How Does Life Insurance Work?

May 23, 2023
A mom hugging her daughter and considering life insurance.

There are a lot of misconceptions about life insurance, and more specifically, the cost to policyholders. These misconceptions lead to many people forgoing purchasing life insurance, which can leave your family and loved ones with overwhelming financial responsibilities in the event of your death. Fortunately, life insurance is more affordable than many people think, and there are plenty of options available to choose from.

If you are looking for life insurance coverage for a specific term at a fixed premium, you may be interested in term life insurance. Or maybe you want something that will cover the costs of your funeral, but do not need extra funds for debts or other expenses, in which case you could opt for a final expense life insurance policy. Fortunately, you do not have to navigate the confusing world of life insurance on your own. Learn more about what life insurance is, different life insurance options, and how you can get a policy that is right for you.

What Is Life Insurance?

Before you can understand how life insurance works, first you need to know what it is. Life insurance policy is a contract between you and the insurance company you choose to purchase life insurance coverage from.  So how do life insurance policies work? Generally, you agree to pay monthly premiums, and the insurance company pays a death benefit to your beneficiaries after your death. The premiums vary depending on the type of life insurance that you choose and other factors like your health and age.

One of the great things about life insurance is that your beneficiaries can then use the funds for whatever expenses they choose. Whether you have a mortgage, college expenses for a loved one, or end-of-life expenses like funeral costs, your family and loved ones can use the funds to pay these bills once they no longer have your source of income to help with expenses.

There are different types of life insurance available to choose from based on your needs and preferences. There are both permanent and term options available, each with different benefits. Whichever option you choose, you can enjoy peace of mind knowing that your family and loved ones will have a financial safety net after you are gone.

What Does Life Insurance Typically Cover?

Traditional life insurance policies typically cover almost every cause of death and can be used to cover a wide range of expenses. Whether the insured’s death is caused by an illness, disease, an accident or homicide, life insurance policy will likely cover the cause.

Some of the expenses that life insurance proceeds are most often used for include funeral costs, estate planning costs, college tuition, medical expenses, mortgage payments, childcare costs, monthly bills and daily expenses.

An insured can also name a charity or a non-profit organization as the beneficiary of their life insurance policy.

What Causes of Death are Typically Excluded from Life Insurance Coverage?

While most causes of death are typically covered by a life insurance policy, there are some exceptions. Most policies do not cover death by suicide within the first two years that the policy is active or in force. Life insurance policies also generally exclude coverage for a death of the insured caused by the insured’s beneficiary.

Even if the policyholder’s death is covered under the policy, life insurance company may deny payment for a few different reasons. One of such reasons is a lapse in premium payments.

Denial of Claims Due to Fraud

Life insurance companies may deny claims if it discovers that the insured committed insurance fraud, either through a misrepresentation of their health status or other information provided in the application. This is why it is especially important to be conscientious when filling out an application as false information can leave your family without the funds that they need after your death.

Types of Life Insurance

There are different types of life insurance available to choose from. Each type of life insurance offers different benefits, from flexible premiums to cash value in addition to the death benefit.

Term Life Insurance

One of the most popular options for life insurance is a term policy. This is also one of the most affordable types as the premium remains the same for the entire duration of the policy term, whether the insured opts for a 10-year term, 25-year term or a 30-year term. The main difference between term life insurance and other types of life insurance is that the term life insurance policy provides coverage for a specific number of years, and the beneficiaries will only receive the death benefit if the insured dies within that period. Term life insurance policies may include a provision that allows the insured to renew coverage at the end of the term. However, premiums may be higher for the subsequent terms.

Whole Life Insurance

After term life insurance, whole life insurance is probably the most popular. With this type of life insurance policy, coverage is active over the life of the insured from the time the policy goes into force until the insured’s death, as long as the insured continues to pay the premiums. In addition to the permanence of this life insurance type, another benefit is that it comes with both the death benefit and cash value.

Universal Life Insurance

Another permanent life insurance option is a universal life insurance. Just like whole life insurance, this option comes with cash value in addition to the death benefit. The biggest difference between whole and universal life insurance is that universal policies offer flexible premiums. An insured can increase or decrease the amount they pay for their monthly premium. If the insured chooses to decrease the premium amount, the difference may be withdrawn from the policy’s cash value.

Variable Life Insurance

Yet another permanent option, variable life insurance allows policyholders to invest the money from the cash value of the policy in different investment options that the insurance company offers. Because of this, the cash value depends on market conditions and is not guaranteed. However, the death benefit still comes with a guaranteed minimum.

Final Expense Insurance

Final expense insurance, also commonly referred to as burial insurance, is a type of permanent life insurance.  Final expense insurance policies are typically designed to cover funeral costs and related services even though the policy proceeds can be used for other expenses.

How Much Does Life Insurance Cost?

There are several factors that impact the cost of life insurance, including the type of policy you choose. Generally, the younger and healthier you are, the less you will pay. Other factors such as gender and occupation can also influence the cost. The best way to know what you can expect to pay is to speak with an experienced agent or broker to get a personalized quote. An agent or broker can look at your specific circumstances and help you not only understand what you will likely pay but they can also help with choosing the type of life insurance that best suits your needs. Each insurer or broker evaluates these factors differently, so it can be helpful to shop around for the right insurance company to find the insurance solution that is right for you.

How to Get Life Insurance

In order to find the insurance company that offers competitive rates for life insurance policies, get a quote from a few different insurance companies or work with a life insurance broker. Most insurers offer an online application option, so all you need to do is answer the questions and an agent will be in touch with you. You can expect questions about your age, health, tobacco use, driving record, and any dangerous hobbies that you participate in. Some insurance companies require a medical exam before issuing a policy. After you obtain life insurance coverage, be sure to pay the premiums.

Finding the right insurance company for your life insurance coverage is easy with the help of Acrisure. To get started, contact us today or learn more now with this blog about Common Life Insurance Questions.

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