Life insurance is a contract in which you pay an insurance company regular payments, called premiums, in exchange for a promise that the company will pay a lump sum, called a death benefit, to the people you choose if you die while the policy is active. It exists to replace the financial support a person would have provided to their family, business, or dependents. Life insurance is not an investment vehicle for most buyers; it is financial protection against the economic loss caused by an unexpected death.

A common approach is to calculate your total financial obligations, including income replacement, outstanding debt, future expenses like college tuition, and final expenses, then subtract existing savings and assets. One widely used rule of thumb is coverage equal to 10 to 15 times your annual income, though other financial professionals cite ranges anywhere from 6 to 20 times depending on your debts, dependents, and how many years of income replacement you want to provide. The most accurate number comes from an actual calculation of your specific situation rather than any single multiplier.

Life insurance cost depends primarily on age, health, coverage amount, and policy type, so there is no universal price; a healthy adult in their 20s or 30s can often secure a substantial term policy for a modest monthly premium, while older applicants or those with health conditions pay considerably more for identical coverage. Getting a personalized quote is the only reliable way to know an individual's actual cost.

Term life insurance is temporary and lower cost, covering a set number of years with no cash value component, while whole life insurance is permanent, more expensive, and builds cash value that grows over time. Term life is generally best suited for covering a defined period of financial responsibility, such as the years until a mortgage is paid off, while whole life fits long-term needs like estate planning, lifelong dependent care, or guaranteed lifetime coverage.

Life insurance death benefits are generally not subject to federal income tax for the beneficiary who receives them. Exceptions include interest earned on a payout distributed in installments rather than a lump sum, which is taxable, and cases where the death benefit is counted as part of the deceased's taxable estate if they owned the policy themselves, which only matters for estates exceeding federal or state estate tax thresholds.

It depends on the policy type and coverage amount; many traditional term and whole life policies require a medical exam that includes basic vitals, a blood sample, and a urine sample, while simplified issue and guaranteed issue policies skip the exam in exchange for shorter health questionnaires or no health questions at all, generally at a higher cost per dollar of coverage.