What is Life Insurance?
Need to learn more about a life insurance policy and how does it work? Get the facts on the coverages and terms you need to know.
No one ever really wants to think about life insurance. But it pays to plan ahead, particularly if you’re a breadwinner. Having a life insurance policy can make paying for essentials easier for your loved ones after you’re gone. Not sure where to begin? Here are a few basic facts about life insurance—and how it works—to get you started on the right path.
What is life insurance?
Life insurance is a policy that helps you provide for your family after your death. Without your income, your loved ones may not have enough money to keep up with the rent or mortgage, pay other household bills, buy groceries, or even cover your funeral expenses. In your absence, life insurance pays your designated recipients a “death benefit,” or a set amount of money specified by your policy, when you’re gone.
What types of life insurance policies are available?
There are three main types of life insurance: term, whole, and universal.
Term life insurance is a cost-effective option when you have more to protect. It offers affordable coverage for a set period of time with level premiums. The benefits can be used to help cover the living expenses of those you care about most in your absence.
Whole life insurance provides simple, lifelong coverage with guaranteed benefits and premiums. The coverage can be there for your family when it’s time to take care of your final expenses.
Universal life insurance provides permanent coverage that can help meet your changing needs. You can use the flexible options with this type of policy to help grow cash value during your lifetime and then leave a legacy to your family or a gift to charity.
What are the common benefits of life insurance?
Depending on your life insurance policy, it provides money for your beneficiaries to help:
- pay your funeral and final expenses (such as medical expenses not covered by health insurance, burial costs, estate administration costs, and federal and state “death” taxes)
- replace your income
- cover outstanding debts
- provide an inheritance
- make charitable contributions
- build/accumulate cash value for yourself
How does life insurance work?
When you purchase life insurance, you begin paying a monthly or an annual premium. Your on-time payments keep your policy active. If you die while you have active coverage under a covered claim, your life insurance provider pays the policy’s death benefit to your beneficiaries. This benefit is often paid out in a lump sum. Your beneficiaries can choose to have the death benefit paid out in installments.
Learn more about how life insurance works.
How much life insurance do I need?
Get a general idea by answering only two questions, then use our life insurance checklist to get a detailed answer.
What is the average cost of a life insurance policy?
Life insurance rates vary greatly, depending on your policy type, age, health, and other factors. Speak to a life insurance professional to get a personalized quote.
Who are all the people named in a life insurance policy?
- The insured is the person whose life is insured by the policy. Typically, there is one insured per policy, but in some situations you can customize your policy and have multiple insureds.
- The owner is the policyholder—the person who purchased the life insurance policy. The owner has control over the policy and is responsible for paying the premium. Where applicable, the owner may borrow against or withdraw its accrued cash value. The owner is typically the insured, but in some situations it could be a different person or party.
- A beneficiary is a person who collects the death benefit when the insured person dies, such as the insured’s spouse or child. You may have multiple beneficiaries of a life insurance policy and specify what percentage of the total death benefit each receives.
- The insurer is the company responsible for issuing the life insurance policy, collecting the premium, and paying the death benefit to the policyholder’s beneficiaries (if the policyholder dies).
What do I need to apply for life insurance?
During the application process, you may need to provide:
- your age
- information about your health, including prescription and nicotine usage (you also may be asked to undergo a no-cost medical exam)
- your driving history
- information about whether you participate in high-risk activities, such as auto racing or sky diving
- financial information, including your annual income, net worth, and the value of your assets and liabilities
When you buy a life insurance policy from AAA Life Insurance Company, our experienced insurance agents guide you every step of the way.