How Does Life Insurance Work?

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Does the idea of life insurance seem a little confusing. Well, good news! It doesn’t have to be. Life insurance is typically quite simple and straightforward. So let’s dive in.

Why would I need life insurance?

If someone is relying on you financially, you should consider life insurance. Ask yourself, what would happen to my family in the event of my death?

Life insurance provides you with peace of mind that your family can move forward with their financial goals after your death. Your spouse will be able to pay for the financial obligations of raising children like food, shelter and college tuition. Depending on the coverage, he or she could also have enough to enjoy retirement later in life.

Don’t have children? There is a purpose for buying life insurance. If you are married or common law, life insurance can help your partner pay off your mortgage or car loan. If you plan on having children, you will want to get life insurance to pay for their expenses.

If debt isn’t an issue for your or your family, life insurance can be used to pay for funeral or medical costs.

Life insurance can be beneficial for single people as well. For instance, if you are running a business, you can name your
business partner as your beneficiary.

How do life insurance policies work?

Life Insurance is a contract or agreement between the policyholder (yourself) and the insurer. This involves:

  1. You paying monthly or annual payments (premiums)
  2. Your insurer paying money (death benefit) to your beneficiaries in the event of your death

Here are a few terms to know when learning about life insurance:

  • Policyholder: The owner of the policy. He or she is responsible for paying the premiums to the insurer
  • The Insured: The person whose life the policy is based on. This is normally the policyholder however, it is possible to take a policy out on another person.
  • Insurer: The insurance company. They are responsible for paying the death benefit in the case of the policyholder’s death.
  • Death Benefit: The coverage or money paid out by the insurer to the beneficiaries.
  • Premium: The annual or monthly fee the policyholder pays the insurer to keep the policy valid. If the policyholder stops payment, the policy is not legally binding.
  • Beneficiary: This can be a person, people or institution who receives the money paid out by the insurance company. You choose the beneficiary. There can be multiple and you choose how to disperse the death benefit.

How do life insurance companies make money?

Life insurance companies make money through the premiums that you pay. They invest that money and hope that it makes more than what they have to pay as death benefit.

Companies also make money from policyholders who stop paying the premiums before the life insurance policy expires. In this instance, the policy is void and the insurer does not have to pay any death benefit. They simply pocket the premiums that were previously paid.

How much coverage do I need?

The amount of life insurance you will need is unique to each policyholder and family. The death benefit is intended to cover any income you would have generated for your family.

To get an idea of how much coverage you need, take the time to review your financial expenses:

Debts: When you die, your debts don’t die with you. Your co-signer will be responsible for paying off these debts. That’s why debts are used to calculate coverage. Debts include mortgage, credit cards, auto loans etc.

Everyday expenses: Your partner is now responsible for paying regular expenses in the absence of your income. Rent, mortgage, utilities and groceries included. Life insurance coverage can cover those expenses creating financial ease for your beneficiary.

Child care: With an absent parent, the surviving parent will be the single breadwinner. Child care will be required for younger children. Another financial consideration is dependant care for aging parents.

Funeral costs: Dealing with death of a loved one is hard enough as it is. However, the average cost of funeral runs from $6,500-$10,000. A life insurance payout would cover the cost of a funeral.

After reviewing your coverage need, you can then compare premium rates in order to choose the best life insurance policy for you.

Types of life insurance

Another item to consider is the type of life insurance policy. There are a variety of policies but there are two most common: term and whole life insurance.

Term life insurance is the simplest and most affordable life insurance, also making it the most common. This type of life insurance lasts for a set period of time (term) until it expires. The term is commonly 10, 20 or 30 years, You can renew this policy or purchase a new one to regain coverage.

Permanent insurance lasts your entire lifetime as long as you pay your premiums. It has a cash value feature which acts as a nest egg for the policyholder. You premiums take into account this cash value making the premiums high compared to term. The most popular type of permanent life insurance is whole life insurance.

How to buy life insurance

The application for life insurance takes approximately four to eight weeks to get approved. The purpose of the application process is for the insurer to calculate your projected life expectancy based on your health and lifestyle. This analysis will establish the risk for the insurer to take on the policy which would affect your premium rates.

Here is the step by step process to get to that application process:

  1. Shop for quotes: Life insurance policies offer different rates for different amounts of coverage. There are many companies so take the time to shop around. Comparing free quotes on Wealtha is easy and provides the most competitive rates in the country.
  2. Choose a policy: Consider cost, coverage, application time and service.
  3. Fill out an application: Apply online or through a licensed professional. At this point, you will be answering basic health and income questions.
  4. Take a medical exam: This may be apart of your application process. The purpose of the medical exam is for the insurer to get a sense of you general health. A professional will conduct it at your home or workplace.
  5. Phone interview: The agent will ask a few health and lifestyle questions.
  6. Approval: The insurance company will analyze the all the information and provide you with a final premium rate. This rate would be close to your quote.
  7. Sign and pay first premium: Once you sign the policy and pay your first premium, your policy is in effect.

After your policy is in effect, if you develop a medical condition, you do not need to disclose this to your insurance company. Any changes in your health or lifestyle cannot affect your rate or coverage.

That is why Wealtha recommends to get life insurance as soon as you can. When you are young and healthy, you will be offered the lowest premium with the highest coverage.