How Life Insurance Works

If you’re like most American adults, chances are high that you’ve heard of life insurance and know that it’s something you need. But what is it exactly, and how does life insurance work?


Life insurance is a way for you to leave money to people you care about in the event of your death.

At its basic level, it’s an agreement between you and a life insurance company. You agree to pay them and in turn, they provide you with insurance coverage. You can think of it like a subscription service: as long as you pay premiums, you’ll be covered.

Covered for what? Well that really depends on you. Maybe you want to make sure your spouse will be able to pay the mortgage, no matter what happens to you. Maybe you want your kids to afford college. Or you might simply want to make sure your people will be ok paying day to day bills if you’re not around to provide for them.

No matter your goal, the right kind of life insurance should be a simple and affordable way to reduce the risk of getting there.

Since there’s little to no chance they can support themselves on their own, they’re often the #1 reason to get life insurance. And that’s not to mention that even when they’re screaming and fighting over toys, the last thing you want is for them to go without. So regardless of your answers to any of the other questions here, if you’ve got kids, this may be a good time to get life insurance. 

Terms to Know

Premiums: The amount of money you pay in exchange for coverage. 

The coverage amount (also known as face amount, death benefit, or payout): The amount of money that goes to your people (beneficiaries) if you die. You set it in advance when buying a policy, and it passes to them tax free. 

Beneficiaries: The people who will receive the coverage amount.

The term: The lenght of time your policy will be in effect for — usually 10, 15, 20, 25, or 30 years, but you can also choose to be covered for your entire life, depending on the type of insurance that's right for you.

Filing a claim: The process by which your beneficiaries can claim the coverage amount if you die.

Whether you’re married or merely living together, romantic relationships are much more than just romance. You share responsibilities—making dinner, walking the dog, watering the plants—and you share expenses. Depending on how much of those expenses are shared, losing one person’s income could cause a financial hardship. 

How Does Life Insurance Work?

Life insurance works like a subscription model: as long as you pay premiums, you’ll be covered. That means your beneficiaries should receive money (tax free) if you die, but it’s worth noting that claims can be denied for various reasons, like fraud or material misrepresentation (basically, not being honest on the application or the claim).

The amount you’ll pay in premiums depends on three big factors:

  • Your personal characteristics (age, health, gender, etc.)
  • The type of life insurance you choose, primarily between term and permanent
  • The coverage amount/size of your policy (how much money you want to leave your beneficiaries)

Question #4: Do you have debt?

That responsibility doesn’t stop there, though. You don’t want credit card balances, college loans, and the aforementioned mortgage to be your legacy. But like it or not, they won’t be magically erased after you die. Your survivors will probably be taking on whatever debt you hadn’t paid off.

In this sense, debt is the first order of business for life insurance. While creditors may give your survivors some leeway in paying off your debt, the compassion of collection agencies will only get them so far. Regardless, the hassle and stress that come with handling debt isn’t something you’ll want on their plates.

If you answered yes to any of these questions, the time to think about life insurance may be now. Any of these four factors on their own likely means significant expenses for your survivors. Even if you’ve got a sizable chunk of assets to pass along to them, they’ll still be missing out on your normal income. Besides, having the money they need means they won’t have to make financial decisions in the short term that may harm them in the long term.

None of the above? Earlier is still better

So what if you answered no to all of the questions? You still might want to get life insurance, and it’s all about two factors that go hand in hand: your youth and your health.

The not-so-secret secret about life insurance is that all other things being equal, the younger you are, the lower your premiums may be. After all, it makes sense. A 25-year-old will likely outlive a 20-year term policy. A 65-year-old? Not quite as likely. You can expect life insurance to be priced accordingly.

But you aren’t throwing money away by getting a life insurance policy at 25. You’re locking in a significantly lower premium that will come in handy as the need for that policy grows. As anyone who’s lived past their mid-20s will tell you, life changes can come at you fast and furious.

Marriage, kids, and a mortgage might not be in the cards for everyone, but if you wait until they appear, you’ll pay more for life insurance. That’s all the more reason to get life insurance sooner rather than later. Think of it as insurance against the rising cost of insurance.

Then there’s your health. As your health risks rise with your age, so too will your premiums. Again, it’s a straightforward risk/reward measurement for the policy writer.

Say you’re a healthy female non-smoker, 5’ 6”, 130 lbs., with a preferred plus rating, and looking for $1,000,000 of coverage for 20 years. According to our life insurance coverage calculator, you’ll pay $34.50 per month if you start a policy when you’re 25. Wait until you’re 45, and you pay $91.80 per month, 166% more. In other words, starting a life insurance policy earlier is one of the few things in life you’ll find that has the potential to protect you from the effects of aging.

If, on the other hand, you feel like there are too many unknowns to commit to life insurance right now, there’s another approach. Instead of using your age as a guideline, you can always decide when you hit a milestone. In other words, evaluate your life insurance needs when you buy a house, get married, or start having kids. Nothing helps put your long-term needs into focus like these kinds of life-altering changes. And for the already insured, they’re a great time to reassess your coverage—something Ladder helps you do easily thanks to our flexible coverage, which allows you to automatically decrease or apply to increase your coverage whenever you want, as many times as you want, with no fees to do so. Your premiums will decrease or increase accordingly.

So is now the right time for you? Start your life insurance application with Ladder today to get the personalized, flexible coverage you need.

Ladder offers term policies in New York (policy form # MN-26) that are issued by Allianz Life Insurance Company of New York, New York, NY. Term policies are issued in all other states and DC by Fidelity Security Life Insurance Company®,  Kansas City, MO (policy form No. ICC17-M-1069, M-1069 and Policy No. TL-146). Ladder California license number OK22568.

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