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Life insurance can help protect your family from financial hardship after you're gone. In 2025, 51% of Americans ages 18 to 75 said they owned life insurance, according to LIMRA, a life insurance industry research group.

Understanding how life insurance works can help you decide whether you need a policy and what type of coverage best fits your needs.

Life insurance is a contract in which you pay a series of premium payments, and in exchange, an insurance company pays out a lump sum to your beneficiaries if you pass away while the policy is active. Some policies protect you for a set number of years, while others can last the rest of your life. Some are simple and affordable, and others can be complex and expensive.

At its core, life insurance shifts some of the financial risk of your death to an insurance company. Whether you need coverage depends largely on who relies on you financially. People with dependents, shared financial obligations, or limited savings generally need life insurance the most. 

In this article, we'll cover the types of life insurance policies, the benefits of life insurance, and how to get coverage. But first, to understand how life insurance works, you need to understand a few key terms:

Life insurance policy: The agreement between the insurance company and the policyholder to insure someone's life.

Policyholder or policy owner: The person who owns the life insurance policy. Typically, this is the person whose life is insured.

Death benefit: The sum of money the insurer pays out when the covered person dies.

Beneficiary: The individual who receives the death benefit payout when the insured person passes. You can name a primary beneficiary and, ideally, a contingent beneficiary, who can receive the payout if your first choice precedes you in death.

Premiums: The monthly or annual payments the policyholder pays to keep the policy in force.

Policy riders: Optional add-ons to a life insurance policy that provide additional benefits for an extra cost.

When you apply for a policy, the life insurance company will review your medical records and often require a physical exam to determine how risky an applicant you are. Essentially, they're assessing your life expectancy and the likelihood you'll die during the covered period. The underwriting process determines how much coverage you qualify for and how much you'll pay.

You'll pay your premiums at regular intervals, such as monthly, quarterly, or annually. If you miss premium payments, your policy could lapse. 

Several factors can impact your premium:

Age: Younger applicants generally pay less.

Sex: Women tend to live longer than men, so women generally pay lower premiums.

Health: Chronic conditions or a serious family medical history can raise your rate.

Tobacco use: Smokers and other tobacco users can pay two to three times more for coverage.

Coverage amount: A larger death benefit usually costs more.

Policy type and length: Permanent policies cost more than term life coverage, while longer term periods tend to cost more than shorter ones.

Occupation and hobbies: Dangerous jobs or activities, such as scuba diving, can increase your premium. So can a bad driving record. 

Your premium payments cover the cost of providing insurance and the insurer's administrative fees. With permanent life insurance, part of your premium also builds cash value, a savings component that grows over time. You can withdraw the money, borrow against it, use it to help pay premiums, or receive the remaining cash value if you surrender the policy. 

Regardless of what type of policy you have, the death benefit is generally income tax-free for your beneficiaries. If you have permanent life insurance, your cash value grows on a tax-deferred basis. 

Life insurance generally covers death from most causes as long as the policy is active. The insurer pays the death benefit to your beneficiaries, who can use the money for any purpose. Often, life insurance is used to replace lost income, finish paying off a mortgage or other debts, cover funeral expenses, or provide an inheritance.

Some policies also offer optional riders that can provide additional benefits while you're still alive. For example, an accelerated death benefit rider might let someone with a terminal illness access part of the death benefit early. Other riders can waive premiums after a disability or provide long-term care benefits.

However, life insurance doesn't cover everything. Suicide is one of the most obvious examples. Most policies include a suicide exclusion lasting one or two years after your coverage start date. If you die by suicide during this period, the insurance company generally won't pay the death benefit but instead will refund the premiums paid. After the exclusion period ends, suicide is usually covered.

An insurer can also deny a claim if you lied or left out important information on your application, such as a severe medical condition, tobacco use, or a dangerous job. 

Read more: Best life insurance companies this year

There are two major groups of life insurance: term life and permanent life. Term life insurance only covers you for a specified period of time, whereas permanent life insurance can provide lifetime coverage. Also, permanent life insurance policies have a savings component called cash value, while term policies don't.

A term life policy pays a death benefit only if you die within a certain period, such as 20 years or 30 years. If you don't die during the term, the policy expires without paying out money. However, some policies let you convert to permanent insurance at the end of the term, though the premium will almost always be higher when converted.

Term life insurance policies don't accumulate cash value. However, premiums are much lower than those for permanent life insurance.

Whole life insurance is the most common type of permanent life insurance. Also referred to as ordinary life insurance, these policies offer a guaranteed death benefit, plus cash value that grows at a rate guaranteed by your insurer. If you choose what's called a participating policy, the insurer may also pay dividends. For all these benefits, you'll pay a higher premium.

Universal life insurance is a type of permanent coverage that's more flexible than whole life coverage. You can adjust the premiums (within limits) and your death benefit as your financial situation and needs change. The insurer guarantees a minimum cash value growth, but the interest you earn will vary based on money market rates.

Like universal life insurance, variable life insurance offers flexible premium payments and death benefits, but you're allowed to invest the policy's cash value in underlying sub-accounts similar to mutual funds. Because the cash value is linked to financial market performance, their future performance isn't guaranteed, making variable life policies riskier than other life insurance options.

Learn more: Types of life insurance: A complete guide

The most important reason you'd want to buy life insurance is to avoid putting a financial burden on your loved ones when you die. Beyond that peace of mind, other reasons for buying life insurance include:

The median cost of a funeral with a viewing and burial was $8,300 in 2023, according to the National Funeral Directors Association. Life insurance — and specifically burial insurance — can help your loved ones pay for these costs and other final expenses.

Buying life insurance can help replace your income if you die, allowing those who financially depend on you to maintain their standard of living. Some people also opt for a death benefit that would cover the cost of their children's education.

Obtaining a policy with a large enough benefit to pay off your mortgage and any other debt after you die provides financial protection for your partner or spouse. If you have debt that someone else co-signed for, you might consider buying life insurance for at least that amount so they won't be stuck paying it off without you.

Buying cash value life insurance can provide a tax-deferred way to save for retirement, particularly if you're already maxing out tax-deferred accounts, like a 401(k) and an individual retirement account (IRA).

Choosing permanent life insurance can allow you to leave a guaranteed inheritance to your loved ones or make a substantial gift to charity.

With the federal estate tax exemption at $15 million in 2026, most people don't need to worry about estate taxes. But some high-net-worth people use life insurance as an estate-planning tool to cover the tax bill.

There's no one-size-fits-all way to determine how much life insurance coverage is sufficient, but there are a few common formulas that can help you estimate your needs. Keep in mind that these are rough estimates. 

Using a free online life insurance calculator — plenty of insurance companies offer them — can also help you estimate how much coverage you need, and some even show how interest and inflation can affect your future premium costs. 

Still, to get the most accurate and personalized estimate of how much coverage you need, consider working with a financial professional.

Read more: How much life insurance do I need?

Determine how many years you'd want to replace your income for, then multiply your salary by that number. If you earn $50,000 a year and want to replace your income for 20 years, you need a $1 million death benefit.

Younger people will usually want to choose a higher multiple than older individuals because they have more potential future earnings. Someone who's 35 may want to replace 30 years of income, while replacing 10 years of income may suffice for a 60-year-old.

In this formula, you multiply your income by 10, then add in the costs of higher education for your children. Many experts recommend estimating college costs at $100,000 to $150,000 per child.

With the DIME method, you add up the following amounts to estimate how much life insurance you need:

Debt: Your total nonmortgage debt.

Income: The amount of income you want to replace.

Mortgage: The amount you need to pay off your mortgage in full.

Education: The expected costs of your children's education.

Essentially, you'd use the multiple-of-income formula, then add your total debt (including your mortgage payoff amount) and education costs to arrive at a benefit amount.

Pro tip: Even if no one relies on your income, you might still need life insurance. For example, stay-at-home parents of young children should consider buying a policy.

The first step in buying life insurance is deciding what type of insurance you want and how much coverage you need. Then you can obtain a quote through an online marketplace or a life insurance broker. When shopping for a policy, make sure to compare quotes from several insurers because premiums, policy features, and underwriting can vary widely from company to company.

To get an accurate quote, you'll usually need to provide some basic information like your date of birth, gender, height, weight, tobacco usage, and whether you take blood pressure or cholesterol medication. The underwriting process usually involves a detailed health questionnaire and a medical exam, though some applicants can qualify for accelerated underwriting, which uses medical records and other data instead of requiring a full exam.

After your application is approved, you'll need to review the policy documents carefully — the insurer's final offer might differ from your initial quote based on what it finds during underwriting. After you sign, coverage will begin shortly after you make your first payment. To avoid a lapse in coverage, you'll need to continue paying the premiums.

Pro tip: Some policies, known as guaranteed issue policies, approve nearly all applicants without requiring health information. But these policies have low death benefits, often $25,000 or less.

You might need life insurance if anyone would struggle financially after your death. This often includes a spouse, children, or aging parents. Buying a policy can also make sense if you owe debts with a co-signer, own a business, or want to leave money for final expenses.

You may not need a policy if you're child-free, unmarried, and have enough savings to cover funeral costs. 

Before buying life insurance, it's smart to sit down with a financial advisor who can help you estimate the amount of coverage you actually need and the policy type that best fits your situation. 

Most policies give you a grace period, often 30 to 31 days, to make a late payment before your coverage lapses. If you don't make a payment, a term policy will generally lapse, and your beneficiaries won't receive a death benefit.

A permanent policy may use its cash value to cover premiums temporarily, but it can eventually lapse once that money runs out. You might be able to reinstate coverage by paying overdue premiums, but you might be required to undergo a new medical exam or update your health questionnaire. 

Your cost depends on multiple factors, including the type of policy, your age, health, tobacco use, and coverage amount. In September 2025, a 40-year-old nonsmoker in good health paid about $36 to $44 per month on average for a $500,000, 20-year term policy, according to Policygenius.

Permanent life insurance typically costs substantially more — think six to 10 times more — because it can provide lifelong coverage and build cash value.

Usually, you need a medical exam, but not always. Traditional underwriting typically requires a physical exam, bloodwork, and a urine sample. However, accelerated underwriting can use your medical history, prescription records, and other health data instead of an exam. Simplified-issue and guaranteed-issue policies also skip the exam, but they may charge higher premiums or offer less coverage. 

No, payouts from life insurance policies generally aren't taxable when the death benefit is paid directly to your beneficiaries. However, if your beneficiaries opt to leave the money with the insurer or receive it in installments, any interest accrued on the original benefit may be taxable. Different rules may apply if the policy was sold or transferred for money, or if the proceeds are included in a taxable estate. 

Not sure how much life insurance you need? Learn how much coverage you need based on your income, debts, and life stage — plus three methods to calculate the right coverage amount.

Explore the major types of life insurance, how much they cost, and which policy may be right for you.

Which life insurance is better for your needs — term or whole life? Learn more about the costs and benefits of both types and how to make the right choice.

Wondering how to get cheap life insurance? Learn which type is cheapest, what affects your premium, and how to get the best coverage for your budget.

Learn more about how taxes apply to life insurance proceeds and when you do (and don't) have to pay taxes on life insurance.

Learn about the best life insurance companies, like New York Life and MassMutual, to find the right policy to fit your specific coverage needs and requirements.