Life Insurance

Background 

Life insurance functions similarly to other types of insurance, with one exception. Unlike other types of insurance policies that cover damage to or loss of property, it insures your life by paying a sum of money to your beneficiaries (usually family members) after your death. These policies essentially estimate how likely you are to die during a certain period of time. 

Most life insurance policies cover both accidental death and death from natural causes. But some policies have restrictions: Most will not cover death by suicide within the first two years of coverage, death from hazardous activities, or death from war or terrorism, for instance. 

Early History 

The concept of life insurance can be traced back to ancient Roman “burial clubs” from roughly 100 BCE. Burial clubs were sort of like today’s country clubs or fraternities—except membership fees for these social institutions funded funeral expenses for members. 

Burial clubs were important to Roman society at the time, being that the ancient Romans believed not having a proper burial was a bad omen for the afterlife. 

The first record of a life insurance contract is from England in 1583. That “insurance policy” resembled a bet between the insured person’s (William Gibbons) beneficiary, Richard Martin, and 13 merchants in London. While Martin paid a premium, if Gibbons died within a year, the merchants owed Martin money. He did, in fact, die in the last month of the policy, and the merchants tried to dispute the outcome. 

Check out this history of life insurance timeline for more.

How It Works

People typically apply for a life insurance policy through a specific company or an online marketplace. You can also add extra benefits called “riders” to your policy for an added cost. 

When you die, the life insurance company pays your beneficiaries a “death benefit.” The size of the death benefit can greatly influence how much this type of insurance will cost you per month, also called your monthly “premium” (determine how much coverage you’ll need here). 

Your premium is based on a number of factors: Higher-risk people—like those with a bad driving record or preexisting health conditions—will likely have a higher overall cost than those who are considered lower risk (learn more about life insurance premiums here). 

Those calculations happen via mortality tables, which help determine the probability of death for specific populations. 

There are two main types of life insurance: term and permanent (learn more about them). Term life insurance only covers you for a fixed amount of time (usually between 10 and 30 years). Permanent life insurance covers you for your entire life. 

The average premium for term life insurance ranges from about $80 to $100 per month, and the average death benefit is $1M for 20 years of coverage. Permanent life insurance costs between about $540 and $700 a month on average, with an average death benefit of $1M. 

Coverage 

There aren’t any restrictions on how beneficiaries are allowed to use the money after the insured person dies (although their ability to access the death benefit depends on how, exactly, the insured person died, as mentioned above).

If you’re newly married or welcoming a baby to your family, you might want to consider purchasing life insurance as a protective measure. (Use this guide to decide whether life insurance is right for you.)