What Is Life Insurance: How It Works & What It Covers

Life insurance is a contract between you and an insurer. You pay regular premiums, and the insurer promises to provide a tax-free lump sum death benefit to your chosen beneficiaries when you pass away.

The death benefit helps cover funeral expenses, pay off debts like mortgages or credit cards, and replace lost income so your family can maintain their lifestyle. It can also fund future needs like your children's education. Some policies include living benefits, which let you access part of the death benefit while you're still alive if you're diagnosed with a terminal or critical illness

Life insurance covers death from illness, accidents and natural causes. Your beneficiaries can use the death benefit for any financial need, including:

• Immediate expenses: Funeral and burial costs, estate taxes and legal fees
• Ongoing obligations: Mortgage payments, monthly bills, outstanding debts like car loans or credit cards
• Future needs: Income replacement so your family can maintain their lifestyle, children's education expenses

Common life insurance coverage exclusions include:

• Undisclosed pre-existing conditions: If you die from a condition you didn't disclose during your application, the insurer may deny the claim, especially within the first two years.
• Suicide within two years: Most policies include a suicide clause that prevents payout if death occurs by suicide within the first two years of coverage. After the two-year period, suicide is covered like any other cause of death.
• Fraud: Providing false information on your application can lead to claim denial.
• War and terrorism: Most policies exclude deaths from acts of war or terrorism.
• Criminal activity: Deaths occurring during the commission of a felony may be excluded.
• Risky activities: Some policies exclude deaths from specific high-risk activities like skydiving or BASE jumping unless you purchase additional coverage.
• Hazardous occupations: High-risk jobs like mining, logging, commercial fishing or firefighting typically result in higher premiums rather than coverage denial.
• Beneficiary involvement: If a beneficiary causes the policyholder's death, that beneficiary cannot collect the death benefit. Proceeds go to contingent beneficiaries instead.

Life insurance comes in two main types: term and permanent. Both pay death benefits to your beneficiaries if you die while the policy is active, and premiums remain the same throughout the policy period. Most buyers just need term life. Here are the most popular policy types:

Life insurance riders are optional add-ons that customize your base policy for specific needs. Common riders include waiver of premium (waives payments if you become disabled), guaranteed insurability (lets you buy more coverage later without a medical exam), and accelerated death benefit (provides early access to your death benefit if diagnosed with a terminal illness).

Riders increase your premium but cost less than purchasing separate policies. Add riders only when they address specific risks your base policy doesn't cover.

Life insurance premiums are the regular payments you make to keep your policy active. Once your policy is approved, your premium locks in and won't change for the policy duration as long as you keep paying on time. Insurers calculate your premium by assessing the likelihood you'll die during the coverage period. The higher your risk, the more you pay.  See our guide on how much life insurance costs.

1. Term Length

This is how long a policy stays in effect. The longer the term, the more likely you'll die during coverage, making your premium more expensive. The most common term lengths are 10 year, 20 year, and 30 year.

*Rates are based on average term life insurance quotes for $500,000 policy for a 40-year-old male nonsmoker with average weight and health ratings. 

2. Coverage Amount

The coverage amount is how much your insurer pays out as a death benefit. Higher coverage means more risk for your insurer, leading to higher premiums. Common coverage amounts are $100,000, $250,000, $500,000 and $1 million.

*Rates are based on average 20-year term life insurance quotes for a 40-year-old male nonsmoker with average weight and health ratings. 

3. Age

Your age when you buy life insurance affects your premium. Younger, healthier people get lower rates because they're less likely to die during the policy term. For example, the average cost of a $500,000 life insurance policy with a 20-year term for a 40-year-old man with an average health level who doesn't smoke is $55 monthly. A similar policy costs a 50-year-old man with the same profile $128 per month.  See our guides to life insurance for ages 20, 30, 40, 50, and 60 year olds.

*Rates are based on average quotes for a 20-year term policy with $500,000 coverage for male nonsmokers with average weight and health ratings. 

4. Gender

Women typically have longer life expectancies, so insurers offer them lower rates. On average, a 40-year-old woman in average health who doesn't smoke pays around $46 per month for a 20-year term life insurance with $500,000 coverage compared to $55 for a man.

*Rates are based on average quotes for a 20-year term policy with $500,000 coverage amount for nonsmokers with average weight and health ratings. 

5. Overall Health

Most insurers require a medical exam before they sell a policy. Good health means you're less likely to die during your coverage period, which leads to lower premiums. Health issues or pre-existing conditions, such as high BMI, cancer, or heart conditions, result in higher rates.

*Rates are based on average 20-year term life insurance quotes for a 40-year-old male nonsmoker with average weight. 

6. Smoking Status

Insurers consider smokers a higher risk than nonsmokers because they're more likely to develop health issues and have shorter life expectancies. See our analysis to find cheap life insurance as a smoker.

Most experts recommend coverage equal to 10 to 12 times your annual income. Your actual needs depend on your debts, mortgage balance, income replacement goals and future expenses like college tuition. Use our life insurance coverage calculator to get a personalized estimate based on your financial situation.