How Does Life Insurance Work and What Does It Cover?

Life insurance is essentially a contract between you and an insurance company. You agree to pay a monthly premium, and in exchange, the insurer agrees to pay a lump sum (called a death benefit) to your beneficiaries if you pass away while the policy is active.

When you buy a life insurance policy, you’re the policyholder and are responsible for paying premiums to keep the coverage in force. This life insurance policy will insure a specific person, who can be either you or someone else. 

As the policyholder, you get to choose how much coverage you want and the person (or people) who should receive the money if you die. You’ll then pay monthly (or annual) premiums to keep the policy active. As long as you make your payments, your insurer must pay the full benefit if you die during the coverage period.

Some policies also build up cash value over time. That means a portion of your premiums goes into a savings-like account that you can borrow from or cash out. Note that many life insurance providers may ask you to take a medical exam during the application process. These exams help them identify any health-related risks and determine approvals and premiums.

These are the most common types of life insurance policies you’ll see when you start shopping. 

Term Life Insurance

Term life insurance covers you for only a set number of years, typically between ten and 30 years. If you pass away during that time, your beneficiaries get the payout. If you outlive the term, the policy ends, and there won’t be any death benefits. Since these policies don’t cover you for life, they’re usually the cheapest option. 

Whole Life Insurance

Whole life insurance is a type of permanent insurance, which means it lasts your entire life as long as you keep paying your premiums. It also builds cash value, which grows at a fixed rate set by the insurer and can be borrowed against. Note that accessing your cash value will reduce the death benefit. If you get whole life insurance, expect your premiums to be higher than term life, but you’ll have guaranteed lifelong coverage in exchange. 

Universal Life Insurance

Universal life insuranceis another type of permanent life insurance, but it’s a bit more flexible than whole life insurance. With this policy type, you can adjust your premiums and coverage amount over time, though premiums paid need to be sufficient to cover the cost of insurance. Universal life insurance also has a cash value component, though the returns depend on interest rates.

Final Expense Insurance

Sometimes called burial insurance, final expense insurance is a smaller policy meant to cover funeral costs or medical bills. It’s often marketed to older adults and doesn’t require a medical exam.

Riders are upgrades you can add to your policy. They usually cost extra, though some may be included at no additional charge depending on the insurer and policy type. Availability and pricing vary by company and product. 

• Accelerated death benefit: Lets you access part of your death benefit early if you’re diagnosed with a terminal illness.
• Waiver of premium: Pauses your premium payments if you become disabled and can’t work.
• Child rider: Adds a small amount of coverage for your children.
• Guaranteed insurability: Lets you increase your coverage later without a medical exam. 
• Accidental death rider: Pays out an additional amount to beneficiaries if you pass away from accidental death.

Buying life insurance is pretty straightforward. Here’s a quick step-by-step:

• Figure out how much coverage you need: Consider your income, debts, and who depends on you. Many insurers also offer tools and calculators to help you figure out the coverage you need. 
• Choose the right type: Understand how each type of life insurance works and figure out the right one for your situation. 
• Compare quotes: Always compare quotes from a few companies since rates can vary a lot depending on your age, health, and lifestyle.
• Fill out an application: When you’re ready to apply, head to the insurer's website and fill out an application. Expect questions about your health and lifestyle.
• Take a medical exam (if needed): Some policies require it, but others don’t.
• Get approved and start paying premiums: Once you’re approved, you’ll get a quote and decide if you want to move forward. Remember that you’ll have to continue paying premiums to keep your policy active.

It depends. If no one is relying on you financially and you don’t have major debts, you might not need it right now. But if you have a partner, kids, aging parents, or anyone else who’d be financially impacted if something happened to you, you’ll want to consider life insurance. 

If you're not sure where to start, Ethos helps simplify the process. You can apply online in just 10 minutes, skip the medical exam- just a few health questions and get coverage that actually fits your life and budget.