Life insurance pays out a sum of money upon your death to those you have designated as beneficiaries, giving them a financial safety net.
You can provide this safety net to take care of a variety of debts or other obligations, present or future. For example, life insurance can provide money after your death so your beneficiaries could:
- Continue to pay household expenses such as food and clothing.
- Make mortgage payments.
- Pay for college tuition.
- Cover your funeral expenses.
You can choose from many varieties of life insurance, depending on how long you want the protection to last and how much you’re willing to pay. The life insurance definition comprises two main types of life insurance:
- Term life insurance, which covers a set number of years.
- Permanent life insurance, which covers you for your entire life and has a “cash value” account that you can borrow against. For these reasons, a permanent policy is more expensive than term life insurance — often significantly more.
Life insurance prices are typically based on your life expectancy. The life insurance company will estimate how much longer you can expect to live, which equates to its chance of having to pay out a claim. The higher the chance of paying a claim, the higher the life insurance rates. To estimate your life expectancy, the company typically will ask you a variety of health questions and request medical records, and it may require a medical exam.
» MORE: How life insurance works
Some policies require no medical exam and few or no health questions. Because the insurer can’t estimate your life expectancy accurately when selling these policies, the rates can be very high.
Life insurance companies invest the premiums their customers pay, hoping that returns on their investments will yield a profit before they have to pay out the life insurance claims.
» COMPARE: NerdWallet’s life insurance comparison tool