What Is Life Insurance and How Does It Protect You?

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.

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.

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

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

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.

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.

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.

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.

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.