Life Insurance 101: A Quick and Easy Primer

Kristin Hoppe


If you're considering getting life insurance for your loved ones, you're in good company. A little over half (54%) of Americans owned life insurance in 2020.

In technical terms, life insurance is a contract between you and your insurer, which acts as financial protection for beneficiaries in the case of your death.

Unfortunately, choosing the right insurance plan isn't exactly straightforward. Below, we'll go over life insurance information so you can form a more clear idea if it's the right fit for you.

Life Insurance 101

Who typically buys life insurance?

People who are the primary financial providers in their family and have dependents are the most likely to buy life insurance.

Because life insurance covers costs of living after the insurance holder has passed away, this gives you peace of mind that your family and loved ones will still have financial means and prospects, even in the worst case scenario.

What are the different types of life insurance?

There are several different types of life insurance. Term and permanent life insurance are the most common types, along with more complex options like variable and universal life insurance.

Term Life Insurance
Term life insurance ends after a specified amount of time. For example, you may pay into your term life insurance plan for a span of 20 years. If you pass away in the designated time frame, your beneficiaries will receive life insurance payouts.

If you do not pass away before the designated time frame, your payments will simply end. This may be a better fit if you assume you will have accumulated an amount of wealth by the end of that time period that will still cover your family's needs.

Permanent Life Insurance
Permanent life insurance guarantees your beneficiaries will receive payments upon your death. This plan usually runs much more expensive than term life insurance plans, but may be a good fit if you want a guaranteed safety net for your family after your passing, including payments for specific services like funeral arrangements.

What does life insurance cover?

  • Medical expenses before you pass away – Some policies have what's called an "accelerated death benefit rider". In simple terms, it means that if you're diagnosed with a terminal illness, you can leverage your life insurance payments to cover long-term care and medical expenses while unable to work. On the downside, the money you use will be deducted from the overall death benefit you leave your beneficiaries afterwards.

  • End-of-life expenses – According to The Consumer Price Index, funeral costs have risen 227% over the last 30 years. The average funeral costs around $8,000-$10,000. Finding life insurance that covers this cost can be a huge relief to your family during a difficult time.

  • Day-to-day bills – Depending on the plan, death benefits may pay out for months or years and help out with regular living expenses like groceries, phone bills, rent or mortgage payments, and gas.

  • Debts – Your family can use life insurance to cover debts you owed (if they're not forgiven when you pass away). That said, it's important to note that your family may only be able to use this money to pay off shared debts if they're officially listed as one of your beneficiaries.

  • Investments – Some life insurance policies pay off in a larger lump sum, which could allow your beneficiaries to invest or grow that money upon receiving it.

How much does life insurance cost?

According to data provided by Quotacy, term life insurance costs $26 a month on average. They base this on a 40-year-old buying a 20-year term life policy.

Of course, rates vary largely based on factors such as:

  • The type of plan you want

  • Your gender and age

  • Your level of health and overall risk

  • Insurer offerings

Whole life insurance can cost over 10 times as much or more annually. That’s because unlike term insurance, it does not have an expiration date for death benefit payout.

What kind of information will insurers want to gather?

  • Lifestyle – Including profession and future plans for risky activities like rock climbing, hang gliding, etc.

  • Health history – Including your family's health history and your own medical records

  • Driving and criminal records – Including violations like DUIs

What is the best way to find reliable life insurance companies?

  1. Narrow down the type of coverage you want. Companies have different types of offerings depending on popular market needs. For example, you may be more interested in finding a policy that specializes in covering multiple dependents, or that has a death rider included in the policy.

  2. Research rankings and price range. As we mentioned above, prices may range significantly depending on the type of life insurance product you want and your own health and life circumstances. Many websites offer comprehensive plan comparisons and rankings that can help you find the best options out there. PolicyGenius/NerdWallet  and Insurify are some of the most popular comparison tools.

  3. Compare life insurance quotes. Most websites can give you a loose quote based on questions around your age, health level, and lifestyle. Save this information and compare with your top contenders to see which prices look best and which plans cover the most bases.

  4. Cross check through ratings agencies. Once you've selected a few life insurance companies that look like a good fit, verify with ratings agencies like the S&P 500 to make sure they don't have questionable ratings lower than a B.

Trustworthy Can Help

Trustworthy is the Family Operating System®, an online service that helps your family curate, manage and securely share your important family information so that you have peace of mind, no matter what the future holds.

Our experts helps your build and improve your Family Operating System. You can learn more about Trustworthy here.