In this guide
Life insurance is a contract. You pay premiums to an insurance company, and if the insured person dies while the policy is in force, the company pays a death benefit to the beneficiaries you named. The insurer decides the price by looking at risk factors such as age and health, and the policy only pays if the contract terms are met, including keeping premiums current.
Key takeaways
- Three roles matter: the owner (controls the policy), the insured (whose life is covered) and the beneficiary (who gets paid). They can be the same person or different people.
- Price is driven by the type of policy, the coverage amount and the insured's age and health, along with other factors.
- Most policies have a free look period, a grace period for late premiums and a contestability period in the first years.
- Term policies cover a set number of years. Permanent policies are designed to last a lifetime and may build cash value.
The basic transaction
Life insurance turns a possible financial blow into a more manageable one. Instead of your family relying on savings alone, the policy provides a lump sum if you die. Beneficiaries can use it for living costs, debts, funeral expenses or whatever the beneficiary decides, since a death benefit usually comes without spending restrictions.
The insurer does not know when any one person will die. It pools premiums from many policyholders and uses statistics to price the risk. That is why the same coverage amount costs more for an older person or one with health problems.
The people in a life insurance policy
| Role | What it means | Example |
|---|---|---|
| Policy owner | Buys the policy, pays premiums, can usually name or change beneficiaries and use cash value | You |
| Insured | The person whose death triggers the benefit | You, or a spouse whose policy you own |
| Beneficiary | The person, people or organization that receives the death benefit | Your spouse, children or a trust |
| Insurer | The company that issues the policy and pays valid claims | A licensed life insurance company |
Naming the right beneficiaries and keeping them current matters, because the beneficiary designation usually controls who gets the money. See our guide on life insurance beneficiaries for details.
Main types of life insurance
Term life
Term insurance covers you for a set period, such as 10, 20 or 30 years. If you die during the term, the benefit is paid. If you outlive the term, coverage ends and there is generally no payout. The NAIC notes term is generally more affordable than permanent insurance, particularly in the early years. Our comparison of term vs. whole life insurance goes deeper.
Permanent life
Permanent policies, including whole life and universal life, are designed to cover you for your entire life as long as required premiums are paid. They typically include a cash value component. The NAIC describes universal life as combining term insurance with a cash account that earns interest, and that the policy stays active as long as the cash value covers its costs. We explain that in universal life insurance explained.
Group and other products
Many employers offer group life coverage, and there are smaller policies aimed at final expenses. We cover the first in group life vs. individual life and the second in final expense insurance.
How the price is set
The process of evaluating you is called underwriting. The insurer asks about things such as:
- Age and sex.
- Health history, medications and family medical history, depending on the policy.
- Tobacco and nicotine use.
- Occupation, hobbies and travel that might raise risk.
- Coverage amount and length of term.
Some policies require a medical exam with measurements and lab tests, while others use questionnaires and database checks only. Our articles on the life insurance medical exam and no-exam life insurance explain the trade-offs.
Insurers then assign a risk class. Better classes generally pay lower premiums for the same coverage, and the classes have different names at different companies. Prices can differ significantly between insurers for the same person, so comparing quotes from several companies is worthwhile.
What happens after you apply
- Application. You answer questions about yourself. Accuracy matters, because misstatements can cause problems later.
- Underwriting. The insurer may review exam results, medical records and other data.
- Decision. You may be approved at the quoted rate, offered a different price or class, or declined.
- Delivery and payment. If you accept, you pay the first premium and coverage begins as the policy states.
- Free look review. Many states give a short period, commonly around 10 days after delivery for individual policies, to review the policy and cancel for a refund. The length varies by state and product, so check the policy.
For the full process, see our step-by-step guide to buying life insurance.
Important policy provisions
Grace period
If you miss a premium, most policies give a grace period during which coverage continues. The length is set by the policy and state law, so check your contract. If the payment is not made by the end of that period, the policy may lapse.
Contestability period
During the first years of a policy, usually two, the insurer may review the application if the insured dies. If it finds a material misstatement, it may deny the claim or adjust the benefit. Most of the sources we reviewed describe a two-year period, but state law and policy terms govern.
Suicide clause
Many policies limit or exclude benefits for death by suicide during an initial period, often the first two years, and some states limit the remedy to a premium refund. Read your policy.
Exclusions and riders
Policies can have exclusions, and they can be customized with riders such as waiver of premium or accelerated benefits. Our overview of life insurance riders explains these add-ons.
Watch out: A policy that lapses for nonpayment stops providing coverage. If your health has changed, replacing it later could be costly or impossible. Set up reminders or automatic payments, and talk to your insurer before skipping a payment.
How a claim works
When the insured dies, a beneficiary contacts the insurer and submits a claim with a certified death certificate and the insurer's forms. The insurer reviews the claim, and if it is valid, it pays the benefit, often in a lump sum, though some beneficiaries can choose other payout options. See how to file a life insurance claim for the steps.
In general, life insurance death benefits paid to a beneficiary are not treated as taxable income at the federal level, but exceptions exist and details differ. Our guide to whether life insurance payouts are taxable covers it, and a tax professional can address your situation.
What life insurance does not do
- It is not a replacement for health, disability or long-term care coverage.
- It does not pay if you cancel or let the policy lapse, unless a non-forfeiture option applies.
- It does not usually pay the cash value on top of the death benefit in standard permanent policies. The NAIC notes beneficiaries receive no more than the stated death benefit, and unpaid loans reduce it.
Frequently asked questions
Who gets the money from a life insurance policy?
The beneficiaries named on the policy. If no beneficiary is named or living, the proceeds may go to the estate or be handled according to the policy and state law.
When does a life insurance policy start covering me?
Typically once the policy is issued and the first premium is paid, according to the policy terms. Some policies offer temporary coverage while underwriting continues. Confirm the exact start date with the insurer.
What is the difference between the owner and the insured?
The owner controls the policy and pays premiums, while the insured is the person whose life is covered. They are often the same, but they do not have to be.
Can I cancel a life insurance policy?
Yes, you can stop paying or cancel, and many states offer a free look period after delivery. After that, canceling a permanent policy may return a cash surrender value, which can be less than you paid in, especially in early years.
How do I know if an insurer or agent is licensed?
Your state insurance department can confirm whether a company or agent is licensed in your state. The NAIC also points consumers to their state department for help.
Sources
- NAIC – Life Insurance (Insurance Topics)
- NAIC – Life Insurance (Consumer guide)
- Minnesota Department of Commerce – Term vs Permanent Life Insurance
- Insurance Information Institute – How to choose the right type of life insurance
General information only. This guide explains general concepts and is not insurance, legal or financial advice. Rules and prices vary by state and insurer. Check your policy documents and speak to a licensed insurance professional or your state insurance department about your situation.