What Is Life Insurance?

Life insurance may seem confusing. Knowing how life insurance works 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.

Options also exist for those who find themselves needing to sell their life insurance policies while they are still alive. Life settlements and viatical settlements are two such options that beneficiaries needing to sell their policies can explore.

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 insurance provides coverage for a specific amount of time. Your beneficiaries receive a death benefit only 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 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.

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.

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. Term life insurance rates will typically be significantly higher for a 60-year-old than for a 50-year-old. The same is true for permanent policies.

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.