What Is Life Insurance? A Guide for Families and Individuals

How Does Life Insurance Work?

The principle of life insurance is straightforward. You buy the policy, select the coverage you require, and pay a premium based on the conditions of your policy. The insurance company may take into account age, health, lifestyle, coverage amount, and nature of the policy when calculating the cost.

When you die during the policy’s term and the claim is eligible per policy requirements, the beneficiaries will receive the death benefit. With that money they can pay their mortgage, cover living costs, put their children through school, pay off debts, pay for funeral costs, or use the funds for other needs. Certain policies may also develop cash value during your lifetime.

Why Do People Buy Life Insurance?

Life insurance can provide protection for loved ones who rely on your income or financial support. For a family with children, a death benefit may be able to replace lost income and assist the family with future expenses. It can also be helpful for those who are not parents — there may be a spouse, business partner, aging parent, or other dependent person who depends on your financial support.

If no one directly relies on your income, coverage could still be needed to pay off debts or cover end-of-life expenses. Coverage for the right reasons depends on your finances and the people and responsibilities you wish to protect.

Term Life Insurance

Term life insurance is for a certain amount of time, typically 10, 20, or 30 years. In case of death of the insured during the term of insurance, the policy may be able to provide benefits to the beneficiaries. Term insurance does not usually develop cash value, and is frequently designed as uncomplicated coverage for a particular time period. It’s helpful when you’re raising a family, making mortgage payments, or saving for the long-term.

Permanent Life Insurance

Permanent life insurance is intended to stay in force for as long as the insurance policy requirements are met. Other varieties also accumulate cash value as time goes on. Whole life and universal life are examples of permanent coverage. These policies may contain additional features and conditions compared to term insurance policies, and it is important to know the premiums, cash value, guarantees, fees, and other policy requirements before obtaining coverage.

How Much Does Life Insurance Cost?

The price of a life insurance policy varies depending on the individual and the policy. Insurers might take into account age, health, lifestyle, occupation, coverage amount, type of coverage, and other underwriting criteria. Term insurance generally costs less than permanent insurance for the same initial death benefit.

A straight monthly premium comparison is not a good way to evaluate policies — look at the coverage period, benefits, exclusions, guarantees, renewal terms, and other costs before making a decision.