Everything You Need to Know About Life Insurance

Helping provide your family with financial protection doesn't have to be confusing

Team LemonadeTeam Lemonade
how does life insurance work

Life insurance is a way to help ensure that your loved ones are taken care of if you’re no longer around.

If you’re reading this, we’re guessing that you’re a savvy consumer. You know you have to insure your car, and your house. Maybe, though, it hasn’t occurred to you to insure your greatest asset of all—your very life, and your family’s future financial protection.

is life insurance worth it

What is life insurance?

It’s a pretty simple concept. You pay your life insurance company (your ‘insurer’) a monthly fee (a ‘premium,’ in insurance-speak), and, if something happens, a payout (‘death benefit’) goes to the person, people, or organization of your choosing, for them to use however they see fit. Those who you designate to receive the death benefit are known as your beneficiaries

Think all of this is outside of your budget? As we mentioned, policies offered by Lemonade start at $8 a month, and you can get a policy for 10 to 40 years, ranging from $100,000 up to an unlimited maximum benefit. (FYI, when we talk about ‘how much coverage’ a plan has, we’re really talking about the total value of the death benefit your beneficiaries would receive.) 

For example, if you have a young daughter with hopes to head off to college, life insurance can help pay for tuition when the time comes. If you’re the main breadwinner in your household, you might use life insurance to help your partner make mortgage payments in the case of your death. If you co-own a business, you might even use it to ensure your colleague can keep the business afloat in your absence. 

How does life insurance work?

There’s flexibility in how the death benefit can be paid out. You can split the benefit between multiple beneficiaries—for example, several children—either equally or in proportion to what you see as their varying need

Your beneficiary doesn’t have to be an immediate relative. You can name a domestic partner, fiancé, ex-spouse, sibling, parent, grandparent, or business partner as a beneficiary, for example. 

If there’s a charity you’ve always wanted to support, you could designate those do-gooders you’ve always admired as your beneficiaries.

As a major bonus to the recipient, the payout isn’t subject to income tax when reporting to the IRS.

Example of life insurance

Here’s one scenario: Suppose you’ve just had a child, and you want to make sure that she has enough to get her through college by putting aside, say, $100,000. 

You might want to buy a life insurance policy in that amount that’s good for (has a ‘term’ of) a certain period of time—say, ten or twenty years. If you should pass away within that window, before she dons the cap and gown, her education is still covered. This policy would be less expensive than one that will last your whole life, but, again, once that ten or twenty years is up, the policy expires. 

Whole life, on the other hand, has higher premiums per month, but never expires. If you’ve bought a million-dollar policy, it pays a million dollars tax-free to your chosen recipient(s) when you pass away.

how does life insurance work

What are the different types of life insurance?

We go into it in much greater detail here, but it’s easy to understand the basics. 

Term life insurance

Term life insurance can tend to be cheaper and simpler. Once locked in, premiums never change. This is the type of plan that Lemonade offers.

A term life insurance policy, as the name suggests, covers a specific amount of time and only pays out should you check out during that specific term. Since term life insurance is often cheaper, in order to keep it that way, insurers don’t typically refund premiums should you outlive the term of the policy. If you do, there’s no death benefit payout. 

Whole life insurance

Permanent life insurance—of which ‘whole life’ insurance is a common option—can be much more expensive. It comes in a number of varieties. These policies cover you for your entire life, and for the most part offer a guaranteed payout upon death. You’ll also build some additional cash value over the years.  

is term life insurance worth it

Are there other types of life insurance?

You bet your life there are! (Sorry.) But seriously, there are many. 

You’ll need to make the decision about what is right for you, but we hope we’ve helped you clarify things a bit, or helped you start this important conversation with your loved ones. But just so you know, there are many other types which we didn’t cover above, since the advantages tend not to be applicable for most audiences.

That said, if you have a real hunger for the nitty-gritty of life insurance, there’s a veritable buffet of other options…

  • Universal life insurance allows you to change your premium and death benefit amounts without having to buy a new policy. Like whole life insurance, it has a cash value component, and if you’ve built up enough value, you can pay your premiums out of it.
  • Variable life insurance has a cash value component, with money being invested in the stock market. That equals more risk than whole life insurance policies, but can lead to greater returns.
  • Variable universal life insurance mixes characteristics of variable life and universal life insurance. Namely, you can change your premium and death benefit amount, and you invest your cash value in the stock market.
  • Guaranteed issue life insurance is (you guessed it!) guaranteed to whoever applies for it. You don’t have to go through any medical exam or even complete a health questionnaire. The catch is that it’s typically far more expensive than other policies, since the insurance company has to charge you as though you were a high risk…in other words, it ain’t cheap.
  • Final expense insurance is designed to help your beneficiaries pay for specific things like a funeral, casket, or cremation. It’s a whole life insurance policy that generally has a very modest death benefit.
  • Credit life insurance is quite different from the rest. It’s a policy that protects a lender by insuring that, if the borrower dies, a loan will be paid off.

How do I choose the right coverage for me?

What amount of coverage should you get? Here’s where you get out your calculator. 

But first, when buying life insurance, you need to ask a few questions. What and whom do you want your death benefit to cover? 

If you’re thinking about supporting your loved ones for years after your passing, think about what their annual costs are now, and estimate what they are liable to be in the future, including expenses like mortgage or rent, car payments and an education as well as everyday items like clothes and food. Consider your own funeral expenses (bummer, we know). You might also factor in items beyond bare necessities, like family vacations.

Once you’ve come up with a figure, you can subtract the assets your family will continue to have even if you’re not in the picture, such as your spouse’s income and any cash reserves. The resulting number is a good place to start in terms of the value of the policy, aka the amount of the death benefit you’ll want to take out.

Pro Tip: Many people suggest a good rule of thumb to start with, if you want to get a quick ballpark figure: Multiply your gross income by 10 or 15, then add $100,000 for the cost to send each of your children to college.

life insurance investment risks

What if I already have life insurance through my job?

It’s possible that you already have life insurance, through the group policy you signed up with through an employer.

If so, that’s a nice perk! But look at the fine print again. That life insurance policy typically doesn’t offer nearly the death benefit you might hope for, since the premiums are very, very low. This kind of policy, called a group life insurance policy, usually provides at maximum two times the policyholder’s salary. It’s a nice supplement, but for true protection, you’ll probably want to get an additional life insurance policy. 

How can I save money on my life insurance policy?

Here are some factors that could lead to a more affordable quote.

  • Healthier, younger people, less likely to incur a payout anytime soon, are cheaper to insure
  • Women have a longer life expectancy… sorry to break it to you, my dudes… so their rates are lower
  • Insurers will also ask you about any risky hobbies (skydiving and mountain climbing are fun, no doubt, but they may raise a few eyebrows) or occupations (we know, being a ninja offers high job satisfaction, but you have to admit, it’s not the safest gig)

Pro tip: Keep in mind that it’s worth it to apply for a term life policy when you’re younger and healthier, since your monthly premiums won’t change once they’re locked in.

How do I apply for life insurance?

Even into the 21st century, applying for a policy quote can still be a drag. Insurance companies often require prospective clients to undergo a complete medical exam.. 

At Lemonade, we’ve tried to streamline the process to make it as seamless as possible. You’ll start the application on the Lemonade website or app, where you’ll answer a few basic questions about yourself and your health. From that point, we’ll transfer you to our partners, Legal & General, who will help you customize your policy and complete your application. 

In some cases, you may be able to skip the medical exam and get a quote right away.  In other cases, you may be required to answer a few additional questions that could take 2-10 days for an underwriter to review. And, depending on your circumstances, you might be asked to complete a medical exam that could mean waiting 10-30 days for a final decision about coverage. 

Is life insurance worth the cost?

How would my beneficiary file a claim?

All of our claims are handled by our partners, Legal & General. If you have any questions about the claims process, you’ll want to get in touch with them directly.

To file a life insurance claim, just head straight to the Legal & General website to fill out their online claims form.

What isn’t covered by my term life policy?

Term life doesn’t cover death from suicide within the first two years of signing up for a policy.

A claims payment could also be jeopardized if any inaccurate or false information was provided when signing up.  

Is life insurance worth the cost?

We can’t make that decision for you—it’s a conversation to have with your partner, other family members, or your financial planner. (Here’s some more food for thought to fuel those discussions.)

But life insurance is indeed worth considering if you have loved ones who depend on you, and who would suffer financially if you were to pass prematurely. 

If you’re in your twenties or thirties, you might feel invincible. But tragedy can strike at any age, and peace of mind is priceless. That means that life insurance isn’t only for older people—it’s for anyone who wants to protect against life’s unpredictable twists and turns.

Hey, we hope this was all helpful! We’d still recommend chatting with a financial advisor before making any big decisions.

A few quick words, because we <3 our lawyers: This post is general in nature, and any statement in it doesn’t alter the terms, conditions, exclusions, or limitations of policies issued by Lemonade, which differ according to your state of residence. You’re encouraged to discuss your specific circumstances with your own professional advisors. The purpose of this post is merely to provide you with info and insights you can use to make such discussions more productive! Naturally, all comments by, or references to, third parties represent their own views, and Lemonade assumes no responsibility for them. Coverage may not be available in all states.


Please note: Lemonade articles and other editorial content are meant for educational purposes only, and should not be relied upon instead of professional legal, insurance or financial advice. The content of these educational articles does not alter the terms, conditions, exclusions, or limitations of policies issued by Lemonade, which differ according to your state of residence. While we regularly review previously published content to ensure it is accurate and up-to-date, there may be instances in which legal conditions or policy details have changed since publication. Any hypothetical examples used in Lemonade editorial content are purely expositional. Hypothetical examples do not alter or bind Lemonade to any application of your insurance policy to the particular facts and circumstances of any actual claim.