What Is Life Insurance?

Life insurance is an agreement between you and an insurance company that, in exchange for monthly premiums, the insurer promises to pay a sum of money to your loved ones when you die. Purchasing a solid life insurance policy can help strengthen a well-rounded retirement plan.

How Does Life Insurance Work?

Life insurance may seem confusing. Knowing the basics makes it easier to navigate your options and select the coverage that’s right for you.

All life insurance policies fall into two main categories: Permanent and temporary. Each type requires you to pay a premium — often monthly — and all policies have a death benefit for your beneficiaries.

The amount of the death benefit depends on how much coverage you purchase. More coverage equals higher monthly premiums.

Most financial planners recommend buying a policy worth six to 10 times your annual salary. So, if you make $50,000 a year, a policy worth $300,000 to $500,000 is ideal.

To receive money upon your death, your beneficiaries will need to make a claim with the insurance company. Money is typically dispersed one to two weeks after filing a claim.

Did You Know?
A trust or organization can be named as a beneficiary on your life insurance policy.

Types of Life Insurance

There are two main types of life insurance. Term life lasts for a specific number of years, while permanent life lasts your entire lifetime.

Term Life

Term life insurance provides coverage for a specific amount of time. Your beneficiaries only receive a death benefit if you die within this timeframe. Typical terms include 10, 20 and 30 years.

Term life tends to be the simplest form of life insurance and more affordable than most permanent life policies. However, these no-frills contracts may not cover all your needs.

Permanent Life

Permanent life insurance, as the name implies, offers coverage that does not expire. It also combines a death benefit with a savings or investment account.

It tends to be more expensive than term life. But these higher premiums are paid in exchange for guaranteed lifetime coverage and an accumulating cash value you can borrow against.

Permanent life insurance is actually an umbrella term for several different subtypes of coverage, including whole, universal and variable.

Types of Permanent Life Insurance
Whole Life
Whole life is the most common type of permanent life insurance, according to the Insurance Information Institute. Premiums remain level for the life of the policy. Like universal and variable, whole life builds cash value that grows tax-deferred. This accumulating cash value is tied to a formula determined by the insurance company.
Universal Life
Universal life insurance offers more flexibility than whole life insurance. Policy holders can typically change the amount and frequency of premium payments as well as adjust the death benefit amount. Accumulating cash value is tied to the current interest rate set by the insurer. Universal life is often used as an estate planning strategy to help preserve wealth transferred to beneficiaries.
Variable Life
Variable life insurance features an accumulating cash value tied to investment options that work like a mutual fund. These investments are made within the policy’s subaccounts and can include stocks, bonds and other options. Your policy’s cash value may grow more quickly, but it carries more risk. Returns from these investments are not guaranteed.

Life Insurance in Retirement

Nearly half of U.S. households don’t have enough life insurance coverage, according to Limra, a life insurance industry group.

Not everyone may need life insurance. However, as you approach retirement, it’s important to consider how your loved ones will survive once you’re gone.

Purchasing life insurance may be a good idea if you:
  • Have debt
  • Live in a joint-income household or are the sole income earner
  • Own a business
  • Are paying off a mortgage
  • Are concerned about funeral expenses
  • Have any minor children
  • Have an adult child with special needs
  • Want to provide an inheritance for your heirs

What Is the Cost of Life Insurance?

The cost of life insurance depends on the type you buy as well as several other factors, including your:
  • Age
  • Gender
  • Personal and family medical history
  • Weight
  • Tobacco use

You will likely need to undergo a medical exam or share recent medical records in order to qualify for life insurance.

Many older Americans worry about the cost of purchasing a new life insurance policy. While you can’t change your age, you can take other steps, including quitting smoking, exercising regularly and losing weight. These measures can help bring down premium costs.

Otherwise, waiting to buy will always be more expensive. In 2020, a 20-year term life insurance policy with a $250,000 death benefit averaged $364 a month for a 50-year-old female. That number jumped to more than $908 a month by age 60.

The average cost for a $250,000 whole life insurance policy for a 50-year-old female in 2020 was $4,262 a month and that figure jumped to $7,015 by age 60.

Adding a Rider

If you or your spouse already has life insurance, you may consider adding a rider to the policy.

Each rider increases your premium, but these options include benefits on top of normal coverage. This can include the ability to convert a term life policy into a whole life policy or to receive part of the death benefit early if you require long-term care in a nursing home.

Last Modified: August 11, 2020

6 Cited Research Articles

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  2. Workspan Daily. (2019, September 3). Many Americans Don’t Have Life Insurance. Retrieved from https://www.worldatwork.org/workspan/articles/many-americans-don-t-have-life-insurance
  3. CNN Money. (2017, March 24). Life insurance: Types of life insurance policies. Retrieved from https://money.cnn.com/pf/money-essentials-life-insurance-policies/index.html
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