Your complete guide to life insurance and how it works
Life insurance is an affordable way to provide financial support to the people you love after you die. It can be relatively straightforward, but understanding how it works will help you get a policy that's right for you.. Whether you're just getting started and wondering what life insurance is, or you have questions about the ins and outs of your policy, our library of explainers has what you need. And for any questions you want to talk over with a real person, our experts are always here to help you out.
What is life insurance & how does it work?
Life insurance provides financial protection for the people you care about. You pay a monthly or annual
premium
to an insurance company, and in exchange the company pays a tax-free lump sum of money to your
beneficiary
if you die while the policy is active. You can customize your life insurance policy to fit your family's needs by choosing the type of policy you buy, the number of years you want it to last, and the amount of money paid out.
So ? Your beneficiaries can use it to cover many types of expenses, including:
Co-signed debt, including student loans
Mortgages
College expenses for your kids
Living expenses for your family
Home labor expenses (cooking, cleaning, etc.)
Burial expenses
Estate taxes that your heirs must pay for other assets
Medical expenses
Charitable contributions
To get this money after you die, your beneficiaries will fill out a death claim form and submit it to the insurer. Once the insurer approves the claim, your beneficiaries get the funds to use however they want.
How do other types of insurance work?
Most people just need a straightforward term or whole life policy, but there are other types out there, too. Most of these policies are catered towards niche financial planning needs, such as a specific investment plan or people who can't get traditional coverage.
Why is life insurance important?
Most Americans don't have enough emergency savings to last three months, [1] let alone enough to cover their family's expenses for years to come. That's where life insurance comes in — you can protect your family even if you don't have $1 million in the bank. Life insurance provides a contingency plan for as little as $20 to $30 a month, and ensures your family isn't left scrambling for funds after you're gone.
Who needs life insurance?
Anyone with financial obligations should get a policy. Life insurance does more than just provide money for everyday living expenses. It can pay for estate taxes, provide money for college, cover outstanding debts, build generational wealth, and pay for your funeral (which can cost ).
People who need life insurance include:
Income-earning parents: Parents provide financial support for their kids, paying for things like food, housing, and college tuition.
Stay-at-home parents: Stay-at-home parents care for children, clean, cook, and do other work that would cost money to replace.
Spouses or domestic partners: If you share expenses, having a life insurance policy ensures your partner won't be liable for double what they can afford.
Students with co-signed student loans: If you die, any unpaid debts fall to the co-signer.
People with a mortgage: Life insurance can cover your mortgage payments so your family doesn't lose their home.
Caregivers: Leaving behind a life insurance policy ensures that your family will be able to afford continued care.
High-net-worth individuals: If your family would be on the hook for estate taxes after you die, they can use the life insurance money to cover those taxes.
How much life insurance do I need?
When you buy a policy, you'll need to decide on a coverage amount — how much your beneficiaries will receive as a death benefit. As a general rule, our experts recommend you get about 10 to 30 times your income in coverage.
To calculate a more precise figure, you can use the DIME method, which tallies up your outstanding Debt, annual Income for the number of years that you'll provide for your family, the amount left on your Mortgage, and the cost of your children's Education. That number is a good starting point, but you may need less or more depending on personal factors such as other savings or whether you're supporting older family members.
