How Does Life Insurance Work?

The primary purpose of life insurance, as with any insurance, is peace of mind. If you should suddenly or unexpectedly die, the beneficiaries named in your policy (often your family members) will receive the benefits of the policy, which can help your family survive financially after you're gone.

Life insurance basics

Life insurance is a financial arrangement between a life insurance company and an individual in which the individual (the insurance policy holder) pays the insurance company (the insurer) a certain amount of money (the premium) with the guarantee that upon the death of the insured (either the insurance policy holder or another person), the insurer will pay a certain amount of money (the benefits) to the beneficiary or beneficiaries named in the policy. The payment of these benefits usually takes the form of either a lump sum or installments over a set period of time (known as an annuity).

In plain language, this means that if you purchase a life insurance policy and pay your policy's premiums on time, when you die the insurance company will pay your family the amount of money specified in the policy. You or your family will usually have a choice to receive the money either all at once or in installments.

Types of life insurance

There are two main types of life insurance: term insurance and permanent (universal or whole life) insurance. Term insurance covers you for a set amount of time, while permanent insurance does not expire.

To learn about term insurance, see our article Term Insurance.

To learn about permanent (universal or whole life) insurance, see our article Permanent Insurance.

Where to purchase insurance

You can purchase life insurance from one of the hundreds of life insurance companies in the United States, though coverage and costs will vary from company to company and plan to plan. If you're unsure of where to begin looking for insurance, use our tool Get Help Finding the Right Life Insurance. You can also check with your employer to see if the company offers Life Insurance as a benefit for employees, but those benefits and/or payouts are often much less than a private policy. Plus, if you leave your job you lose the benefits.

For advice on how to choose an insurance agent, see our article How to Choose a Life Insurance Agent.