How Does Life Insurance Work?
Life insurance can be vital in helping your loved ones with covering unexpected (and expected) financial obligations after you pass away. Knowing what to expect when researching life insurance can help you make the right choice for your financial situation.
What is life insurance?
As an overview, a life insurance policy is a contract with an insurance company. When an individual purchases a life insurance policy, they pay a premium towards the policy consistently. When they pass away, the life insurance policy will provide a lump-sum payment to the beneficiaries listed on the policy.
What is life insurance used for?
Life insurance is used by the policyholder to protect their loved ones from financial hardship in the event of their death.
Life insurance can be used for a variety of purposes, including:
-To pay off debts, such as a mortgage or car loan -To cover living expenses, such as rent or utilities - To cover funeral expenses -To fund a child's education -To provide financial security for a spouse or partner -To leave an inheritance
How does life insurance work?
When you purchase a life insurance policy, you pay premiums (essentially, a monthly payment) to the life insurance company. In exchange, the life insurance company agrees to pay a death benefit to your beneficiaries (or those you want to gain the benefits of your policy) if you die while the policy is in force.
The death benefit is the amount of money your beneficiaries will receive from the life insurance company when you die. The death benefit can be used to cover expenses such as funeral costs, outstanding debts, and/or living expenses.
Many life insurance policies require you to undergo a medical exam before the policy is issued. In the past, the life insurance company used the results of a medical exam to determine your premiums. Nowadays, there are many life insurance companies that do not require an exam.
If you have any health conditions that could shorten your life expectancy, you may be classified as a higher risk and your premiums will be higher.
Once you have been issued a life insurance policy, it is important to keep up with your payments. If you miss a payment, your policy may lapse and you will no longer be covered.
It is also important to keep your life insurance company updated on any changes in your life that could affect your policy. For example, if you have a baby, you may need to increase your coverage to make sure your family is protected.
Life insurance is an important part of financial planning. It can give you and your family peace of mind knowing that they will be taken care of financially if something happens to you.
Life insurance types
There are two main types of life insurance: term life insurance and whole life insurance. To understand the differences between these types of insurance, it can help to have a brief overview of common terms when it comes to life insurance.
- Level death benefit: The face value of the policy that will be paid out to beneficiaries upon the policyholder's death.
- Premium: The amount that the policyholder pays to the insurance company for coverage.
- Policy term: The length of time that the policy is in effect.
Term life insurance
Term life insurance provides coverage for a set period of time (typically 10, 20, or 30 years). If the policyholder dies during the term of the policy, the death benefit is paid to the beneficiaries. If the policyholder does not die during the term of the policy, the policy expires and no death benefit is paid. Term life insurance is generally less expensive than whole life insurance, but it does not build cash value.
- Level term life insurance: This type of policy provides coverage for a set period of time at a fixed death benefit amount. The premium remains the same for the duration of the term. The beneficiaries will be paid the fixed death benefit amount, regardless of when you pass away (whether it be in the first year or the 40th year of a 40 year policy, for example).
- Decreasing term life insurance: This type of policy starts with a high death benefit amount that decreases over time. The premium remains the same for the duration of the term.
- Renewable term life insurance: This type of policy can be renewed for an additional term, without having to undergo a new medical exam. The premium typically increases at each renewal.
- Convertible term life insurance: This type of policy can be converted to a whole life policy without having to undergo a new medical exam.
Term life insurance is typically purchased to provide financial protection for a set period of time, such as during the policyholder's working years or until their children are out of college.
Whole life insurance
Whole life insurance provides coverage for the policyholder's entire life. The death benefit is paid to the beneficiaries upon the policyholder's death, no matter when that occurs.
Whole life insurance typically costs more than term life insurance, but it also builds cash value. The cash value can be used to pay premiums, borrow money against, or withdraw money from.
- Traditional whole life insurance: This type of policy builds cash value and provides level premiums and a level death benefit.
- Universal life insurance: This type of policy builds cash value and provides flexible premiums and a death benefit that can increase or decrease, depending on the investments that you choose.
- Variable universal life insurance: This type of policy builds cash value and provides flexible premiums and a death benefit that can increase or decrease. The cash value is invested in sub-accounts, which may fluctuate in value.
Whole life insurance is typically purchased to provide lifelong financial protection and to build cash value that can be used in the future.
Life insurance for seniors
While life insurance can be incredibly beneficial for your family, it’s important to know what kind of life insurance you’re interested in purchasing and to be wary of companies that aren’t looking out for your best interest. Identify the type of policy you’d like and look for that kind of policy. Try to avoid looking specifically for insurance targeted towards seniors, as this may lead you to less reputable companies. Beware of life insurance companies targeted at seniors that promise high payouts for low premiums.
These companies often use aggressive sales tactics and may not be reputable. Be sure to research any life insurance company before doing business with them.
Life insurance rates
Life insurance costs are determined by a number of factors, including the policyholder's age, health, lifestyle, and coverage amount.
- Age: Generally, the younger you are, the cheaper your life insurance rates will be.
- Health: If you have any health conditions that could shorten your life expectancy, you may be classified as a higher risk and your rates will be higher.
- Lifestyle: If you have any risky hobbies or jobs, you may be classified as a higher risk and your rates will be higher.
- Coverage amount: The more coverage you purchase, the higher your premiums will be.
The best way to get an accurate life insurance quote is to compare rates from multiple life insurance companies. You can do this easily by using an online life insurance comparison tool.
When you're shopping for life insurance, it's important to understand the different types of policies available and how they work. Life insurance can be a complex topic, but it doesn't have to be. By understanding the basics, you can be sure to choose the right life insurance policy for your needs.
Make sure you and your loved ones are prepared by recording key information to help with end-of-life affairs. Ever Loved’s comprehensive checklist will help you make sure your family has the information they need to easily handle logistics after a death.