Life insurance guide: who needs it and how it works
Life insurance pays money to the people you choose when you die. If anyone depends on your income or would be left with your debts, it's one of the most important policies you can own.
Published by Marcus L. Barber, former licensed Maryland property and casualty producer (2010–2012)Reviewed by Marcus L. Barber on Updated This guide is general education, not advice for your situation. We're an independent publisher, not an insurer or agent, and we may earn a commission from partner links. How we make money.
Key points
- You need life insurance if someone depends on your income, or would face costs or debts when you die.
- Term insurance covers a set number of years and costs the least. Permanent insurance lasts for life and builds cash value.
- A needs-based estimate, not a quick multiple of income, gives the best coverage figure.
- Most states give you a free-look period to cancel a new policy for a full refund.
Who needs life insurance
Life insurance is about people who'd be hurt financially by your death. You likely need it if:
- You have a spouse, partner, children or relatives who rely on your income.
- You have a mortgage or other debts someone else would have to deal with.
- You provide care, such as raising kids at home, that would cost money to replace.
- You want to cover funeral costs so family doesn't have to.
If no one depends on you and your savings would cover final expenses, you may not need much, or any. Coverage through work can help, but it's usually tied to your job and may end if you leave.
Term vs. permanent
| Term life | Permanent life (whole, universal) | |
|---|---|---|
| How long it lasts | A set period, such as 10, 20 or 30 years | Your whole life, as long as premiums are paid |
| Cash value | None | Builds cash value you can borrow against |
| Cost | Lowest premiums for the coverage amount | Much higher premiums for the same coverage |
| Best for | Covering years when people depend on you: a mortgage, raising kids | Lifelong needs, such as estate planning or a dependent who needs lifetime support |
Our term vs. whole life guide goes into the trade-offs.
How much coverage
A common rule of thumb is five to eight times your annual income, but the NAIC and the Insurance Information Institute both suggest working out your actual needs: income to replace, debts, final expenses, and future costs like college, minus savings and other coverage. Try our step-by-step method.
How buying works
- Decide the type, amount and term you want.
- Get quotes. Insurers price based on your age, health, tobacco use and sometimes hobbies or job. Comparing several insurers matters because they assess health differently.
- Apply. You'll answer health questions. Some policies also require a medical exam; others use records and data instead, which is faster but can cost more.
- Underwriting. The insurer reviews your application and offers a final rate, which can differ from the initial quote.
- Pay the first premium and the policy starts. Answer every application question honestly: misstatements can lead an insurer to contest a claim.
Check that the insurer and any agent are licensed in your state, and review complaint data with the NAIC's Consumer Insurance Search.
Your right to cancel
States give you a "free-look" period after a new life policy is delivered, during which you can cancel for any reason and get your premium back. The length varies by state. North Carolina, for example, allows at least 10 days for a new policy and 20 days when it replaces an existing one, and Texas allows at least 10 to 20 days. Read the policy during this window to make sure it's what you expected.
Beneficiaries and finding lost policies
You name beneficiaries, the people or organizations who receive the payout. Name a backup (contingent) beneficiary too, and update both after marriage, divorce or a birth. Payouts to named beneficiaries generally don't go through probate.
If a relative has died and you think they had a policy, the NAIC's free Life Insurance Policy Locator asks participating insurers to search their records. If you're a beneficiary, the insurer contacts you.
How this guide was made
We drafted this guide with help from AI writing tools, working from the sources listed below. Every fact was checked against those sources, and Marcus L. Barber read and reviewed the full page, including its title, description and FAQs, before it was published. AI tools don't decide what we publish; a person does. Our editorial standards.
Sources
- What are the principal types of life insurance?, Insurance Information Institute
- Life insurance, National Association of Insurance Commissioners
- What type of life insurance is right for you?, National Association of Insurance Commissioners
- How much life insurance do I need?, Insurance Information Institute
- Life insurance guide, Texas Department of Insurance
- FAQs about life insurance, North Carolina Department of Insurance
- Learn how to use the NAIC Life Insurance Policy Locator, National Association of Insurance Commissioners
- How to file a complaint and research complaints against insurance carriers, National Association of Insurance Commissioners