What Is Life Insurance? Answers to Common Questions

People often buy insurance to manage financial risk. According to the 2025 Insurance Barometer Study, conducted jointly by LIMRA and Life Happens, most adults have at least one type of insurance, such as home, auto, health, or life insurance, and just over half of all U.S. adults have life insurance.¹

Chances are, you’ve heard something about life insurance, even if you don’t own a life insurance policy yourself. But you may have questions, such as: What is life insurance in simple terms? Why is it important, and should I get it? If so, what kind of life insurance do I need, and how do I purchase a policy?

We’ve prepared this guide to help answer these questions and more to help you navigate the life insurance landscape.

What Is Life Insurance?

Life insurance is a contract between a policyowner and an insurer that guarantees the payment of a sum of money when the policyowner passes away. The money paid out is called a death benefit. The recipients of the money are called beneficiaries. 

To keep the contract in effect, the policyowner makes regular payments, called premiums, to the insurer. In exchange for those premiums, if the policyowner passes away while the policy is active, the insurer agrees to pay the death benefit to the policyowner’s chosen beneficiary or beneficiaries.

Why Is Life Insurance Important? 

Investing in life insurance can allow you to provide greater financial security for the loved ones you leave behind. It also lets you relieve them from having to worry about paying your financial obligations when you’re gone. Some life insurance policies can even provide cash for you to use during your lifetime.

Surveys of policyowners show they purchase life insurance for a variety of purposes. Here are the top five reasons people buy life insurance:¹

1. Cover burial and final expenses (60%)
2. Transfer wealth or leave an inheritance (42%)
3. Help replace lost wages/income of wage earners (26%)
4. Pay off mortgage (20%)
5. Supplement retirement income (19%)

There’s agood reason why burial costs and final expenses rank at the top of the list. According to the National Funeral Directors Association, the national median cost of a funeral with a viewing and burial was $8,300 in 2023, while the median cost of a funeral with cremation was $6,280.²

Funeral costs and final expenses, which can include medical and legal bills, can easily become mingled with mounting debt. Life insurance benefits can help cover those expenses, along with others, such as estate taxes.

The second most common reason for life insurance, to transfer wealth or leave an inheritance, can be especially important for those who have assets to pass on. If you have a spouse or young children who depend on your income, life insurance can help replace those earnings if you pass away.

A life insurance policy that includes a cash-value component can provide money for you to pay some of your own expenses while you’re alive. Besides paying off your mortgage and supplementing your retirement income, which roughly 20% of life insurance policyholders plan to do, you can withdraw or borrow money from a cash-value policy for any other purpose you choose.

Another way to use life insurance is to make charitable donations by naming one or more nonprofit organizations as beneficiaries of your policy. 

Life insurance is also an important element of estate planning. It can enable you to achieve a wide range of long-term financial goals, from making sure your family is taken care of to leaving a legacy by giving to a cause. 

Who Should Get Life Insurance?

There are several categories of people who should seriously consider buying life insurance.

Those with Financial Dependents

Anyone with people in their lives who would be affected by the loss of their income when they pass away should have life insurance. Examples of people who might depend on your income include:

• Spouse or partner
• Young children
• Adult children with special needs or disabilities

Small Business Owners

If you own a business, you may want to have a life insurance policy with your business partners or heirs as beneficiaries. That way, they will have funds from the payout to help cover expenses they encounter when you pass away.

Those Who Have Reached a Milestone in Life

A good time to assess your need for life insurance, or increasing your coverage, is at a milestone moment, like getting engaged, purchasing a home, or having a child. 

Even if you already have some life insurance through an employer, it’s often worth evaluating your situation to see whether you may need additional coverage. 

How Do I Choose the Right Type of Policy?

If all the different terminology and the variety of options for life insurance have you feeling overwhelmed, you’re not alone. Nearly one in four Americans without life insurance say the reason they don’t have it is that they don’t know how much they need or what type to buy.¹

Here are the main distinctions in the three most common types of life insurance:

• Term Life Insurance offers coverage for a designated period.
• Whole Life Insurance offers coverage for your entire lifetime.
• Universal Life Insurance offers lifetime protection with accumulating cash value.

Consider these questions when deciding which type of life insurance is right for you:

• Do I need term or lifetime coverage?
• Can I afford the policy’s premiums?
• Do I need a premium rate that won’t change?
• What situations does the policy cover, and which does it not cover?
• Will I need a medical exam to qualify?
• What are my long-term financial goals?
• What policy best fits my financial situation and the needs of my family?
• Do I need a policy that earns cash in addition to paying a benefit?

An insurance agent, broker, or financial advisor can guide you in choosing the life insurance coverage that meets your needs.

With the right life insurance coverage, you can enjoy peace of mind knowing there will be money available to help meet your financial goals and the needs of your loved ones. Choosing the right coverage can feel overwhelming, but experts, like life insurance agents, are ready to help you through the process.

Many others have the same questions you do, and you’ll find a lot of answers in this article. But for now, here a few of the most common questions and answers that might be on your mind:

5 FAQs About Life Insurance

1. How Much Does Life Insurance Cost?

Life insurance premium rates depend on factors such as the policy type, your age, biological sex, and health history. According to MarketWatch Guides,the average monthly premium is $22 for a 30-year-old, $32 for a 40-year-old, and $80 for a 50-year-old.³

2. What Is a Life Insurance Beneficiary?

A beneficiary is the person or entity you select to receive the proceeds of your life insurance policy upon your death. With each policy, you select a primary, or first-choice, beneficiary and a contingent beneficiary who will receive the death benefit if the primary beneficiary cannot be found.

3. How Do I Get a Life Insurance Policy?

You can purchase life insurance through an agent or broker or directly from an insurance company.

4. Can My Life Insurance Application Be Denied?

Yes, some life insurers can turn you down for reasons such as your health, age, occupation, or participation in dangerous hobbies. With a type of whole life insurance known as guaranteed acceptance, you will not be denied a policy because of your health.

5. How Much Life Insurance Do I Need?

To understand how much life insurance you may need, consider your financial obligations, the amount your family would need to replace your income for an extended period, and other sources of income available to your survivors.

Colonial Penn is here for you!

Colonial Penn has specialized in making life insurance simple and accessible by offering it directly to consumers since 1957. Click here to learn more.

Sources:

1. LIMRA, “2025 Facts About Life Insurance,” accessed September 2, 2025.
2. National Funeral Directors Association, “Statistics,” accessed September 4, 2025.
3. Marketwatch Guides, “Life Insurance Rates by Age: How Age Affects Your Premiums,” accessed September 3, 2025.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.