Skip to main content

What is life insurance and how does it work?

What we'll cover

  •  Life insurance terminology

  • The different kinds of life insurance

  • Top reasons you need life insurance

Life insurance is not an easy talking point for anyone. No one likes to think about worst-case scenarios, but planning ahead can make life's challenges more manageable down the road. Now is as good of time as any to learn what life insurance is and how it works.

What is life insurance?

Put simply, life insurance is a contract between you and a life insurance company that delivers a tax-free payment to your loved ones after you die. You pay a monthly premium and in return your insurance provider pays your beneficiaries (family, friends, charities) the benefit.

Pick the best Ladder life insurance policy for you. Learn more.

Life insurance terminology

Life insurance has its own vocabulary and knowing it can help you navigate it with confidence.

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

  • Coverage Amount: Also known as face amount, death benefit or payout, this is how much money goes to your beneficiaries if you die during the coverage period.

  • Beneficiaries: Those who will receive the coverage amount.

  • The Term: The length 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.

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

  • Underwriting: The process by which the life insurance company collects personal information that determines your premium.

What affects your premiums and costs?

The amount you'll pay depends on three main factors:

  • Your personal characteristics (age, health, gender, etc.)

  • The type of life insurance you choose, primarily between term and permanent (more on these below)

  • The coverage amount/size of your policy

Different types of life insurance

Life insurance policies provide a variety of benefits and terms to address a variety of needs and preferences, based on which one you choose. The most common options are:

Term life insurance vs. permanent life insurance

Term life insurance lasts for a set period of time, such as 10, 20 or 30 years. If you don't die during the term, your coverage ends. On the other hand, permanent life insurance (also known as cash-value) often includes investment components that can last the whole life of the insured. Term life insurance is usually less expensive than permanent life insurance.

Put simply, life insurance is a contract between you and a life insurance company that delivers a tax-free payment to your loved ones after you die.

What type of life insurance policy is right for you?

Deciding between a term and permanent life insurance policy depends on your needs and budget. You might also consider your dependents (if you have them), your employment situation and any debt you have.

How do I determine how much life insurance I need?

Ultimately, how much you need depends on your goals and budget. Many factors (your savings, debt, mortgage payments, etc.) could be considered when determining an appropriate policy value, so it is a good idea to consult a life insurance professional when making this decision.

Do you need life insurance?

Ask yourself — would your absence cause anyone financial strain? If the answer is yes, you probably need life insurance.

The top 5 reasons you may need life insurance

  1. You contribute a meaningful portion of your family's income. You can think of life insurance as a way of helping to replace your income if you die during your policy's term.

  2. You have kids. Anyone with children should consider life insurance, whether they earn a salary or not. It can help pay for childcare and future expenses like college in your absence.

  3. You have a mortgage or other shared debt. If you have a loan that someone else has co-signed — such as a mortgage, personal loan or home equity line of credit — they may be required to make the full payments when you die.

  4. You run a business. Life insurance can help protect your family from having to assume debts from your company in your absence.

  5. Your life insurance through work isn't enough. The death benefit included in your employer-sponsored benefits may not be enough to cover your beneficiaries' needs.

None of the above apply?

If none of the situations are applicable to your life, you may not need life insurance now. You will want to reevaluate if/when major life changes happen, including when you take on debt. Buying life insurance when you're younger can also help you lock in a better price.

Secure your loved ones’ future with life insurance

We can't always predict the future, but life insurance is a smart way to help make sure the people who depend on you financially are covered in your absence.

Ally Insurance is referring you to Ladder for an innovative approach to term life insurance with an easy online application process and a variety of coverage options to fit a wide range of needs.

Disclosures: Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers – for further details see . All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.2203.9-LDRev 3/22

Explore more

Estate Planning Save Family

Read next

Money solutions and strategies sent straight to your inbox.

Tips and tools to help you build your best financial future.

Let's Connect