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For millennia, philosophers have wondered, Where did we come from? Where are we going? And most importantly, What is the meaning of life insurance?
Okay, we updated the last one slightly and Aristotle is probably rolling over in his grave right now. But it’s a valid question!
Seriously. With all the different kinds of life insurance out there (not to mention all the marketing), deciding what to buy can feel like researching a doctoral thesis. But it shouldn’t be that way!
The actual concept is so simple, you don’t even have to be an ancient Greek in a toga to understand it. Life insurance is just an agreement between you and an insurance company. You pay them a monthly premium, and if you die, the insurance company pays a specific amount of money—a life insurance payout—to whoever you choose.
Makes sense, right? Doesn’t everyone with loved ones who depend on them financially have life insurance? You’d think so—but tons of people don’t.
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Here’s the deal: If anyone depends on the money you bring in, you need life insurance. Today! If you’ve been putting it off because you’re not clear on how it works, that ends now. We put together everything you need to know about life insurance—how it works, which type is right for you, and how much it costs—so you can get this taken care of right away.
How Does Life Insurance Work?
Here’s a quick-and-dirty answer to the question, “How does life insurance work?”
Life insurance has one purpose—to replace your income when you die. Think about it: If you unexpectedly pass away, how will your family pay their living expenses without going into major debt? Life insurance removes that risk—and gives you and your family peace of mind. With this protection in place, you know that if the worst happens, your family will be okay financially.
Like we said earlier, the concept of life insurance is simple. But the question of how to get life insurance is a little more complicated. The reason is something we’ve already mentioned—the insurance industry has muddied the waters with all kinds of jargon and more types of life insurance than you can shake a stick at.
But we’ll walk you through all that stuff—and even talk through what you should know to file a claim for a death benefit. First, let’s go over the life insurance terms you need to know.
Life Insurance Terms to Know
Does googling life insurance feel like sitting down for an exam you forgot to study for? Don’t worry—life insurance isn’t as complicated as calculus. You only need to know a few common terms to really understand how life insurance works:
- Death benefit: the life insurance payout, or money given out when you die
- Beneficiaries: the people you choose to receive the death benefit of your policy, like your spouse or children, but it can be anyone you name (unfortunately your purebred poodle doesn’t make the cut—but anyone else counts)
- Claim: a formal request to the life insurance company to receive the death benefit
- Insured: the person who is insured (see? some of these terms make sense!)—their death causes the insurance company to pay out the death benefit
- Policy: the contract between you and the insurance company
- Premiums: the monthly or yearly payments you make to keep the life insurance policy active
- Policyholder: the owner of the policy, which is normally you (the one insured), but you could also buy a policy for another person
Pretty simple, right? Now let’s dig into the really important stuff.
Main Types of Life Insurance
While there are all kinds of life insurance policies—everything from variable life, to indexed universal life and even final expense insurance—they all fall into two main buckets: whole life (pretty much the worst option) and term life (which we always recommend).
Why are we such big fans of term life insurance? Our reasons are really simple:
- It’s the least expensive type of life insurance. (Hello, chedda!)
- It does the one thing life insurance is supposed to do—replace your income when you die.
- It provides coverage for a specific amount of time—long enough for you to become self-insured.
Whole life insurance is what’s known as permanent life insurance because it does exactly what the name implies—it provides coverage for your whole life.
That might sound like a good deal. But trust us, it’s hot garbage. All forms of whole life insurance try to combine two goals (life insurance and savings) into one product. The thing is, it doesn’t do either very well. It’s way more expensive than term life insurance, and the savings side of whole life policies almost always suck because you end up paying so many fees.
And that’s not even the worst part. If you keep the policy until you die, your family receives the death benefit on the policy, but any savings you managed to build up go to the insurance company. Yep—your family won’t see any of it. Sound like a scam? That’s ‘cause it is.
And it’s why we recommend term life insurance for everyone who needs life insurance. Now let’s find out if you do!
Do I Need Life Insurance?
Like we mentioned, if anyone in your life relies on you financially, you need life insurance. Depending on where you are in life, how much you need can look really different. One easy way to think about it is by looking at your life insurance needs at different life stages.
If you have credit card or student loan debt, you need enough life insurance to cover the total if you die unexpectedly. But if you’re completely debt-free with no kids (or other dependents), then all you really need to worry about are burial costs. If you’ve signed up for a group life insurance plan through your employer, you’ve probably already got that covered. No need to take out your own policy—yet!
Congratulations! You’ve just started your new life together! And we hope you and your spouse are up for a lifetime of adventure. But till death do us part isn’t the end of the discussion. You should both have a life insurance policy in place.
This isn’t just about paying off debts if one of you passes away—it’s about protecting and providing for your spouse’s future as they grieve your loss. Get enough life insurance to make sure they’ll be taken care of. (We’ll get into the details of exactly how much in a minute.)
If you have children, both you and your spouse need to be covered, even if one of you doesn’t work outside of the home. Losing a stay-at-home parent would still hurt the family budget because let’s be honest, childcare costs ain’t cheap.
Just think what it would take to run the household, provide for your kids (including college), and possibly pay off your home in the years following your death or the death of your spouse. Trust us—the right life insurance will provide the peace of mind you want (and need).
Winding down your career? You might already have hefty retirement savings. You could even be well on your way to becoming self-insured. That’s exactly where we’d expect you to be, assuming you’ve been busy working the Baby Step plan.
But let’s say you’re still paying off your house and trying to add to your retirement savings. We’re not mad at you, or the millions of Americans in the same situation! But if you died today and your spouse no longer had your income to rely on, would your life savings be enough to take care of them? It’s pretty doubtful. So, you’re definitely in the market for at least some term life insurance coverage.
Remember, the whole purpose of buying life insurance is to replace your income if you die.
Best Life Insurance Companies
When you’re shopping for the best life insurance company, you’ll want to look at each provider’s AM Best rating. AM Best is not an old-time radio podcast (but hey, we’d subscribe if it were). It’s actually an agency that rates a company’s ability to pay claims over the long haul. (And just like in school, A+ is excellent work.) Price obviously comes into play too.
To help you out, we put together a list of some companies with the most impressive AM Best ratings, and whether they require a medical exam from applicants. This gives you an idea of companies to consider. But working with someone like our RamseyTrusted partner Zander Insurance is better than going straight to providers. That’s because they’ll shop the best rates for your specific needs, and they’ve always got your back.
A.M. Best Rating*
American General Life Insurance Company
Banner Life Insurance Company
Lincoln National Life Insurance Company
Pacific Life Insurance Company
Protective Life Insurance Company
Pruco Life Insurance Company
Savings Bank Mutual Life Co of MA
United of Omaha Life Insurance Company
*A.M. Best is an agency that rates insurance companies on their ability to pay claims over the long haul. An A+ rating means this company has a “Superior” ability to pay out claims.
**All you have to do is answer a few health questions instead of setting up medical exams and blood tests. Depending on responses, you may still need a medical exam to obtain a policy.
So those are some companies to consider. Now let’s talk about how much insurance to get.
How Much Life Insurance Do I Need?
When you buy your term life insurance, look for a level (that means the premium stays the same forever) term policy that lasts 15–20 years and covers 10–12 times your annual salary. If all those numbers just spun you around, don’t worry, we got you. Here’s an example.
If you make $100,000 a year, buy a term life insurance policy between $1 million and $1.2 million that lasts 15–20 years.
That sounds like a lot, we know. But the idea is, if something happens to you in that 15–20-year time period, your family can invest that death benefit in good growth stock mutual funds. Then they can use the growth of that investment to replace your income year after year.
And shoutout to you hard-working grandmas and grandpas in the house: unless you’re already debt-free and self-insured (great work if you are), senior life insurance is probably a wise move for you too. Now you might not need a 20-year term, or as big of a payout as a younger worker. But a smaller 10-year policy could be just what your dependents need if you’re still knocking out debt or shoring up that nest egg.
How Much Does Life Insurance Cost?
Now for the fun part. How much should you expect to pay?
The cost of a life insurance policy depends mostly on the type you’re buying (term vs. whole life), but other stuff comes into play too. We’ve listed off some of the factors insurance providers use as they tally your life insurance premium:
- Personal and family medical history
- Tobacco use
- Risky hobbies, like skydiving, shark wrestling or rock climbing (seriously, we know a rock climber whose premiums tripled for her love of scaling walls)
- Regular travel to dangerous parts of the world, like jungles, combat zones and volcanic areas
Your age and your health are two of the biggest factors that affect the cost of your life insurance policy. Most policies require you to get a medical exam, but you can find life insurance options that don’t involve a medical exam.
How Do Life Insurance Payouts Work?
If you ever have to make a claim on a life insurance policy, you can be sure it won’t happen at an easy time. Knowing how life insurance payouts work ahead of time can make the process less stressful. Here are a few things you should know:
- How do you contact the insurance company? When you need to make a claim, the company’s name and contact info will come in handy.
- What paperwork will you need? The person receiving the payout will need to provide the insurance company a certified copy of the policyholder’s death certificate, either through the hospital or from the county or municipality where they died.
- When should you make a claim? There’s no time limit for filing a claim for a life insurance payout. You can take care of it on your own timetable when you and your family are ready.
- When will you receive the payout? Life insurance benefits are usually paid within 30 days after the insurance company receives all the right documents.
- What does life insurance cover? Basically everything! Although the one-and-only job of the policy is to replace your income at death, how your beneficiary uses the payout is entirely up to them—anything from investing, to paying off a mortgage, to covering living expenses or college for children.
- What taxes will you owe? Generally speaking, life insurance payouts are tax-free!
How Do I Buy Life Insurance?
Let’s make this simple. There are basically three decisions to make when you buy a life insurance policy:
- What type?
- How much?
- How long?
We can answer the first two questions for you: Always buy term insurance and get 10–12 times your annual income. (We covered a couple exceptions about policy amount for seniors earlier.) We can help with the third question too, but the final answer is up to you. Here’s why.
Most folks will do best with a term life policy that lasts 15–20 years. That way, if you have young children, they’ll be out of college and able to support themselves by the time the term life policy is over.
And when you’ve got your numbers in mind, you’ll want to work with our RamseyTrusted partner Zander. By filling in just a few details about yourself and what you’re looking for, they’ll serve you up some custom quotes. Here’s what to expect:
- You’ll choose a quote from their top-rated carriers.
- You’ll complete your online application (it’s super quick and easy).
- Get ready for a phone call from Zander (yeah, texting isn’t the only way to talk on a device).
- Your waiting time begins. They’ll underwrite your policy as fast as they can.
- Sign and buy your policy—and enjoy the feeling of protection!
If you’re following our Baby Steps, you’ll be busy building an emergency fund and investing your money in mutual funds during those 15–20 years. And by the time your term life insurance plan is over, you’ll be all set to enjoy life and share it generously with those you love. And that, friends, is the true meaning of life!
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Learn our go-to advice about life insurance and when you may need to adjust how much coverage you get.
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If you’ve come this far, you now know the truth about where you came from (a state of confusion), where you’re going (to get term life) and the meaning of life insurance. See, anyone can be a philosopher!
There’s one more thing you need to know about how to get life insurance: The longer you wait to buy it, the more expensive it gets (unless you found a way to age backward!). Don’t put it off.
Ready to get started? We recommend RamseyTrusted partner Zander Insurance. Their insurance experts can give you a quick, free quote on a term life policy in a few minutes.
Get your term life insurance quotes today!
Why Should You Trust Our RamseyTrusted Brokers From Zander Insurance?
Whenever you see the RamseyTrusted shield, that means the individual or company, like Zander Insurance, is an advocate of Ramsey’s financial principles and fully vetted by our team. They know their job is to serve—not sell. They’ve earned by our trust, and we make sure they keep it through an ongoing relationship. That’s the only way to get our seal of approval.