How Does Life Insurance Work?

Life insurance to put it simply is protection for those who depend on upon you financially.

If you die prematurely, life insurance products will provide them a sum of money to replace your lost income. You may see also see it referred to as “death insurance”, they are the same thing.

The money from the insurance payout can be used for whatever your dependents wish but is typically used for things such as:

  • Mortgage
  • Funeral expenses
  • College tuition
  • Retirement
  • Daily living expenses

Put in more formal terms, life insurance is a contract between one person or entity and the insurance company.

The contract states that as long as the payments are made to keep the policy in force, the insurance company is obligated to pay out a previously established death benefit. The death benefit will typically be a lump sum of cash but can also be installments if set up that way.

Who is Involved in the Life Insurance Process?

Policy owner – Purchases the policy and pays the premium.

Insured – Person whose life is being insured. If this person dies, it triggers the death benefit payout. The insured may or may not be the same person as the policy owner.

For example, if John buys a policy on his own life he would be both the policy owner and the insured. If John’s wife Kim buys the policy on John’s life then Kim is the policy owner and John is the insured.

Beneficiary – Person(s) who will receive the death benefit in the event of the death of the insured.

Insurer – The life insurance company who collects the premiums and pays out the death benefit to the beneficiary.

Life insurance agent – Assists the policy owner in selecting the right type of policy with the right insurance company while getting the lowest rates (premiums).

Underwriter – Works for the insurer. Reviews and evaluates the application for insurance.

The basic process to get life insurance

  1. Policy owner works with life insurance agent to select an insurer to apply with.
  2. Life insurance agent submits an application on behalf of the policy owner.
  3. Underwriter at insurer reviews the application and assess the risk of the insured.
  4. Underwriter responds with the applicable rating and associated premium (cost)
  5. Policy owner pays the first premium which puts a policy in force.

The basic process to receive a payout if insured dies

  1. Beneficiary contacts insurer to file a claim and submit a certified copy of death certificate of the insured.
  2. Insurer reviews claim.
  3. Insurer pays the death benefit to the beneficiary.

How Are Life Insurance Premiums Determined?

When you purchase a life insurance policy, you are participating in risk sharing. You are sharing the burden of loss amongst many others who are paying premiums to the same insurer.

For example: 100 people are paying insurance premiums for coverage. From that group, 5 people die. The risk was shared amongst the group of 100 and their premium payments will fund the death benefit payouts for the unfortunate 5 who died.

Since life insurance companies are in the process of making money, they must charge enough premiums to fund these death payouts, cover administrative expenses, and still have some profit left over.

Essential to the process is determining the risk of each insured and charging the correct premium. While the insurer does not know exactly when a specific individual will die, they will use years of experience and piles of data to make their best predictions and assumptions.

At first glance, people will be separated into basic health classes based on the following 3 factors:

  • Age – younger pay less
  • Gender – women pay less
  • Tobacco usesmokers pay more

From there, the underwriter will look at each case in more depth and consider things such as:

Some of the questions and things they consider may not seem fair but really are in your best interest. Without this process rates for most people would be significantly higher, and many others would be DENIED no matter how much they were willing to pay.

The insurance companies have millions of data points that help them answer these 2 questions:

How likely is the insured to die?

How soon is the insured likely to die?

Having the best estimation of these questions allows everyone to get the rate that is fair for them based on their personal situation.

We have written some other helpful articles that help explain the basics of life insurance. Always feel free to contact our office with any questions. We run a small shop dedicated to life insurance only. I promise that a conversation with us will always be done with no pressure or obligation. That will forever remain one of my core beliefs.



  • Ty Stewart

    Ty Stewart is a founder and contributor of He started researching and studying about life insurance when he got his first policy for his own family. He has been featured as a life insurance expert speaker at agent conventions and in top publications. As an independent licensed life insurance agent he has helped clients nationwide to secure affordable coverage while making the process simple. Stewart Ty
  • Bennett Bier

    I’m Bennett Bier, owner, author and fact checker of Simple Life Insure. I believe working with a small independent broker offers consumers more personal attention and superior customer service. As an independent agent licensed in all 50 states and the District of Columbia I have access to many of the top A+ rated life insurance carriers. This lets me locate a plan that you will qualify for while saving you money at the same time. Over the years I have mastered the art of underwriting, getting approvals even for my highest risk clients. I’m also likely the person that will answer the phone when you call. Bier Bennett