How Does Life Insurance Work?
How does life insurance work? If you are asking this question, then there are people that you care about, and you want to do the work now to make sure that they will be okay when you are gone. If you are unsure where to even start, then this is the right place for you.
What Is Life Insurance And How Does It Work?
Life insurance is actually a contract between you and an insurance company. In exchange for payments that you make every month, or premiums, your insurance company agrees to pay out a certain amount of money on your death. This money is meant to support your family financially recover after your death. Depending on the contract, you may also be able to get a payout for other situations, such as permanent disability. Another important part of the contract are the exclusions. There are certain situations where the contract becomes invalid, such as if the insured committed suicide or if there was fraud involved.
Life Insurance Vocabulary
Before getting into the nitty gritty details regarding the question "How does life insurance work?" it will help to define a few key terms that you will see throughout this article.
Beneficiary
A beneficiary is the person who is receiving the death benefit from your life insurance policy. While many people choose their children and/or spouse as their beneficiary, you can choose anyone who depends on you financially, including business partners or even friends. You can even change and update your beneficiaries over time.
Premium
The premium is the amount of money you pay to the insurance company towards your life insurance coverage. The payment of your premium will be agreed upon in your contract and can be paid monthly, quarterly, semiannually, or annually.
Insurance Underwriter
The insurance underwriter is the person who determines if the insurance company can insure you and at what price.
How Does Life Insurance Work?
Many people ask "How does life insurance work?" It's an important step for many families, but many people do not know how to even begin. Setting up your life insurance policy is pretty simple and straightforward. You only need to follow these eight simple steps:
Do Your Research
You're already a step ahead! You are already taking time out of your day to research and inform yourself. It is important to do the research to determine what type of insurance -- and at what amount of coverage -- is appropriate for you and your family. Insurance salesmen are informed, which is why they are paid to inform the average person on insurance, but they are also paid to sell it to you. While there may be many honest insurance salesmen, you do not really need to deal with them if you have done your own research, since there is so much free information out there. Besides, maybe buying a life insurance policy isn't the right move for you and your family. That is easier to determine on your own rather than being talked into a policy by a salesman.
Calculate how much life insurance you need
Not all life insurance policies were created equal. Just like every individual is different, every individual's financial situation is different. Some families have more financial needs than others. It is important to consider what other assets and resources will be available to your family after your death. The more assets and resources your family will have available to them, the less you need to provide in the life insurance policy. Another important thing to consider when determining how much life insurance you need is the financial needs of your family after your death. This includes final expenses, debts, and income needs. Make sure when doing your calculation that the assets and resources cover the financial needs for your family. If they don't, then you will want to get a life insurance policy equal to or greater than that deficit.
Check Your Budget
If you do not already have a budget set up, then now is the time. There are no excuses! You can even build a budget on low income. Building a budget takes time and patience, but it gets easier over time. Just make sure you learn the budgeting basics, and if you have the time, there are some great personal finance books, both for beginners and for experts, that could also be helpful. Now that you have your budget, check it! Signing up for a life insurance policy is a long-term financial commitment, which means that you need to choose a policy that you can afford. When deciding how often you will pay the premium -- either annually or installments -- you need to make sure you choose an option that you can afford. Make sure you communicate your needs and financial situation with your insurance agent or company representative, so that you are able to sign up for a policy that covers the future needs of your family [see step 2 above] and still fits in your monthly budget.
Shop Around for the right policy
It goes without saying that you shouldn't just choose the first policy you see. There are some good deals out there, and if you shop online for insurance, then you are bound to find the right life insurance policy for you. Don't look in just one place, there are so many different online shopping portals that can help with life insurance comparison. Always check to see how long the insurance company has been in business, how financially sound they are, and whether they have a good or bad reputation. Here we have compiled our own list of the top 7 best life insurance for family security. See if any of these policies are right for you and your family, and then you can make a list of a few companies that you may want to contact for a quote. Even if these policies are not right for you, they may give you an idea of what kinds of things to look for when searching for the right life insurance policy for you.
Prepare for your medical exam
The majority of life insurance companies will require you to get a medical exam. This medical exam will typically be covered by the insurance company, but they usually have their own medical company who they have complete the medical exams. You will need to set aside some time to get this done, but this shouldn't be a problem, as they typically come to your home, at your convenience, to complete the exam. The medical exam will oftentimes include a health questionnaire, regular health check-up measurements -- height and weight, and blood and urine samples. Be prepared to also provide your medical records. The life insurance company will use all of this information about the condition of your health to determine what to charge you in your premium. Because of this, it is important to follow their instructions for preparing for the exam, which could include fasting for a certain amount of time, drinking plenty of water and staying hydrated, and avoiding caffeine.
Sign up for your policy
Once you have completed your medical exam, you can officially turn in your application. You will often turn this in to the medical examiner who performed your medical exam, who will pass both your application and medical exam results to the insurance company's underwriter. While they take many factors into consideration, age and health are of course two of the biggest factors. Expect to wait at least two weeks from the time the medical exam is completed to the time the underwriter makes their determination.
Sign Your contract
Getting an application approved is not the last step.
Once you receive an approved application, don't just sign it!
Read the terms and conditions first, to make sure that, after the price and conditions have been finalized, this is still the right policy for you. If you are not very legal-minded, it is a good idea to have your partner or a family member or friend look over the contract as well, just to ensure that you do not miss anything important; if your family member or friend is a lawyer, even better! Even if they are not a lawyer, it never hurts to have an extra pair of eyes look over a binding legal document. Once you are sufficiently assured that this is the right life insurance policy for you and that it fits into your monthly budget, then you can sign your contract.
Inform your beneficiaries about your life insurance policy
You may have thought that surely now you were done, but you are not quite done yet. Now that you have a life insurance policy, it is important to inform your beneficiaries about your life insurance policy. It would be a horrible waste if your beneficiary did not realize they were a beneficiary and never had the opportunity to claim the benefits. Your beneficiaries need to know where an easily accessible paper copy of the policy is, as well as the specifics of what your wishes are regarding the death benefits.
Receiving Your Life Insurance Benefits
Now that you know how to set up your life insurance policy, you are probably still asking yourself: "So how does life insurance work?" Sure, it is pretty simple to set up your policy, but then how does life insurance work? The life cycle of your life insurance will follow these three phases:
Pay your premiums
The payment plan for your premiums will be decided between you and your insurance agency and will be clearly stated in the terms and conditions in your contract. Whatever your payment plan -- no matter if it is monthly, quarterly, semiannually, or annually -- the most important thing you can -- and should -- do is pay your premium on time, every time. Not only is this important for your credit, but it also ensures that your policy will not be cancelled, which could leave your family in a rut after your passing.
File a claim for payout
As mentioned above, it is essential that your beneficiaries know how to access a paper copy of your policy. This will allow them to file the appropriate documentation to make their claim for payout. If your policy is in force when you die, then your beneficiaries should have no problem receiving the benefit from the policy. However, if you die within two years of buying your life insurance policy, then the insurer will have the right to conduct an investigation to determine if the claim was a possible fraud.
Receive your death benefits
When your beneficiary receives your benefit, it will come either in the form of a lump sum or in multiple payments, as specified in your contract. The death benefit your beneficiary receives will be tax-free.
So, What Are My Options?
Now you know how to set up your life insurance policy and how your beneficiaries can receive your death benefit, but how does life insurance work? Well, it depends on what type of life insurance you have. The two main types of life insurance are:
term life insurance
Our philosophy and Budgetry, and across the Goalry family, is simple. Term life insurance is temporary, its policies ranging from 1 to 35 years. It tends to be a popular choice, particularly due to it being the cheapest coverage available, allowing also for the greatest amount of flexibility. The downside to this type of life insurance is that it does not earn any cash value and if you outlive your policy, you will not see any money. If you are not sure if you want a term life insurance or a whole life insurance, you can rest easy knowing that many term life insurance policies are convertible, which means that if, after some time but before a certain deadline, you decide that you would rather have whole life insurance, then you can upgrade -- sometimes without needing to take another medical exam.
Whole life insurance
Whole life insurance, also known as permanent life insurance, on the other hand, is permanent rather than temporary. This means that "it lasts your entire life and becomes a cash asset over time". Since the policy lasts longer -- your entire life -- it will be more expensive. Because of this, it may not be worth the investment. However, if you are someone with a lifelong dependent -- such as a special needs child, a high net individual who wants to pass on a tax-free inheritance on to your beneficiaries, or a senior who has already outlived your term life insurance and wants a lifelong solution, then whole life insurance is the right investment for you. Now that you are familiar with both of these options, you can begin the process of making the best decision for yourself. If you need any more information, Insurry can help.
Can I Cancel My Life Insurance Policy?
You have not answered the question "How does life insurance work?" without explaining the possibility of cancellation. Generally, you can cancel a life insurance policy any time you want. However, it is important to understand the consequences of canceling, and the benefits of continuing an existing policy rather than canceling and purchasing another one in the future.
If you have term insurance, you can cancel by telling your agent and simply stopping payment. Don't forget, though, that when you decide to purchase another policy, it will be based on your age and possibly your health. You are unlikely to find a policy with as low a premium as the one you are canceling.
On the other hand, if you have a whole life insurance, you will probably lose at least some of the actual value you have paid in, especially if it is in the early years of the policy. There may also be tax consequences, and it will be more expensive to purchase a new policy when you are older. It may be wise to try to hold on to a whole life insurance policy if possible.
Can I Sell My Life Insurance Policy?
There are even a few situations where you can sell your life insurance policy. If you are thinking about canceling your life insurance policy, think about it carefully and make sure you know how it will affect you. If you are just worried about affording your premium, then talk to your insurer. Maybe you can set up a decrease in your premiums by decreasing your death benefit, or if you do not want to decrease your death benefit, then you may be able to get a loan to cover your loans -- a loan which may actually help your credit.
Compare Life Insurance Company With Insurry.
Conclusion
Getting a life insurance policy protects those you most care about, making sure they can take care of themselves financially after you are gone. If you want to get life insurance, then follow our eight simple steps on finding the right life insurance policy for you. There is no simple answer to choosing the right life insurance policy, since it is totally dependent on your special circumstances, but hopefully after this article, you now have an idea of what might be right for you.