Life Insurance Guide: What It Is & How It Works

Last Updated: May 2020

Life Insurance can be a confusing topic. There are different types of policies, dozens of companies to choose from, and many ways to purchase a life insurance policy.

Rootin is making it simple for you. We know that life insurance isn’t the most exciting topic, but we also know that it’s important!

Below, we will help you better understand life insurance, how to shop for it and guide you to find the best policy for your situation as quickly as possible.

What is Life Insurance, & How Does It Work?

Life insurance is a contract between a person (the policyholder) and an insurance carrier (the insurer).

The insurance company provides a payment, called the death benefit, to a person (or people), called beneficiaries, designated by the policyholder, when the policyholder passes away. In exchange for this, the policyholder makes payments called premiums to the insurer, typically on a monthly basis, while they are alive.

It sounds simple enough, but there are many different types of policies available. Making sure you understand them is critical to finding the best life insurance for your needs.

What are the Different Types of Life Insurance Policies?

Below are the 3 primary types of life insurance.

Term Life Insurance: This is the most popular. It lasts for a fixed amount of time, called a term. This term is usually 10 to 30 years.
Whole Life Insurance: This type of life insurance lasts your “whole life” but is more expensive than term. It also comes with a cash value component that grows over time, and that you can borrow from while you’re alive.
Universal Life Insurance: This type of policy also lasts your whole life, but is more complex than whole life insurance. It has more options, such as flexible premiums and death benefits. The cash value in universal life insurance can be tied to investments in the market as well.

Other common types of life insurance include high risk life insurance, no medical exam life insurance, and final expense insurance.

Common Questions People Ask About Life Insurance

Here are several frequently asked questions about life insurance.

How do I know if I need life insurance?

If you have family, or other loved ones, who depend on your income, and would not be able to afford necessary expenses if you passed away, then you might need life insurance.

Can I qualify for life insurance?

Almost anyone can qualify for some type of life insurance. Even people who have serious medical complications can purchase a guaranteed acceptance policy.

Learn more about applying and qualifying for life insurance here.

How much does life insurance cost?

The cost of your life insurance policy depends on:

The type of policy you get.
How much coverage you need.
Your age.
Your health.
The company you choose.
And many other factors.

A healthy 40-year-old male can get a 20-year term policy for $500,000 in coverage for around $36 per month. For the same policy, a healthy 40-year old female would pay around $30 per month.

How much life insurance coverage do I need?

Consider who you are buying the life insurance for. At what point will they be okay financially, if you passed away. It is usually best to be covered until that time comes.

For example, if you have a 3-year-old child, you may purchase a 20-year term policy so that your child is covered until they are out of college and able to work.

Should I purchase term or permanent life insurance?

It depends.

Term life insurance is good for families who would be hurt financially if a breadwinner passed away. Most people buy term life insurance until their kids are an income-earning age or until they hit retirement age.

Permanent life insurance, which includes whole & universal, is usually for people who want to help their heirs pay estate taxes when they die. Many people use a permanent policy to leave an inheritance for loved ones, sometimes to simply cover burial costs. It is also common for parents with special needs children to purchase a whole life policy.

How can I find a cheap life insurance policy?

Making sure you get the lowest rates is done by first choosing the right type of policy and the right amount of coverage. Then, you must compare rates from the best companies that specialize in the type of life insurance you are looking for. Comparing multiple companies can save you $1000’s of dollars over the life of the policy.

Read 11 ways to save money on life insurance here.

Choosing the Best Life Insurance Company

When deciding which life insurance carrier to choose, you should first consider the type of policy you need.

There is no single “best company” for everyone.

One company might give you lower rates for term life insurance, but an entirely different carrier might be better if you need a permanent policy. Some companies specialize in certain medical conditions like life insurance for smokers or diabetics, and others have great policies for seniors over 70.

Read reviews of over 50 life insurance companies here.

Here are Rootfin’s top 10 life insurance carriers. Click to see a review of each company.

Read about our reviews of the 10 best life insurance companies here.

There are dozens of other great carriers as well, so be sure to compare more than just our top 10, especially if you have a unique health situation.

What is the Best Age to Get Life Insurance?

One of the biggest factors to the price you pay for life insurance is your age. Older people will pay more, simply because they are at higher risk of passing away.

At Rootfin, we’ve written articles on nearly every single age that a person might buy life insurance.

Our Most Popular Life Insurance Articles

We have hundreds of articles to help you understand and shop for life insurance. Below are our top 10 most popular articles.

Life Insurance: What it is, How it Works, & How to Find the Best Policy

What is Life Insurance, & How Does It Work?

What are the Different Types of Life Insurance Policies?