What Is Life Insurance And How Does It Work?

In “Plain English,” life insurance is a contract between you (the policyholder) and an insurer (the insurance company). A life insurance policy provides financial protection against the loss of life by paying out a lump sum of money to the named beneficiaries upon the passing of the policyholder.

How Does Life Insurance Work?

The way life insurance works is that you (the insured) will make monthly payments (your premium) to an insurance company, and if you die while the policy is still active or "in-force," the insurance company pays out a death benefit to your beneficiaries.  With the national average life expectancy decreasing due to COVID19, it's essential for everyone to be covered

What Is The Purpose Of A Life Insurance Policy? 

The main purpose of a life insurance policy is to protect your family. If you are the primary breadwinner and you pass away, having life insurance will allow your family to replace your income and maintain their current lifestyle when your life insurance payout arrives. If you pass away the last thing you want to do is leave your family in debt or cause them financial ruin. 

What Are The Different Types Of Life Insurance Policies?

The different types of life insurance policies are term life insurance and permanent life insurance (often referred to as whole life insurance.) While you might have seen several different types of polices, they are all just variations of term and permanent life. 

Term Life Insurance

The most common type of life insurance is term life because of how much more affordable it is than other products and how easy it is to understand.

Term life insurance will have a set term length, usually, 10, 15, 20, 25, or 30 years based on your current and future needs.  Your rates are usually locked in and as long as you make the payments, your policy stays active. 

Permanent Life Insurance 

Whole life insurance is a type of permanent life insurance policy (meaning it lasts for your entire life) and is probably not the best option for about 95% of people searching for life insurance.  

Since whole life insurance never ends, it means that the insurance company knows they will have to pay the death benefit one day.  Because of this, your monthly premiums are going to be ridiculously more expensive then they would be for a term life policy. 

Whole life polices also give you the ability to borrow against the cash value built into the policy; however, I don't ever recommend that someone use their policy's cash value for anything. 

How Much Life Insurance Do I Need?

On average, you will need at least 10x (times) your annual income in life insurance coverage. This will replace your income for your family by 10 years. So, if you make $50,000 per year, at 10x you should have at least $500,000 in life insurance. If you can afford it, at a licensed agent, I suggest going for 15 to 20 times your yearly salary so that your family can have 15 to 20 years of income replacement if you pass away.

How To Calculate How Much Life Insurance You Need?

The best way to calculate your life insurance needs is to figure out what your current financial situation is, and what it would look like if you weren't around. 

You should consider things such as current debt, if you have a mortgage, will you need to cover your kids college tuition, do you have an outstanding car loan.  

Do you have a stay at home spouse or a child with special needs.  What about your final expenses like funeral costs, will you spouse have to replace your lost income? Go as far as you would like because there isn't really a thing as "too much" insurance.

If you don't want to calculate it all by hand you can check out our calculator.

We created a nifty life insurance calculator that you can use to better understand exactly how much you need. You will still need to have an idea of what your current and future expenses may be but it makes calculating your needs much easier.

How Much Does Life Insurance Cost?

The average cost of life insurance is $22.59 a month for a 40-year-old female buying a 20-year term policy for $250,000 in coverage. For a male, the average life insurance cost is around $27.35 a month for the same coverage. While a 20-year term policy is the most common term length purchased, rates will vary on an individual basis. 

The national average life insurance premium by state is around $631 per year or about $53 per month, you should definitely to do your due diligence before you decide on how much life insurance you need or which company to choose.

What's The Average Cost Of Life Insurance By Age? 

Below we review life insurance costs by age for three of the best life insurance companies, Bestow, Haven, and Fabric. There are no companies that are faster at giving you a few quotes without personal information and getting you insured without a medical exam. 

What Determines Your Life Insurance Rates?

Tobacco Use - Tobacco use is probably the one item on the list that will give you the largest increase in your premiums. Upwards to 60% or more per month..

Age - Your age will also determine what your premiums will be. The younger you are when you purchase life insurance the more affordable it will be.

Gender - All things being the same, if you are male, your premiums will be higher than women. This is because women typically live longer than men. 

Lifestyle - Insurance companies need to be sure that you don't take too many risks and that if you do, you probably will pay more per month. Things like race car driving or skydiving.

Term Length - The term length of your insurance policy will also play a role in how much you pay per month. The lower the term length, the lower your premiums. 

Health - Your health is the one factor that makes everyone's premiums different. If you have several health conditions you can expect a higher premium than usual.

How To Buy A Life Insurance Policy Online?

There are some sites that state it will take between four to eight weeks from start to finish to get covered; however, I can as sure you that is no longer the case in 2021.

There are products now that are able to give you a life insurance quote online and get you covered in under 5 minutes and at most a few days.

When buying life insurance it's best to compare quotes across multiple insurance companies to make sure you are getting the best rate and the most benefits.  We even recommend applying to more than one company so that the insurance companies have to fight for your business.

Why Trust Simply Insurance?

We make things simple. At Simply Insurance, you get to compare only the top online life insurance companies. We've done all the hard work and picked out the top companies so that you don't have to go through all of the top insurance companies in the nation... I mean, no one really has time for that. 

Years of licensed experience. As licensed agents, we help our customers navigate the entire insurance buying process. We don't work on commission and can answer any questions you may have in regards to your insurance policy.

Keeping it in "Plain English." We pride ourselves on creating content that is easy to understand and that doesn't have a ton of "insurance-ese". Insurance education is essential to us and we put our customers needs first.