Term life insurance explanation. How does life insurance work? - CBS News

Life insurance provides your loved ones with a sum of money in the event of your death. Getty Images How does life insurance work.

Life insurance is a type of policy that pays your loved ones in the event of your death. They can then use those funds for funeral expenses, paying off outstanding debts or handling everyday expenses — which may be necessary if you're the primary breadwinner.

Are you considering buying life insurance to protect those you care about? It's important to understand both how life insurance works and how much you might pay for it.

How life insurance works

Getting life insurance is a little different than buying other types of insurance coverage, so it's important to understand the process before diving in.

Typically, buying and utilizing life insurance would look like this:

You'd apply for the policy. This typically requires a health questionnaire and, in many cases, an in-person medical exam. You'll also need to choose how much coverage you want — meaning how much your policy will pay out if you pass on.

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You're approved for your policy. After the insurer reviews your application and exam, they'll either approve or deny your coverage.

Your beneficiaries make a claim. If you die, your beneficiaries will need to file a claim with your life insurance company. This requires a death certificate and some paperwork.

Your insurance company pays out. Once the claim is processed, your beneficiaries will get your policy's payout based on how much coverage you've chosen.

There are some scenarios in which you might use your life insurance policy while still alive, too, but we'll get to those later on.

Types of life insurance

There are many types of life insurance you can choose from. Some last for only a select period, while others last a lifetime. There are also other policies you make withdrawals from or even use as savings and investment tools.

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Here's a look at the most common life insurance types:

Term life: This is life insurance that's designed to last only a set increment of time, usually somewhere from five to 30 years. Term life insurance is typically cheaper than other options, as its benefits are limited.

Whole life: Whole life insurance offers permanent coverage, meaning it covers you for the rest of your life — no matter when you may pass on. These policies also have a cash value attached to them that grows (with interest) over time.

Variable life: With variable life insurance, you have the opportunity to grow your policy's cash value and your benefits by investing in various types of investments. You also get coverage for your lifetime, and the policy comes with set premiums and a guaranteed death benefit for your loved ones — whether your policy's cash value grows or falls.

How much does life insurance cost?

Life insurance monthly payments vary from person to person. Your age, gender, health history, habits and occupation will play a role, and the amount and type of policy you choose will matter, too. Permanent coverage, for example, will cost more than policies with a limited term.

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The insurance company you pick influences your costs. To make sure you get the most affordable life insurance protection, always get quotes from at least a few insurance providers. Use the table below to start comparison shopping now.

You may be able to use life insurance while you're alive

Life insurance isn't just for once you pass. Some types of life insurance allow you to take cash out, borrow against your policy or grow your wealth by investing. If this is something you're interested in, talk to an independent insurance agent about your options. They can provide personalized life insurance information that can guide your decision.