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What Is Life Insurance? [Updated]

By Kaycie Tyll Oct 31, 2018

In this article

Definition: What Is Life Insurance?

How Do Life Insurance Plans Work?

How Much Does Life Insurance Cost?

If I Buy a Policy Today and Pass Away Tomorrow...

Term Life Insurance

Accidental Death Insurance

Whole Life Insurance

Universal Life Insurance

Who Might Want Life Insurance?

Which Type of Policy Is Right for Me?

Does anyone depend on you financially? Do you have any significant debts? Do you own a business? Do you want to leave an inheritance behind when you pass away?

If you answered yes to any of those questions, you might need life insurance.

Definition: What Is Life Insurance?

The purpose of all life insurance is to help provide a secure financial future for your family after you’ve passed away.

Many people determine how much coverage is appropriate for them based on the needs approach. This would involve estimating how much money your family would need in order to help replace your lost income and make debt payments in your absence.

It could also include one-time expenses like funeral costs and other ongoing expenses after you’re gone.

How Do Life Insurance Plans Work?

A life insurance policy is an agreement between you (the “policyholder”) and the insurance company (the “insurance provider”). It says that if a specific person passes away (the “insured”), while the monthly payments (the “premiums”) are paid-up, the insurer will make a lump sum payment (the “death benefit,” also referred to as the “coverage amount”) to the person or persons of your choosing (the “life insurance beneficiary”).

How Much Does Life Insurance Cost?

That varies based on a number of factors: the kind of life insurance you're looking for, your age, gender, health, whether you smoke, how risky your hobbies are and more. For policies that consider your health when determining the cost to insure you, even something like weight loss can affect your rates.

In some cases, you'll need to undergo a health exam to receive a final rate. That said, some insurers may be able to fast-track your application without a health exam.

Some kinds of insurance are guaranteed-issue, which means they don't take your personal health situation into account. With guaranteed-issue policies, you don't need a health exam.

Once you’ve completed the health exam (if required), life insurance underwriters will evaluate your results and determine your rating classification. Essentially, that summarizes, how risky is it to insure you? From there, you'll receive your final, confirmed price.

If I Buy a Policy Today and Pass Away Tomorrow...

Then how much of the policy would be paid?

One hundred percent. So long as the event leading to your mortality is covered by your policy, and the premiums are paid. End of story.

There are a number of types of insurance that pay a death benefit. Here are a few:

Term Life Insurance

Term life insurance provides death benefits if you die during a certain time period, or term. If you had a 20-year term policy, you'd be covered for that 20-year span. After that, you'd either need to buy another policy or let your coverage lapse.

Often, people choose term life insurance as an affordable way to help protect their loved ones during a specific, high-need time. One of the most common situations is the time frame when they’re raising kids. After 20 years, for example, your kids might be out of the house and your need for life insurance might be lower.

Term life insurance is often medically underwritten, which means it may require a physical exam, though a new breed of companies like Fabric are using algorithms to allow some applicants to skip the medical exam.

Term life insurance also tends to get more expensive as you age, which is a reason to apply sooner than later.

Full disclosure: Fabric offers this kind of life insurance. You can apply online in just five minutes, without ever speaking to an insurance agent.

Accidental Death Insurance

When you’re 25 to 44, the single greatest risk to your life is accidental death. Accidental death insurance is built specifically for that.

Accidental death insurance tends to be affordable. Because the insurance provider doesn’t need to take your health into consideration, it can be purchased extremely quickly and without a medical exam. This type of insurance is more affordable, too, because it only covers death due to accidents, not illness.

Whole Life Insurance

Whole life insurance, also called permanent life insurance, offers coverage for your entire life. Its premiums include a mix of insurance and investment components. That investment component builds accumulated cash value that can be borrowed against or withdrawn before you pass away.

Whole life insurance plans are more expensive and complex than term life insurance because they provide lifetime protection and cash accumulation. Certain fees and expenses will reduce the cash value. That can, in turn, affect and even reduce the amount of the benefits.

Check out our full rundown on term and whole life insurance.

Note that you can convert your term life insurance policy from Fabric into a whole life policy, if you want.

Universal Life Insurance

This is another form of permanent life insurance. You’ve got more flexibility with universal life insurance to adjust the death benefit without opening a new policy, subject to the terms of the contract. You can also lower your premium payments by paying from the cash value account.

If you expect your economic situation to change dramatically and you think permanent life insurance is your best fit, universal life may give you room to adjust as you go. You can potentially increase your death benefit down the road if you pass medical and any other requirements.

And if your income drops suddenly (for example, due to unemployment), paying premiums from available cash value funds can help you keep the policy active while you get back on your feet.

If coverage is your main concern, though, you may be able to purchase a term life policy with the same or higher death benefit at a lower rate than universal life. If universal life plans appeal to you because you’re worried about eventually not being able to pay premiums, considering options with a lower monthly cost may make sense for you.

Who Might Want Life Insurance?

The first reason, and the main purpose of life insurance, is the death benefit. We’ve all thought about what would happen to our families if the primary wage-earner were to unexpectedly pass away, whether that be us or our partner.

Purchasing life insurance shouldn’t just be about the lost income of the “breadwinner.” It’s also worth considering how much child care would cost if a non-earning spouse, who takes on the responsibility of staying home with the children, were to pass away.

Another big reason to get a policy is because life insurance creates an immediate estate, so to speak.

Estate creation can be especially important for young families that are just getting started and don’t have much when it comes to assets.

With life insurance, though, your beneficiary or beneficiaries will end up with the money from your policy’s death benefit.

There are also reasons that single people might want to buy life insurance, too.

All this being said, the policy needs to remain active and in force. Additionally, the cause of death needs to be covered by the specific policy in order for your beneficiary to receive the benefit.

Which Type of Policy Is Right for Me?

Experts often recommend a coverage amount that's five or more times your annual salary. (Here's a more detailed rundown on how much life insurance coverage you need.)

When you compare life insurance policies, spend some time thinking through your family's financial needs. How will they be impacted if you or your spouse were to suddenly pass away? In some cases, spouses end up shopping for life insurance together, to align their goals.

A solid rule is to read, and understand, all of the information that’s available to you on any type of insurance policy before buying it.

If you’re unsure where to start, here are some questions to help get the ball rolling:

  • How long should I have insurance coverage?

  • Would it make sense to have lifetime coverage?

  • Do I need the cash accumulation features of a whole life policy?

  • Am I willing to take a medical exam?

Then, down the road, when you're assessing a specific policy, there are a few questions you might ask. These include:

  • Are there any limitations and/or exclusions in this plan? If so, what are they?

  • What happens if I miss a payment?

  • How long is the coverage term, and what's the coverage amount?

  • Do I need to take a medical exam?

At the end of the day, you need the right kind of coverage for your life.

Fabric exists to help young families master their money. Our articles abide by strict editorial standards.

Fabric by Gerber Life exists to help young families master their money. Our articles abide by strict editorial standards.

Information provided is general and educational in nature and is not intended to be, and should not be construed as, financial, legal, or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. We make no warranties with regard to the information or results obtained by its use, and disclaim any liability arising out of your use of, or reliance on, the information.

Fabric by Gerber Life offers a mobile experience for people on-the-go who want an easy and fast way to purchase life insurance.


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Written by

Kaycie Tyll

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Term Life Insurance Policy Series ICC22 2205-4004 WSA and Accelerated Death Benefit Rider policy series ICC22 2205-2623 WSA (and state variations where applicable) issued by Western-Southern Life Assurance Company, Cincinnati, OH which operates in DC and all states except NY, and distributed by Gerber Life Agency, LLC using Fabric Technologies. Gerber Life Agency, LLC is an affiliate of Gerber Life Insurance Company (est. 1967). All are members of Western & Southern Financial Group (Western & Southern). Issuance of coverage for Term Life Insurance is subject to underwriting review and approval. Please see a copy of the policy for the full terms, conditions and exclusions. Product provisions, availability, definitions and benefits may vary by state. Payment of benefits under the life insurance policy is the obligation of, and is guaranteed by, the issuing company. Guarantees are based on the claims-paying ability of the issuer. Products are backed by the full financial strength of the issuing company.

All sample pricing is based on a 30-year old F in Excellent health for the coverage amount shown and a 10-year term policy, unless otherwise stated. Gerber Life Agency, LLC (GLA) is an insurance agency licensed to sell life insurance products. GLA will receive compensation from Western-Southern Life Assurance Company for such sales. The NAIC Company Code for Western-Southern Life Assurance Company is 92622.

Western-Southern Life Assurance Company's A+ Superior A.M. Best Rating: Superior ability to meet ongoing insurance obligations (second highest of 13 ratings; rating held since June 2009). Ratings are subject to change from time to time. The ratings shown here are correct as of 09/03/2022. For more information about a particular rating or rating agency, please visit the website of the relevant agency.

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