Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Dec 6, 2021

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The Lowdown

  • Life insurance pays your beneficiary an agreed amount once you die
  • There are many variations on policies to customize coverage
  • Discussing with a financial advisor or agent may help narrow it down

How do life insurance policies work? Most of the time, you’ll pay into your policy to ensure that your loved ones receive financial support when you pass. A comprehensive life insurance policy can remove any additional financial stress from your loved one’s life.

While researching how life insurance policies work, enter your ZIP code into our free quote tool to get an idea of what you could pay.

How does life insurance work?

What is life insurance? Life insurance can be a great tool to keep your loved ones supported after you pass. With a comprehensive life insurance policy, you can ensure that your loved ones won’t have to worry about any financial issues that may arise without you there.

While life insurance can vary between companies and states, most life insurance policies follow the same process:

  • Decide what type of policy you want.
  • Apply with the insurer, following all underwriting procedures.
  • Pay your agreed premiums for the length of the policy.
  • If you die within the agreed period, your beneficiary will receive a death benefit.

The death benefit is a lump sum of cash that the beneficiary can use for anything they need. Whether to pay for burial expenses or college tuition, the death benefit can help support your loved ones.

The rates you pay will often depend on medical underwriting. The underwriting process is when an insurer will research your lifestyle to determine if you pose any undue risk to the insurer. It’ll look at everything from your health history to your job.

What does life insurance cover?

What life insurance covers will often depend on your policy type and any additional coverage your insurer provides. At a minimum, your life insurance policy will provide some amount of money to a beneficiary of your choosing once you pass.

What are the benefits of life insurance?

Life insurance benefits include the death benefit, which the beneficiary can use on anything they want. The payout from the insurance company is often tax-deductible, too, so you don’t have to worry about putting yourself in another tax bracket with the payment.

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What are the life insurance basics?

If you’re considering getting your first life insurance policy, you should be familiar with some of the terms that will get thrown around in front of you. Some of these include:

  • Premium – What you pay each month to maintain your policy.
  • Beneficiary – The person you assign to receive the payment upon your death.
  • Death benefit – This is the name of the payout that your beneficiary will receive.
  • Cash value – Some permanent life insurance policies accrue a portion of your premiums in a savings account, letting you loan against it.
  • Underwriting – The process where an insurer will look at your health, hobbies, and occupation to determine your risk.

While all this can seem daunting, life insurance is easy to learn once you understand the basics. Then, as always, you can seek the help of a financial advisor who may guide you towards the correct type of insurance policy for you.

How does insurance work for beneficiaries?

The life insurance beneficiary rules often ensure that loved ones can get a quick payout from the policy to help pay for any costs as soon as possible. This isn’t always the case, though, and sometimes the insurer may wait to verify the deceased before paying.

Some instances include when someone goes missing or cases of homicide in which the beneficiary has to be cleared by the police.

What are the major types of life insurance?

According to the Insurance Information Institute, the major types of life insurance include term and permanent, or whole, life insurance. Each one will suit individual situations. Some insurers offer further variations on each policy to customize the coverage truly.

What is term life insurance?

Term life insurance will only last for a period of your life and is often regarded as one of the most affordable and straightforward forms of life insurance. This is because it lasts for a pre-agreed period and is much cheaper due to the reduced risk.

There are other options for term life insurance to customize your coverage further and increase the value of the policy:

  • Traditional term life – This lasts for a period of your life, usually in increments of five years.
  • Return of premium – If you don’t like the idea of losing out completely when your term life policy ends, this one will ensure you make some money back.
  • Renewable term – This policy version allows you to renew your insurance at the same rates as your original policy until a certain age.

There’s a reason that term life insurance is regarded as one of the more affordable types of life insurance. As shown below, many of the top insurers are willing to give reasonable rates for healthy non-smokers. For example, this chart shows a ten-year term life insurance policy with a $100,000 benefit:

Average Monthly Term Life Insurance Rates for Non-Smokers by Age – $100,000 / 10-Year Term

Non-Smoker Age & GenderPrudentialLincoln NationalMassMutualAegon/
Transamerica
John HancockState FarmMinnesota Life
25-Year-Old Female$12.25$9.46$8.36$9.89$8.78$12.44$7.04
25-Year-Old Male$13.83$9.46$9.23$11.27$9.64$14.27$7.37
30-Year-Old Female$12.25$9.46$8.53$9.72$8.78$13.14$7.04
30-Year-Old Male$13.92$9.46$9.23$10.06$9.64$14.70$7.37
35-Year-Old Female$12.25$9.56$8.88$10.66$8.78$14.44$7.15
35-Year-Old Male$13.92$9.56$9.31$11.09$9.64$15.23$7.48
40-Year-Old Female$13.30$9.94$10.10$12.47$9.45$15.49$8.14
40-Year-Old Male$15.67$10.61$10.53$13.33$10.63$16.36$8.25
45-Year-Old Female$16.28$12.69$11.58$14.02$11.54$20.71$10.01
45-Year-Old Male$17.68$14.53$12.97$15.65$13.10$20.79$11.00
50-Year-Old Female$21.27$15.95$14.62$17.46$14.80$23.49$12.65
50-Year-Old Male$21.88$20.74$16.97$20.21$15.81$26.54$14.74
55-Year-Old Female$23.80$21.50$20.28$25.89$19.58$29.67N/A
55-Year-Old Male$28.18$27.66$24.10$30.10$22.44$34.45N/A
60-Year-Old Female$29.49$29.84$28.19$36.98$27.30$40.98N/A
60-Year-Old Male$37.72$39.03$35.50$42.66$35.15$51.50N/A
65-Year-Old Female$41.13N/A$42.64$59.94$37.74$59.51N/A
65-Year-Old Male$58.45N/A$61.68$71.29$55.74$83.09N/A
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As you can see, young and healthy individuals can get a term life insurance policy from many insurers for under $10 a month.

What is whole life insurance?

What is whole life insurance? It guarantees that you’ll have coverage for your entire life, as long as you continue to meet the financial obligations on the policy.

Whole life insurance has a few more variations than traditional term life insurance, but it will also cost more. Some of these variations include:

  • Whole – This insurance will cover you for your entire life, as long as you stay up-to-date with payments.
  • Universal – This policy allows you to customize your death benefit and, in turn, the rates you pay.
  • Variable – This insurance policy will allow you to invest the death benefit in stocks, bonds, and mutual funds.
  • Burial and final expense – This type of life is often cheaper because it provides just enough for your funeral and any leftover medical bills.

As mentioned, whole life insurance is often more expensive than term life due to the insurer’s obligation to pay.

How do I choose the right life insurance policy?

Deciding which life insurance policy is right for you can be a tough decision but an important one. It’s essential to make sure that your new policy will take care of your loved ones.

It might be worth considering discussing your options with a financial advisor or insurance agent to better narrow down what you need.

How Life Insurance Works: The Bottom Line

If you’re embarking on the insurance market, you’re likely to be confused by the way some life insurance policies work. However, there are straightforward and affordable options that can help you ensure you’re loved ones are taken care of no matter what.

If you’re finished researching how life insurance policies work, enter your ZIP code into our free quote tool to get an idea of what you could pay for a policy.