How Life Insurance Policies Work [2025]

Figuring out how life insurance policies work is an essential step when purchasing life insurance to keep your loved ones protected after you pass. Your life insurance quotes will depend on many factors, however many life insurance companies will offer a term life insurance policy for under $10 a month for young and healthy individuals.

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Daniel Walker

Licensed Insurance Agent

Daniel Walker graduated with a BS in Administrative Management in 2005 and has run his family’s insurance agency, FCI Agency, for over 15 years (BBB A+). He is licensed as an insurance agent to write property and casualty insurance, including home, life, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com and Safeco. To ensure our content is accura...

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Michael Leotta

Insurance Operations Specialist

Michael earned a degree in Business Management with an insurance focus, which led to a successful 25-year career in insurance claims operations and support. He possesses a high-level of business acumen across multiple areas of the insurance industry. Over the course of his career, he served in multiple roles supporting claims operations including: Claims Specialist, Claims Trainer, Claim Automatio...

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Updated March 2024

The Lowdown

  • Life insurance pays your beneficiary an agreed amount once you die
  • There are many variations on life insurance policies allowing you to customize your coverage
  • Discussing with a life insurance agent may help you choose the right life insurance policy

Buying a life insurance policy is a way to protect your loved ones from a total loss of income if you pass away. Designated life insurance beneficiaries receive a lump-sum payment, also known as a death benefit in exchange for monthly insurance premiums. (For more information, read our “What is a life insurance death benefit?“).

A life insurance policy ensures that your loved ones receive financial support during difficult times and removes any additional financial stress from your loved one’s life. It’s important to understand how life insurance works in order to choose the most affordable policy.

While researching how life insurance policies work, enter your ZIP code into our free quote tool to get an idea of what you could pay.

How does life insurance work?

What is life insurance? Life insurance can be a great tool to keep your loved ones supported after you pass. With a comprehensive life insurance policy, you can ensure that your loved ones won’t have to worry about any financial issues that may arise without you there. (For more information, read our “Understanding Direct Term Life Insurance“).

While life insurance can vary between companies and states, most life insurance policies follow the same process:

  • Decide what type of policy you want.
  • Apply with the insurer, following all underwriting procedures.
  • Pay your agreed premiums for the length of the policy.
  • If you die within the agreed period, your beneficiary will receive a death benefit.

The death benefit is a lump sum of cash that the beneficiary can use for anything they need. Whether it’s covering burial expenses or funding college tuition, the death benefit provided by Colonial Life & Accident Insurance Company can assist in supporting your loved ones.

The rates you pay will often depend on medical underwriting. The underwriting process is when an insurer will research your lifestyle to determine if you pose any undue risk to the insurer. It’ll look at everything from your health history to your job.

Read more:

What does life insurance cover?

What life insurance covers will often depend on your policy type and any additional coverage your insurer provides. At a minimum, your life insurance policy will provide some amount of money to a beneficiary of your choosing once you pass.

What are the benefits of life insurance?

Life insurance benefits include the death benefit, which the beneficiary can use on anything they want. The payout from the insurance company is often tax-deductible, too, so you don’t have to worry about putting yourself in another tax bracket with the payment. (For more information, read our “How do life insurance payouts work?“).

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What are the life insurance basics?

If you’re considering getting your first life insurance policy, you should be familiar with some of the terms that will get thrown around in front of you. Some of these include:

  • Premium – What you pay each month to maintain your policy.
  • Beneficiary – The person you assign to receive the payment upon your death.
  • Death benefit – This is the name of the payout that your beneficiary will receive.
  • Cash value – Some permanent life insurance policies accrue a portion of your premiums in a savings account, letting you loan against it.
  • Underwriting – The process where an insurer will look at your health, hobbies, and occupation to determine your risk.

While all this can seem daunting, life insurance is easy to learn once you understand the basics. Then, as always, you can seek the help of a financial advisor who may guide you towards the correct type of insurance policy for you. (For more information, read our “Continental Heritage Insurance Company“).

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How does insurance work for beneficiaries?

The life insurance beneficiary rules often ensure that loved ones can get a quick payout from the policy to help pay for any costs as soon as possible. This isn’t always the case, though, and sometimes the insurer may wait to verify the deceased before paying.

Some instances include when someone goes missing or cases of homicide in which the beneficiary has to be cleared by the police.

Read more: Can you name a pet as a life insurance beneficiary?

What are the major types of life insurance?

The major types of life insurance include term and permanent, or whole, life insurance. Each one will suit individual situations. Some insurers offer further variations on each policy to customize the life insurance coverage truly.

What is term life insurance?

Term life insurance will only last for a period of your life and is often regarded as one of the most affordable and straightforward forms of life insurance. This is because it lasts for a pre-agreed period and is much cheaper due to the reduced risk.

There are other options for term life insurance to customize your coverage further and increase the value of the policy:

  • Traditional term life – This lasts for a period of your life, usually in increments of five years.
  • Return of premium – If you don’t like the idea of losing out completely when your term life policy ends, this one will ensure you make some money back.
  • Renewable term – This policy version allows you to renew your insurance at the same rates as your original policy until a certain age.

There’s a reason that term life insurance is regarded as one of the more affordable types of life insurance. As shown below, many of the top insurers are willing to give reasonable rates for healthy non-smokers. For example, this chart shows a ten-year term life insurance policy with a $100,000 benefit:

Average Monthly Term Life Insurance Rates for Non-Smokers by Age – $100,000 / 10-Year Term

Non-Smoker Age & GenderPrudentialLincoln NationalMassMutualAegon/
Transamerica		John HancockState FarmMinnesota Life
25-Year-Old Female$12.25$9.46$8.36$9.89$8.78$12.44$7.04
25-Year-Old Male$13.83$9.46$9.23$11.27$9.64$14.27$7.37
30-Year-Old Female$12.25$9.46$8.53$9.72$8.78$13.14$7.04
30-Year-Old Male$13.92$9.46$9.23$10.06$9.64$14.70$7.37
35-Year-Old Female$12.25$9.56$8.88$10.66$8.78$14.44$7.15
35-Year-Old Male$13.92$9.56$9.31$11.09$9.64$15.23$7.48
40-Year-Old Female$13.30$9.94$10.10$12.47$9.45$15.49$8.14
40-Year-Old Male$15.67$10.61$10.53$13.33$10.63$16.36$8.25
45-Year-Old Female$16.28$12.69$11.58$14.02$11.54$20.71$10.01
45-Year-Old Male$17.68$14.53$12.97$15.65$13.10$20.79$11.00
50-Year-Old Female$21.27$15.95$14.62$17.46$14.80$23.49$12.65
50-Year-Old Male$21.88$20.74$16.97$20.21$15.81$26.54$14.74
55-Year-Old Female$23.80$21.50$20.28$25.89$19.58$29.67N/A
55-Year-Old Male$28.18$27.66$24.10$30.10$22.44$34.45N/A
60-Year-Old Female$29.49$29.84$28.19$36.98$27.30$40.98N/A
60-Year-Old Male$37.72$39.03$35.50$42.66$35.15$51.50N/A
65-Year-Old Female$41.13N/A$42.64$59.94$37.74$59.51N/A
65-Year-Old Male$58.45N/A$61.68$71.29$55.74$83.09N/A

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Read more: Massachusetts Mutual Life Insurance Company Review

As you can see, young and healthy individuals can get a term life insurance policy from many insurers for under $10 a month.

Read more: Annual Renewable Term Life Insurance: What It Is and How It Works

What is whole life insurance?

What is whole life insurance? It guarantees that you’ll have coverage for your entire life, as long as you continue to meet the financial obligations on the policy.

Whole life insurance has a few more variations than traditional term life insurance, but it will also cost more. Some of these variations include:

  • Whole – This insurance will cover you for your entire life, as long as you stay up-to-date with payments.
  • Universal – This policy allows you to customize your death benefit and, in turn, the rates you pay.
  • Variable – This insurance policy will allow you to invest the death benefit in stocks, bonds, and mutual funds.
  • Burial and final expense – This type of life is often cheaper because it provides just enough for your funeral and any leftover medical bills.

As mentioned, whole life insurance is often more expensive than term life due to the insurer’s obligation to pay.

Read more: Understanding Variable Life Insurance: What is it and how does it work?

How do I choose the best life insurance policy?

Deciding which life insurance policy is right for you can be a tough decision but an important one. It’s essential to make sure that your new policy will take care of your loved ones. Read more about Everest national insurance company: customer ratings & reviews for more information.

It might be worth considering discussing your options with a financial advisor or insurance agent to better narrow down what you need.

Read more:

How Life Insurance Works: The Bottom Line

If you’re embarking on the insurance market, you’re likely to be confused by the way some life insurance policies work. However, there are straightforward and affordable options that can help you ensure you’re loved ones are taken care of no matter what.

If you’re finished researching how life insurance policies work, enter your ZIP code into our free quote tool to get an idea of what you could pay for a policy.

Frequently Asked Questions

How do life insurance policies work?

Life insurance policies require you to pay premiums to ensure your loved ones receive financial support when you pass away. The policy provides a death benefit, a lump sum of cash for the beneficiary to use as needed.

What does life insurance cover?

Life insurance covers the financial needs of your loved ones after your death. It can be used to pay for expenses such as funeral costs, mortgage payments, debts, education expenses, and daily living expenses.

What are the two main types of life insurance?

The major life insurance types are term life insurance and permanent life insurance. Term life insurance provides coverage for a specific term or period, while permanent life insurance provides coverage for your entire life.

What is term life insurance?

Term life insurance offers coverage for a specified term or period, such as 10, 20, or 30 years. It is more affordable than permanent life insurance and does not build cash value. It can be a good choice when you need coverage for a specific period, like when you have dependents or a mortgage.

How do I choose the right life insurance policy?

Choosing the right life insurance policy depends on factors like your financial goals, budget, age, health, and the needs of your loved ones. Consulting a financial advisor or insurance agent can provide personalized guidance. Use our free quote tool by entering your ZIP code to compare quotes and find a suitable policy.

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