What is life insurance and how does it work? A beginner's guide

Life insurance can provide a financial payout for your loved ones in the event of your death. It's often a smart financial move for parents, partners, primary income earners, homeowners and others who have dependents relying on them — or their salaries — to get by.

Still, life insurance isn't right for everyone — or every budget. So it's important to take an informed approach before securing a policy. Below, we'll detail what to know about life insurance, how it works and what it could cost you if you buy a policy.

Find out more about your life insurance policy options here.

What is life insurance?

Life insurance is a type of insurance policy that provides a payment to your family members, relatives or other people after you have died. You name a beneficiary (or beneficiaries) on the policy, pay your premiums, and if you die during the covered period of time, the beneficiary makes a claim on the policy and receives money (called the death benefit) based on the coverage amount on the policy.

Getting life insurance typically requires a medical questionnaire and sometimes, even a medical exam (though there are no-exam life insurance options for those who don't want to take an exam or who are concerned about the results). Policy prices are based on many factors, including age and health of the insured, length of the policy, coverage amount and more.

Types of life insurance

There are three primary types of life insurance policies:

Term life insurance

Term life is a type of life insurance that lasts for only a specific period of time. Policies can last up to 30 years or even longer depending on the provider, and many use them to cover defined or time-limited expenses, like a mortgage loan, children's college expenses, etc. It typically costs less than whole or universal life insurance.

Whole life insurance

Whole life insurance is a form of permanent life insurance and is designed to last a policyholder's lifetime. These policies also have a cash value that grows (via a guaranteed interest rate) the longer you have it though you won't be able to access the cash portion immediately as it will take time to build. You can withdraw money from the policy's cash value once that threshold is reached. 

Universal life insurance

This is another type of permanent life insurance, lasting you the entirety of your lifetime, though it's more flexible than whole life insurance. With this type of coverage, you can adjust the death benefit and, as the policy's value grows, even put those funds toward reducing your premiums. Depending on the specific policy, cash value may earn interest based on declared rates or market-linked formulas. Policyholders must monitor funding and charges because insufficient cash value can cause coverage to lapse.

Explore your life insurance coverage options online now.

What does life insurance cover?

Life insurance can cover the costs of funeral and burial expenses, lost income, unpaid debts and medical bills, and other expenses left behind by a loved one after they pass. But it only pays out if the policyholder dies for a covered reason.

Typically, these include things like natural causes, accidents, and terminal illnesses. There are often exclusions if the policyholder dies by:

• Acts of war

• Suicide after a select period of time

• Participating in a dangerous activity

• Committing a crime 

• Fraud in the application process

Always read through a company's exclusions before deciding to buy a policy and make sure you — and your beneficiaries — understand the limitations.

How much does life insurance cost?

The costs of life insurance depend on the age, health, gender, term, type of insurance, and coverage amount. Men typically pay more than women for life insurance, and the older the policyholder is, the more expensive premiums get, too.

Here's a look at the costs of term life insurance for a 35-year-old in average health, with no history of nicotine use, living in Houston, Texas, according to Ethos in October 2026. 

Keep in mind that these are just approximate ranges. Your exact premium will depend on a number of factors specific to your health, policy, and needs.

How much life insurance do you need?

There are many ways to determine how much life insurance you should purchase.

Some common strategies include:

• 10x income: This is a classic rule. Just take your annual salary and multiply it by 10. That's the minimum amount of coverage you should apply for. If you have kids, you can go further and add $100,000 per child for future education costs. 

• DIME: With this method, you add up your household's total debts (D), income (I), mortgage balance (M), and educational costs (E). This total is what you'll need to cover via life insurance.

• Obligations – assets: This strategy requires you to add up all your financial obligations, including your mortgage balance, future college costs, annual earnings, car loans, and other debts, and then subtract those from your total liquid assets (savings, college funds, etc.) Whatever remains is what you need to cover with life insurance. 

• Income before retirement: Another option is to get enough insurance to cover your dependents through what would have been your retirement. To do this, take the years you have remaining until you're of retirement age, and multiply it by your current annual salary.

Generally speaking, you'll want to take into account your age, how many dependents you have, any debts you or your spouse have, your income, and the inheritance plans you have for your children and loved ones. 

If you're not sure how much insurance to get or what type of policy is right for you, consider talking to a financial professional. Make sure they're independent and not affiliated with any specific insurance company. This will ensure you get the most unbiased guidance.