What Is Life Insurance and How Does It Work?

A life insurance policy is a financial instrument that pays money to beneficiaries (people you designate to receive the payout) in case of your death. Your beneficiaries are often your spouse, children, or other family members. A life insurance policy may be a financial cushion, especially if your family relied on your income. Selecting the right coverage is crucial. You’ll want to ensure they can cover outstanding debts when you pass on. Most people also want their family to maintain their current lifestyle or better with the insurance payout.

What Is Life Insurance?

How Much Does Life Insurance Cost?

Your policy costs depend on three things:

  • The policy type selected,
  • The coverage you want, and
  • Your risk profile.

Your insurer will look at a number of factors to determine your insurance policy. They’ll consider your age, gender, health and health history, lifestyle, and career choice.

The coverage you’ll get depends on the type of life insurance policy you select.

  • Term life insurance covers a specific time period. It’s popular because it’s cheap and simple. A policy term is usually 10, 20, or 30 years, and the premium remains the same until the term ends. The insurance does not build cash value. Your beneficiaries only receive the payout if you pass on during the covered term.
  • Permanent life insurance has more advantages than term insurance. For example, it gives a cash value (which you can borrow against) and grows over time. It’s best if you’re looking for coverage that lasts a lifetime. One major disadvantage is that it costs 6 to 10 times more than a similar term life policy.
  • There are other types of insurance, like variable, universal, and variable universal.

When purchasing life insurance, the general rule is that younger, healthier people pay less, regardless of the amount of coverage. If you’re interested in purchasing life insurance, you should do so in your thirties. By the time you’re in your forties, your insurance costs would have risen 63% on average.

How Much Life Insurance Do I Need?

It depends. Consider the following factors in your decision:

  • How healthy is your lifestyle?
  • Who are your financial dependents? If you have a family, you may need a lot more coverage than a single person.
  • What does your financial situation look like?

If you’re still having trouble determining how much insurance you need, check out this calculator at Finder.com

Employer-Provided Life Insurance

Some folks have life insurance provided through their work: a set, pre-determined amount often equal to a year’s salary. Employer-provided insurance is usually very inexpensive for the employee; some employers offer it free of charge. Employees can purchase more coverage for themselves and their families; this may or may not require a medical exam.

Many employees opt-in to this insurance because it saves them money. However, employer-provided insurance may have disadvantages:

  • The coverage may not be enough for you and/or your family.
  • If your health declines, you can risk losing the insurance.
  • The insurance is usually only available as long as you’re an employee.
  • Employer-provided insurance may not be the lowest cost option (check your alternatives just in case).


While there’s no reason not to get free life insurance from your job, you may need to consider other options. Carefully review what’s available, using the guidelines above. You should end up with the right priced policy that gives the advantages you need. Remember, the goal is to provide financial support for your loved ones.

Roman Zelvenschi

I started a digital marketing agency Romanz Media Group Inc. 12 years ago. Running my own business quickly taught me the importance of cash flow. Making sales was not enough, I had to have money in the bank to pay the vendors, staff and personal bills.

During those early stages of the company I learned how to get creative with debt and to save on interest cost. I paid for everything I could with a credit card to both get more points and to extend the payment date by 25 days (credit card grace period). I then utilized a 0% balance transfer offers to rotate this debt.

I learned a lot during this process and made a lot of mistakes. My key lesson is that the most important part of being financially independent is how much I managed to save, rather than how much I earned. Staying disciplined with savings and tracking spending is not easy and I tried many different methods to stay on track.

FinancialFreedom.Guru is a side project where I and my staff are trying to share the practical knowledge on how to understand finances and to build wealth.