What Is Life Insurance and How Does It Work?
Understanding how life insurance works and the options available to you is the first step toward protecting your family with confidence.
Understanding how life insurance works and the options available to you is the first step toward protecting your family with confidence.
What Is Life Insurance?
Life insurance offers financial protection for your loved ones in case something happens to you. If you pass away while your insurance policy is active, they will receive a cash payment based on your coverage amount. They can then use it for whatever they need: extra income, debt or loan payments, your end-of-life expenses, or anything else that comes up.
What are the different types of life insurance?
The most common types of life insurance include:
- Term life insurance: Term life insurance covers you for a set period of time, usually up to 30 years. It’s the most affordable type of life insurance and can work well for anyone who needs coverage for a certain number of years, like families who have young children or are paying off a mortgage.
- Permanent life insurance: A permanent life policy offers lifelong coverage as long as you pay your premiums. These policies also have extra cash value that grows over time, which you can access during the life of the policy. Permanent life includes whole life and universal life options. While permanent life insurance is more expensive than term life insurance, it can be a good option for people who need coverage for their entire life, such as families who want to provide for a special-needs child.
- Final expense: Final expense insurance is a policy that helps to cover end-of-life expenses, like funeral costs. With coverage amounts that are typically lower than a term or whole life policy, this can be a smart choice for people over 50 who just want to make sure their final needs are covered.
Consider comparing life insurance quotes to better understand what fits your budget and needs.
How life insurance works
A life insurance policy is an agreement between you and the insurance company. You pay a monthly or yearly premium, and the insurer provides a payout called a “death benefit” if you die before the policy term expires.
You can customize your plan by changing the benefit amount or choosing a specific term length, in the case of term life insurance. Some life insurance companies also allow you to add optional features called “riders” to meet your unique coverage needs. Here’s a closer look at how life insurance policies work.
When you apply
- Research your options. eFinancial makes it simple and easy to compare quotes online.
- Select the right policy. Ask a life insurance agent to help you weigh your options and provide an estimated cost. Costs vary depending on factors such as your age, health, coverage level, and coverage length. It typically pays to get life insurance sooner rather than later, since your rates are likely to increase as you get older.
- Apply for a policy. Depending on which policy you choose, you may need to answer health and lifestyle questions and take a medical exam as part of the approval process.
- Get approved. Life insurance policy approval can take anywhere from 4-8 weeks, though some companies offer a quicker process. If you choose a policy that doesn’t require an exam, you could be approved and covered in just minutes.
Once you're approved
- Make premium payments. Your premiums stay the same during the life of the policy for most plans and keep you covered as long as they are paid.
- Review the policy regularly. It’s a good idea to check in regularly to make sure your policy is still meeting your needs. Big life changes like a bigger house, new baby, job promotion, or a move can be good reasons to adjust your insurance plan.
After you die
- Protect your family financially. After your death, the beneficiary of your policy – generally a spouse or other relative – receives a lump sum death benefit. This will happen as long as your policy was active at the time of your death, you were still making premium payments, and you followed any other policy rules. Beneficiaries typically receive payment soon after the policyholder’s death, which can provide much-needed funds much faster than a will.
Advantages of life insurance
- Financial security: Give your loved ones access to tax-free income for expenses, unpaid debts, and other financial needs.
- Peace of mind: You can rest easy knowing your funeral expenses and your family’s needs will be taken care of.
- Affordable coverage: A healthy 30-year-old male can often pay less than $15 a month for a $250,000 term life policy.
How much life insurance do I need?
When it comes to life insurance, everyone’s coverage needs are different. Consider the following questions as you research your options:
- What are your current financial obligations, such as day-to-day expenses, mortgage, medical bills, and credit card debt?
- How much do you want to set aside for funeral costs?
- How much income does your family need to maintain their lifestyle?
Want to crunch the numbers? Use our online calculator to get a customized estimate of your ideal payout amount based on your debt, savings, expenses, and more.
What are the features of a life insurance policy?
Understanding the key features of a life insurance policy can help you shop and compare options more confidently. Here are a few common terms you’re likely to come across.
- Life insurance policy: This is an insurance product you buy to provide financial security in case of your death. You make regular payments to keep the policy active, and your beneficiaries receive a lump sum of money if you die while the policy is in place.
- Policyholder: The person who holds a life insurance policy, pays the premium, and is eligible to make changes to the policy. This is typically the same person as the insured.
- Insured: The person whose life is covered by the life insurance policy; often, but not always, the policyholder.
- Beneficiary: The person or entity that receives life insurance proceeds after the policyholder’s death. Beneficiaries are often family members, but can also be friends, business partners, trusts, or estates.
- Premium: The monthly, quarterly, semi-annual, or annual payments you make on a life insurance policy.
- Term length: For a term life insurance policy, the term length is how long the policy is active. This is usually 10, 15, 20, or 30 years.
- Death benefit: The amount of money the beneficiary receives upon death of the insured; also called face amount or face value.
- Cash value: The amount of money you can borrow from a permanent life insurance policy while you’re still living. If you don’t need the policy anymore, you can also surrender (aka cancel) the policy to receive the cash value. Only permanent life insurance policies come with cash value.
Explore our life insurance glossary for more information about common terms and definitions.
Questions about lifeinsurance
Life insurance quotes with eFinancial
At eFinancial, we’re committed to helping individuals, couples, and families find the best life insurance to meet their needs. You’ll have access to high-quality, affordable policy options from over 20 leading life insurance providers. Our team of professional agents offers personalized guidance to help guide you through selecting a policy and getting approved.
Let eFinancial give you peace of mind about your loved ones’ financial future. We look forward to helping you and your family.
To learn more, start your free, no-obligation online quote or call 866-388-3996800-957-9525 to talk with one of our agents.