it a good option if you want insurance to be part of your overall wealth plan.

With whole life, a type of permanent life insurance, your premium payments stay constant throughout the life of the policy. Upon your death, the policy pays your beneficiaries a guaranteed death benefit plus the cash value, which has grown at a guaranteed rate of return. You can even borrow against this cash value while you’re still living.


Other types of life insurance

Of course, there are other types of life insurance as well. For example, universal life insurance has premium payments which vary over the life of the policy; it has both a death benefit and a cash value. Final expense life insurance, sometimes called burial life insurance, is designed to cover your funeral expenses. Then there’s survivorship life insurance, which insures two people under the same policy and pays a death benefit only when both of the insureds have died.


How do I choose the right life insurance?

It’s easy to let yourself get overwhelmed when choosing life insurance, but the decision doesn’t have to be difficult.

  • First, determine why you want life insurance—to take care of your family or pay off old debt or something else—and how much you need.
  • Next, decide how long you want to be covered. Some people choose a policy that ends on a certain date—once their children are done with college, when they retire, or when their mortgage is paid off. Others want coverage that doesn’t end.
  • Finally, choose between term life and permanent life. Term is the most affordable, but permanent (which can be more expensive) provides some investment and estate planning advantages.

Your insurance agent or broker can walk you through your options.


How do I sign up for life insurance?

The first step is to request a quote from an insurance agent or brokerage. If you work with a broker, they’ll help you compare quotes from insurance companies to make sure you get the right coverage at the right price. Depending on the insurer, you may need to get a medical exam or fill out a medical questionnaire. And as you complete your application, be thoughtful about how you list your beneficiaries to make sure the right people are protected.

Don’t wait

There are many reasons to get life insurance—to pay for your funeral expenses, support your loved ones when you die, or even leave an inheritance. Each is valid. And once you’re insured, you can be confident knowing that the people you love will be taken care of when you’re gone.

Ready to explore your options? Our partner, Policygenius, can help quickly and easily compare policies from the nation’s top insurers. Their digital tools and team of licensed agents help you identify your best options and ensure you’re getting the right coverage.

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