How Does Life Insurance Work?

No matter where you are in your life’s journey—single or married, just starting your career, in the midst of raising a family or planning for retirement, life insurance should be an important part of your financial strategy. Yet, many people put off getting coverage. Let’s talk about why it’s important.  

What is life insurance?

Life insurance is a contract between you and an insurance company where you pay a set amount regularly (also known as premiums). In return, your insurance company promises to make a lump-sum payment after you pass to those you name as beneficiaries. You’ll often hear this payment referred to as a death benefit.

Who needs life insurance (and when should you get it)?

The short answer to who needs coverage is probably everyone. None of us can predict the future, and no one wants to leave behind a huge funeral bill or debts for others to pay. It’s an especially good idea for anyone who has people relying on them financially. Parents with young children, couples with a single income earner, people supporting aging parents or anyone with debt like student loans or a mortgage could benefit. It’s also important for business owners to have key person or buy-sell coverage, so their businesses can continue. Basically, if your death would cause financial hardship for others, it’s a good idea to get covered.

The right time to get life insurance really depends on your circumstances. There are certain life events where having life insurance becomes particularly important—like starting a family, buying a home or getting married. 

Many Active Duty servicemembers and Veterans already have coverage through Servicemembers’ Group Life Insurance (SGLI) or Veterans’ Group Life Insurance (VGLI). But, depending on your circumstances, that may not be enough. It’s a good idea to compare your coverage to your current situation to decide whether you need to buy more life insurance. We’ve partnered with Navy Mutual to provide affordable coverage for military members who want to supplement their coverage.

How much does life insurance cost?

Although there are lots of factors that will affect your cost—your age and how much coverage you choose are the two that probably weigh the most. Generally, the younger and healthier you are, the less you’re likely to pay. Some other factors include:

• Lifestyle: People who don’t smoke or drink alcohol may pay less.
• Occupation: Some jobs are riskier than others. A riskier job may mean you’ll pay more.
• Family History: A family history of certain health conditions might mean higher premiums.
• Driving Record: A history of accidents or traffic violations could mean higher premiums.

To get the best rates, it’s a good idea to get quotes from multiple companies before you buy.

Get Insights From Our Partners

• Want to compare different policies from different companies online? Our partner, Covr, can show you comparisons for policies up to $10,000,000.
• Are you an Active Duty servicemember? Our partner, Navy Mutual, offers coverage up to $1,500,000, with no combat or war exclusions.
• Want a quick, instant-issue application process for life insurance coverage? You can get a decision and policy in about 15 minutes for coverage up to $300,000 from our partner, TruStage.

How does life insurance work?

Life insurance isn’t just to cover funeral expenses. It also can be a financial safety net for those who depend on your income. Depending on how much coverage you have, it can help pay off debts, replace lost income or even fund children’s education.

Isn’t all life insurance the same?

No. There isn’t one single type of life insurance—it isn’t a one-size-fits-all thing. There are different types of policies, and each has different features, benefits and requirements. And, these may differ from company to company.

Two of the most popular types are term life and whole life insurance (which is frequently referred to as permanent life insurance). Which one you choose depends on your goals and budget. Let’s take a look at how they compare.

What is Term Life Insurance?

These policies cover you for a specific period of time, such as 10, 20 or 30 years. If you pass away during your coverage period and you’ve paid your premiums, your beneficiaries will receive the death benefit. But, if you outlive the term without renewing or converting it to a whole life policy, the policy expires and no payment will be made.

• Features. These policies are basic coverage for the amount you choose and for a set number of years. They don’t include extras. Some, but not all of them may be renewable without needing to re-apply. Some are convertible to a whole life policy at a later time.
• Costs. In general, you’ll pay less than you would for the same amount of coverage with a whole life policy. Premiums depend on how much coverage you choose and, most likely, your health. They’ll be higher for policies that don’t require a medical exam. If you choose to renew or convert to a whole life policy later, your premiums could be higher because you’ll be older.
• Advantages. The main advantage is its affordability. You can buy more coverage for less money than you can with whole life insurance. This can be especially important for young families who can’t afford to pay for the same amount of whole life coverage.
• Disadvantages. It can be a temporary solution. It only covers you for a specific period of time. There’s no coverage after the term expires. Plus, these policies don’t have any of the benefits available with whole life. 

What is Whole Life (Permanent) Insurance?

As the name implies, these policies cover you for your whole life. Assuming you’ve paid your premiums, your policy will stay in force until you pass. It will pay at least the amount of insurance you purchased.

• Features. Depending on the company, you may earn dividends on your policy. You can use them to reduce or possibly pay premiums, accumulate in your policy or receive them as cash. And, your policy will include a cash value. This is the savings component of your policy. A portion of your premium goes toward building it, and it grows tax-deferred over time.

You can also borrow against your policy. Once it has accumulated a certain amount of money, you can borrow it just like a loan—generally up to 90% of its cash value. But, you’ll pay interest charges, which will be outlined in the policy. You won’t need a credit check and aren’t technically required to pay it back on a set schedule. But, the longer you take, the more interest you’ll owe. You can also cash it in, but then you’d no longer have coverage.

• Costs. In general, whole life premiums are higher than those for term insurance for the same amount of coverage. But, they won’t increase. They depend on the amount of coverage you choose and, most likely, your health. And, they’ll be higher for policies that don’t require a medical exam.
• Advantages. You’re covered for your whole life and have access to benefits not available with a term policy. Your premiums will stay the same. And, you’ll only pay until the policy is considered “paid up.” During the time you own the policy, its cash value generally will increase.
• Disadvantages. It may cost you more upfront. (But as explained above, once you’ve finished paying, you’ll own the policy and will continue to be covered for at least the amount you purchased.) If you miss a payment, your policy could lapse, so you’d lose coverage. (Most companies allow you a grace period and some offer an option known as automatic premium loan. That means it advances the premium for you, if there’s enough cash value. But, you’ll pay interest on the loan.) Finally, if you borrow against your policy and by the time of your passing you haven’t repaid it, the death benefit paid to your beneficiaries will be reduced by that amount, plus interest.

Busting Common Life Insurance Myths

Many people don’t realize how accessible, versatile and important life insurance is. Here are 4 common myths. 

Navy Federal can help you find the right life insurance policy.

You don’t have to figure out what you need alone. We can help you understand your options and find a policy that fits your unique circumstances.