How life insurance works
When you buy a policy, you agree to pay the insurance company a regular premium, usually monthly or once a year. In exchange, the insurer promises to pay a set amount of money, the death benefit, to the people you choose if you die while the policy is in force.
- ApplyAnswer questions about your age, health and habits, and choose a coverage amount.
- Get approvedThe insurer reviews your application, which is called underwriting, and sets your price.
- Pay premiumsKeep paying on time and your coverage stays active.
- Beneficiaries are paidIf you die while covered, your beneficiaries file a claim and receive the death benefit.
The people on a policy
| Role | Who it is |
|---|---|
| Policy owner | The person who owns the policy and pays the premiums. Usually you. |
| Insured | The person whose life is covered. Also usually you. |
| Beneficiary | The person, people or organization who receive the death benefit. You can name more than one and split the money by percentage. |
| Insurer | The insurance company that issues the policy and pays the claim. |
What the money can pay for
Beneficiaries can use the death benefit however they need to. There are no restrictions. Common uses include:
Replacing your income
Rent or mortgage, groceries, utilities and everyday bills your family relies on.
Paying off the house
Clearing the mortgage so your family can stay in their home.
Debts
Car loans, credit cards, and loans you co-signed with someone else.
Childcare and education
Daycare, after-school care, and college savings for your kids.
Final expenses
Funeral and burial costs, and medical bills left at the end of life.
Leaving a legacy
A gift to family members or a charity you care about.
The main types of life insurance
There are two broad families: term life, which lasts for a set period, and permanent life, which lasts your whole life and builds cash value.
| Type | How long it lasts | Cost | Cash value | Often best for |
|---|---|---|---|---|
| Term life | 10 to 30 years | Lowest | No | Parents, homeowners, anyone covering a need that ends |
| Whole life | Your whole life | Highest | Yes, guaranteed growth | Lifelong needs, estate planning, a fixed premium forever |
| Indexed universal life (IUL) | Your whole life, if funded | High, and flexible | Yes, linked to a market index, with caps and floors | People who want flexible premiums and can review the policy regularly |
| Final expense | Your whole life | Low monthly, small coverage | Small | Adults 50 to 85 covering funeral costs |
Which one do most people choose?
For most families, term life does the job at the lowest cost: it covers you during the years people depend on your income. Permanent policies make sense for lifelong needs, and are worth talking through with a licensed agent first.
Riders: optional add-ons
Riders let you customize a policy. Some are included at no cost; others add to your premium.
- Accelerated death benefit: lets you use part of the death benefit early if you're diagnosed with a terminal illness.
- Waiver of premium: pauses your premiums if you become disabled and can't work.
- Child rider: adds a small amount of coverage for your children.
- Conversion option: lets you switch a term policy to a permanent one later without a new medical exam.
What life insurance doesn't cover
Policies pay out in almost every situation, but there are a few standard limits worth knowing:
- Contestability period: for the first two years, the insurer can review a claim and deny it if information on the application was false or left out. Answering honestly protects your family.
- Suicide exclusion: most policies don't pay for death by suicide in the first two years (one year in some states). The premiums paid are usually refunded.
- Lapsed coverage: if you stop paying premiums and the grace period ends, the policy ends too.
- Waiting periods: some final expense and guaranteed-issue policies pay only a partial benefit, or a refund of premiums, if you die of natural causes in the first two or three years.
How to buy a policy
- Work out how much you need. A common starting point is enough to replace your income for the years your family would need it, plus debts, minus savings.
- Choose a type and term. Many people match the term to their youngest child or their mortgage.
- Compare quotes. Prices for the same coverage can differ a lot between insurers, so compare several.
- Apply. Many healthy applicants can get approved without a medical exam.
Frequently asked questions
Is the death benefit taxable?
In most cases, no. Death benefits paid to your beneficiaries are generally not subject to federal income tax. Large estates can have estate tax considerations, so talk to a tax professional if that applies to you.
Can I have more than one policy?
Yes. Many people have coverage through work plus their own policy, or combine two term policies with different lengths to lower costs as needs shrink.
Isn't the life insurance from my job enough?
Often not. Workplace coverage is commonly one or two times your salary, and it usually ends when you leave the job. A personal policy stays with you.
What happens when a term policy ends?
Coverage simply stops, and you don't get your premiums back. Many term policies let you renew each year at a much higher price, or convert to a permanent policy before a set age.
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