Your Complete Guide to Life Insurance
New to life insurance? With so much information out there, it can feel overwhelming but the concept is simple. Life insurance helps protect your family’s financial future, ensuring they can maintain their lifestyle if the unexpected happens.
So, what is life insurance, how does it work, and do you need it? DIY breaks it all down for you.
The Basics
Life insurance is a contract between you and an insurance company.
You agree to pay regular premiums, and in return, the insurer provides a lump-sum payout called a death benefit to your beneficiaries if you pass away while the policy is active.
Depending on the policy, premiums may be paid for a set term or for life. This legally binding, government-regulated agreement ensures your loved ones receive financial support, typically as a tax-free payout.
At its core, every life insurance policy consists of these four key components:
- Policyholder – The person who owns the policy and pays the premiums. This is usually the insured person but can also be someone purchasing coverage for another individual.
- Beneficiary – The person, group, or entity that receives the payout if the policyholder passes away. You can name one or multiple beneficiaries when setting up the policy.
- Premium – The amount paid monthly or annually to keep the policy active. If premiums are not paid, the policy lapses, and coverage ends.
- Death Benefit – The lump-sum payout given to beneficiaries upon the insured person’s passing. This payment is typically tax-free and helps provide financial security.
Is life insurance right for you?
Life insurance isn’t necessary for everyone, but many people can benefit from having coverage.
Research shows that one in three families could struggle to cover daily expenses within a month if the primary earner passes away.
A life insurance policy can provide financial security, helping your loved ones maintain their lifestyle and plan for the future.
Types of Life Insurance:
Life insurance comes in many forms, but there are two main categories you need to know: term life and permanent life.
What is Term Life Insurance?
Term life insurance is a straightforward and budget-friendly option that provides coverage for a set period, usually 10 to 30 years. It’s designed to protect your loved ones during that time. If you pass away while the policy is active, your beneficiaries receive a tax-free cash payout, known as the death benefit, to help cover expenses or replace lost income.
Think of it like a subscription. For example, Johnny, a healthy 35-year-old, buys a 15-year term policy with $1 million in coverage to protect his family until they build enough retirement savings. He pays $47 per month to keep the policy active. If he passes away during the term, his beneficiary receives the full $1 million tax-free. If he outlives the policy, no payout is made, but his family can rely on the retirement savings built during those years.
What is permanent life insurance?
Permanent life insurance is more complex than term life but comes with additional benefits. Whole life insurance is the most common type, offering lifelong coverage instead of a set term. As long as premiums are paid, a guaranteed payout is provided to beneficiaries upon the policyholder’s death.
Unlike term insurance, whole life policies also build cash value over time. This cash value can increase the death benefit or be accessed tax-free through policy loans. Supporters see it as a stable, long-term financial strategy, but the added benefits make whole life insurance significantly more expensive—often 5 to 10 times the cost of term policies.
What Type of Life Insurance is Right for You?
When deciding between term and whole life insurance, consider three key factors: how long you need coverage, the purpose of the policy, and your budget.
Some financial experts argue that whole life insurance isn’t worth the cost due to its higher premiums and lower cash value returns. Many recommend buying a more affordable term policy and investing the savings in a 401(k), IRA, or the stock market to build wealth over time.
However, whole life insurance can be beneficial for those who need lifelong coverage, value financial guarantees, or are looking for estate planning strategies. It can also be a tool for high-income individuals who have maxed out other tax-deferred accounts and want to leave a financial legacy.
Still unsure which policy is right for you? Our licensed professionals are here to help—contact us today.
DIY offers term life insurance because it’s often the best financial choice for many families, especially if:
- You need financial protection for a set period, such as while raising children or paying off a mortgage.
- You’re looking for the most budget-friendly option.
- You prefer a simple and hassle-free process.
For those aged 66 and older looking to ease their loved ones' financial burden, DIY offers guaranteed whole life policies. This type of insurance is ideal if:
- You were previously denied life insurance.
- You believed your age or health made you ineligible.
- You want to ensure your family isn’t burdened with final expenses.
Who Benefits From Life Insurance?
Homeowners
If you own a home, life insurance can help cover mortgage payments and ensure your co-signers or family members aren’t burdened with the debt if you pass away unexpectedly.
Breadwinners
Life insurance provides financial protection for your loved ones, helping them cover everyday living expenses, tuition costs, outstanding debts, and any other financial obligations your income once supported.
Parents
Whether you have a job or stay at home, you play a crucial role in your children’s well-being. Life insurance can provide financial stability for your kids, especially if you’re a single parent, by covering education costs, daily expenses, and future needs.
If you're married
If you’re married or in a committed relationship, life insurance helps protect your partner by replacing lost income and covering shared expenses like rent, car loans, or credit card debt, ensuring they remain financially secure.
Individuals with debt
Even if you’re single with no dependents, life insurance can be beneficial if you carry debt, such as student loans, which may not be forgiven after death. A policy can help prevent your family from inheriting financial burdens.
Business owners
If you own a business, life insurance can be used to pay off business debts or provide funds to keep the company running, helping your business partners and employees navigate financial challenges after your passing.
You want to cover your end of life expenses
Funeral and final expenses can be costly, and a small life insurance policy can ease this burden on your family, ensuring they don’t have to worry about covering these costs.
You're single
Beyond protecting against debt, life insurance can support anyone who depends on you financially, such as aging parents or siblings. Purchasing a policy while you’re young can also help you secure lower rates before premiums increase with age.
Does Life Insurance Through Work Provide Enough Coverage?
Employer-sponsored life insurance is a valuable benefit, but it may not provide enough coverage for long-term financial security. Most policies cover only 1-2X your salary, while experts recommend 10X to fully replace lost income and cover major expenses like mortgage payments, child care, and tuition.
Another major drawback of employer-sponsored life insurance is that it usually ends when you leave the company, whether due to a job change, layoff, or retirement. This means you could lose your coverage at a time when your family needs it most.
For greater financial security, many people choose to supplement or replace their employer-sponsored policy with an individual life insurance plan. This ensures continuous protection, regardless of employment status, and provides a coverage amount tailored to your family’s long-term needs.
How Much Life Insurance Coverage Do You Really Need?
Debt + Income + Mortgage + Education = Total
Everyone’s life insurance needs are different.
To determine the right amount of life insurance coverage, start by calculating your long-term financial obligations and subtracting your existing assets. The remaining amount is the gap your life insurance policy should cover. However, figuring out what to include in these calculations can be challenging, which is why we offer a term life insurance calculator to help estimate your coverage needs.
There are also general guidelines that can simplify the process. One common rule of thumb is to multiply your annual income by 10 to estimate a suitable coverage amount. However, having some coverage is always better than having none. Another approach is the DIME formula, which considers four key factors: Debt, Income, Mortgage, and Education, helping you determine a more personalized coverage amount.
If you’re considering a guaranteed issue whole life policy, your primary goal is likely to cover final expenses. In this case, it’s important to assess any outstanding debts along with the costs associated with the type of funeral and burial arrangements you prefer.
Debt
Calculate the total amount of outstanding debt you owe, including student loans, credit cards, car loans, and any other liabilities. Be sure to also account for funeral expenses in this total.
Income
Multiply your annual income by the number of years your family will need financial support. For example, if you earn $50,000 per year and want coverage until your youngest child turns 21, the formula would be $50,000 x 11 years = $550,000. If you’re a stay-at-home parent, factor in the cost of replacing essential services like childcare to ensure full financial protection.
Mortgage
Ensuring sufficient life insurance coverage can help keep your family in their home. To calculate this, add up the remaining balance on your mortgage. If you’re renting, you may want to include at least 10 years’ worth of rental payments in your coverage plan.
Education
Estimate the cost of education for your children, whether for college or private school. A common guideline is to budget around $100,000 per child for a four-year degree at a state university, covering tuition, room and board, and books
When is the Right Time to Get Life Insurance?
Life insurance premiums tend to rise as you get older, so purchasing a policy sooner rather than later can save you money in the long run. On average, premiums increase by 8 to 12% each year you delay buying coverage (“How Age Affects Life Insurance,” Investopedia). By applying now, you can secure a lower rate and lock in a policy with fixed premiums that won’t increase over time.
How It Works
1. Pick your coverage
Find the right policy for you. DIY provides flexible coverage options, allowing you to customize your plan to match your needs. Explore your choices.
Not sure how much coverage you need? Use our life insurance calculator to determine the right amount for you.
2. Apply online
After selecting your plan, apply for coverage in just minutes—completely online. We only ask essential questions to ensure accurate pricing.
Once submitted, your application is processed quickly, often providing an instant decision on eligibility and rates. If approved, you can activate your coverage immediately.
3. Take a medical exam (if needed)
At DIY, medical exams are rarely required—only when absolutely necessary. Our process is designed to eliminate extra steps like blood tests, doctor visits, and in-person meetings with agents. However, in some cases, a medical exam may still be needed to complete term life insurance coverage. If required, it’s always free.
4. Sign up for a policy
After approval, you’ll sign a contract with the insurer outlining your coverage terms, conditions, and premium payments.
5. Pay your premiums
Make timely premium payments—monthly, semi-annually, or annually—to keep your policy active. Coverage begins with your first payment. If premiums aren’t paid, the policy lapses, and no death benefit is paid.
6. File a claim for the death benefit
If you pass away, your beneficiary can file a claim with the insurance carrier. The carrier will guide them through the process to ensure the death benefit is paid out efficiently.
How Much Can I Expect it to Cost?
The cost of your policy depends on several factors, including policy type, coverage amount, gender, age, lifestyle, health, and term length for term policies. Some factors, like tobacco use, are within your control—non-smokers typically pay significantly less than smokers.
Shorter terms and lower coverage amounts generally cost less, but choosing the right policy is more important than just picking the cheapest option. Your coverage should last until major debts are paid off, you have sufficient retirement savings, or your children are financially independent.
We're here to assist you
Life insurance can feel overwhelming, but it doesn’t have to be because it is simply about securing peace of mind and ensuring your loved ones are financially protected. Our team is here to help, so feel free to reach out with any questions at help@diy-insurance.agency.
FAQs
What is life insurance?
Life insurance is a financial agreement that provides a guaranteed payout to beneficiaries upon the insured’s passing. Acting as a crucial safety net, it helps secure financial stability for loved ones. In exchange for regular premium payments, the insurer ensures a lump-sum benefit, which can be used to cover essential expenses and future financial needs.
How does life insurance work?
Life insurance provides financial protection for your loved ones by ensuring a payout (death benefit) if you pass away. In exchange for regular premium payments, the insurer guarantees a lump-sum payment to your beneficiaries. This benefit can help cover funeral costs, debts, and daily living expenses. The type of policy and coverage amount depend on your financial goals, offering peace of mind that your family remains financially secure.
Why is life insurance safe?
Life insurance is considered a safe financial tool due to its guaranteed payout structure. As long as premiums are paid on time, beneficiaries receive a predetermined sum upon the insured’s passing, ensuring a reliable financial safety net for their future.
What does life insurance cover?
Life insurance helps cover death-related expenses, such as funeral costs, outstanding debts, and ongoing living expenses for beneficiaries. The death benefit provides financial security, allowing loved ones to use the funds as needed.
Why do people prefer life insurance?
People choose life insurance to help protect their loved ones’ financial future. It offers peace of mind by ensuring beneficiaries receive financial support through a death benefit in the event of the insured’s passing.
What is the main benefit of life insurance?
The main advantage of life insurance is the death benefit, which helps ensure financial support for loved ones after the policyholder’s passing. It provides stability and peace of mind during difficult times.