Life Insurance Explained: Types, Coverage & Benefits Simplified

Written by
Lindsey Crossmier
Lindsey Crossmier
Financial Writer
Lindsey Crossmier is an accomplished writer with experience working for The Florida Review and Bookstar PR. As a financial writer, she covers Medicare, life insurance and dental insurance topics for RetireGuide. Research-based data drives her work.
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Edited By
Lamia Chowdhury
Lamia Chowdhury
Financial Editor
Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.
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Reviewed By
Eric Estevez
Eric Estevez
Owner of HLC Insurance Broker, LLC
Eric Estevez is a duly licensed independent insurance broker and a former financial institution auditor with more than a decade of professional experience. He has specialized in federal, state and local compliance for both large and small businesses.
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Published: April 22, 2020
Updated: October 7, 2023
7 min read time
This page features 5 Cited Research Articles

Key Takeaways

You must keep up with premiums payments for your life insurance policy to remain active.
If your life insurance policy is active when you pass, your beneficiary will receive a death benefit.
There are two main life insurance policy types — term and permanent.

Understanding the Basics of Life Insurance

While the life insurance types and coverage rules can be complex, how life insurance works is simple.

You pay monthly premiums to an insurance company, and they’ll pay your beneficiary a death benefit if you were to pass away while the policy is active. They can choose to receive the benefit in a lump sum or in scheduled payments over time.

In some cases, you’ll be required to complete a medical exam or fill in an online survey about your health to have your application accepted.

Life insurance typically covers all types of death, with one main exception. If the insured commits suicide within the first two years of the policy being active, the insurance company won’t pay out.

Basic Life Insurance Terms

Premiums: The amount you pay to the life insurance company to keep your life insurance policy active.
Beneficiary: The individual you select to receive your death benefit.
Death Benefit: The amount, or face value of your policy, that your beneficiary will receive when you pass away.
Riders: Optional add-ons you can add to your life insurance policy. Riders provide additional benefits and flexibility, so they usually increase your premium.

Life insurance is an essential component to establishing financial security, which is a challenge during times of high inflation. In fact, 44% of Americans wouldn’t be prepared financially if a primary wage earner in their family passed away, according to the 2022 Insurance Barometer Study.

If you’re wary of purchasing a life insurance policy due to cost concerns, consider getting a few life insurance quotes, as nearly 80% overestimate the cost of a life insurance policy.

Life insurance coverage is one of the most important financial decisions one can make in their lifetime.

— Eric Esteves, Owner of HLC Insurance Broker, LLC

What Does Life Insurance Cover?

Choosing the Right Life Insurance Policy for Your Needs

To choose the right life insurance policy, you need to consider:

There are two main types of life insurance policies — term and permanent.

Term vs. Permanent Life Insurance

Policy Type	Coverage Length	Premium Cost	Fixed Death Benefit and Premiums	Cash Value Component
Term	10 to 30 years	Affordable	Yes	No
Permanent	Lifelong	Usually Expensive	Varies	Yes

Term policies are best for those looking for short-term coverage at an affordable price.

Permanent policies are best for those with a bigger budget looking for lifelong coverage with investment options.

Compare each life insurance policy type to ensure it fits your financial and lifestyle needs.

Whole Life Insurance vs. Term Life Insurance: Which Is the Best Fit for You?

Pro Tip

Your health and the amount of coverage you need can affect the cost of your life insurance policy. If you have poor health, you may want to consider purchasing a policy that doesn’t require a medical exam.

Life Insurance Calculator: Estimate Your Needed Coverage

You shouldn’t accept the first quote for a term or permanent policy you receive. You can request a quote for the same exact policy from different life insurance companies and receive wildly different numbers.

“Make sure to shop around and compare policies from different providers to find the best one that fits your needs and budget,” Linda Chavez Founder & CEO of Seniors Life Insurance Finder told RetireGuide.

Compare at least three life insurance quotes to avoid overpaying on premiums and to find the best policy.

You should also verify that the life insurance company has a high financial strength rating, which dictates how trustworthy a company is to meet financial expectations.

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Applying for Life Insurance and Understanding the Underwriting Process

You can apply for life insurance online directly through the company, or through an agent or broker.

Life insurance companies utilize an underwriting process, which includes a medical exam and questions about your life. If you’re found to have too many health risks, you could be denied coverage.

However, this shouldn’t be an incentive to lie about your health on your application. If you lie or omit an illness, you’d be committing life insurance fraud.

Poor health doesn’t mean high-risk individuals can’t get life insurance coverage. Acceptance varies on a case-by-case basis and depends on which policy type you’re applying for.

For example, some life insurance policies have accelerated underwriting, which typically doesn’t include a medical exam. Accelerated underwriting also typically results in a quicker application approval for coverage.

Did You Know?

While most purchase a life insurance policy for themselves, you can also apply for a life insurance policy on behalf of someone else if you have insurable interest. Note that the individual must consent to the coverage.

When Should You Get Life Insurance?

Managing Your Life Insurance Policy

The most important part of managing your life insurance policy is making sure you pay your premiums on time.

If you miss premium payments, your policy could lapse. And if you pass away while your policy is lapsed, your beneficiary won’t receive a death benefit in most cases.

There are four other factors to consider when managing your life insurance policy.

Taxes: You may be considering taxation of your life insurance benefit for your beneficiaries. In almost all cases, your life insurance’s death benefit is not taxable. However, there are a few rare instances when life insurance may involve taxes. Make sure the fine print of your life insurance policy guarantees a tax-free benefit.
Borrowing From Your Cash Value: If you have a permanent life insurance policy, you can borrow funds from your policy’s cash value. However, you should consider consulting with a tax expert or financial planner before doing so. In some cases, you can severely reduce your death benefit and forfeit coverage by borrowing too much.
Converting Your Policy: If you purchased a term policy 20 years back and the term is about to end, you can sometimes convert your term policy into a permanent one. Just know you may have to retake your medical exam and your premiums will be readjusted.
Considering a Life Settlement: Say you decide down the line that you don’t want your life insurance policy anymore. You could consider a life settlement, in which you’d sell your policy to a third party for a portion of your death benefit.

Facts About Life Insurance: Must-Know Statistics in 2023

When To Get Life Insurance

There’s a common misconception that only those with children need life insurance, but this isn’t true. There are many key moments when you should consider purchasing a life insurance policy.

“Life insurance is important to consider during various life milestones. Some key moments include getting married, starting a family, buying a home or launching a business.” Dennis Shirshikov, a finance, economics and accounting professor at the City University of New York told RetireGuide.

“For example, when you get married, life insurance can help provide financial security for your spouse in case something happens to you. Similarly, when you have children, a policy can ensure their financial needs are met even if you’re not there to provide for them.”

Since premiums for life insurance rise as you age, you should consider getting life insurance as soon as possible.

For example, the monthly premium cost is $36.32 for a 20-year term policy with $250,000 of coverage through State Farm for a healthy 50-year-old woman.

For the same exact policy, but quoted for a healthy 65-year-old woman, the quote is $167.04 a month.

Why is life insurance an important aspect of retirement planning? - Featuring Josh Curtis — Learn why life insurance is an important aspect of retirement planning, explained by Josh Curtis, founder and lead investment advisor of Clarity Financial LLC

Frequently Asked Questions About Life Insurance

Can you buy life insurance if you have pre-existing medical conditions?

Yes — you can still purchase a life insurance policy if you have a pre-existing condition.

What factors affect the cost of your life insurance premiums?

Your age, sex, health, lifestyle and policy type you select affect your premium costs for life insurance.

Can you change your life insurance policy after you purchase it?

In some cases, you can convert your term policy into a permanent policy after you complete the purchase.

Can you have multiple life insurance policies?

Yes — you can purchase multiple life insurance policies. This is a strategy called laddering. However, there are limits to the amount of coverage you can have, which depends on your income and assets.

Last Modified: October 7, 2023

Lindsey Crossmier Financial Writer

Lindsey Crossmier joined the RetireGuide team in 2022 as a writer to promote long-lasting financial literacy. She leverages her creative writing background, editorial experience and financial education from Yale to write retirement-focused financial content for those ready to prepare for their futures. Making complex information simple and accessible for all is her specialty.

Special focus on content about life insurance, Social Security, Medicare and certificates of deposits (CDs)
Research-based data drives her work
Bachelor’s degree in English from the University of Central Florida

Edited By

Lamia Chowdhury Financial Editor

Reviewed By

Eric Estevez Owner of HLC Insurance Broker, LLC

5 Cited Research Articles

Texas Department of Insurance. (2023, May 2). Life Insurance Guide. Retrieved from https://www.tdi.texas.gov/pubs/consumer/cb018.html
State Farm. (2023). Life Insurance for All That Matters to You. Retrieved from https://www.statefarm.com/insurance/life
Progressive. (2023). Can You Have More Than One Life Insurance Policy? Retrieved from https://www.progressive.com/answers/multiple-life-insurance-policies/
Progressive. (2023). Can You Get Life Insurance With a Pre-Existing Condition? Retrieved from https://www.progressive.com/answers/life-insurance-pre-existing-conditions/
Life Happens. (2022, April). 2022 Insurance Barometer Study. Retrieved from https://lifehappens.org/research/owning-life-insurance-provides-a-clear-path-to-financial-security/