How Does Life Insurance Work?

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Purchasing life insurance can seem like a daunting task, but taking the time to understand how life insurance works before making a decision will save you time and money in the long run.

Life insurance is a financial planning tool intended to protect your loved ones financially in the case of your death, offering you peace of mind no matter your current situation. Therefore, it’s important to select an appropriate policy with sufficient coverage.

Whether you are thinking ahead and browsing policies for the future or are ready to buy now, Insurify’s free, user-friendly platform allows you to compare quotes from top life insurance coverage providers in just a few minutes.

What is Life Insurance?

When you purchase a life insurance policy, you appoint beneficiaries who will receive the life insurance payout. These people are typically family members but can be business partners or even friends. Life insurance covers most causes of death, from illness to accidents. However, in some cases, such as suicide in the first two years of a policy or application fraud, the insurance provider may not cover it and decline to pay out the death benefit.

Though different types of life insurance exist—such as variable, universal, and term life—the main idea is pretty simple: as long as you pay your premiums, your insurer will pay out the life insurance benefits to your designated beneficiaries if you pass away. Typically, you can pay your premiums monthly, twice a year, or annually. Paying the premium is very important; if you stop paying, you could lose coverage and be forced to reapply. This not only leaves you uninsured, but your rates will probably increase because you will be reapplying as an older person.

The death benefit is typically given as a tax-free lump sum with no strings attached. Because of this, beneficiaries can use it for whatever they need, from final expenses and funeral expenses to mortgage payments and college tuition costs.

The amount of coverage needed depends on your current financial obligations and the standard of living you want to give your loved ones after you have passed. To calculate the coverage amount, you need to add up all of your current and shared debts as well as the amount of money you want your beneficiaries to have for future expenses.

For example, if you have children that want to go to college and you plan to pay tuition, you will want to make sure your death benefit is large enough to cover that cost in your absence. If it doesn’t, your children might have to take out loans or forgo higher education.

What are the Different Types of Life Insurance?

Depending on your needs, you can choose between five different types of life insurance. Some are more expensive and comprehensive while others are cheaper and more bare-bones. Keep in mind that you can change the type of policy if your life circumstances call for it. However, it’s best to keep the same policy as long as you can because getting a new one later in life is typically more expensive.

  1. Term Life Insurance is cheaper due to its set term length and simplicity.
  2. Whole Life Insurance costs more because it accrues cash value over a period of time and is permanent.
  3. Universal Life Insurance tends to be cheaper, like a term life insurance policy, but is a form of permanent coverage with an investment savings component.
  4. Variable Life Insurance is more expensive because it provides lifelong coverage and a cash value account. However, these policies don’t always have a guaranteed rate of return, which adds a level of risk.
  5. Variable Universal Life Insurance is more expensive because it is a permanent life insurance policy that also has a cash value component, but it is flexible in how much premium the owner has to pay in a given month.

If you’re interested in learning more, be sure to read up on how term and whole life insurance can differ based on their varying features and requirements.

What are Insurance Riders?

Adding a rider to your insurance policy is a way to modify the coverage or terms of the agreement. Typically, riders add coverage for an added cost. However, exclusionary riders restrict coverage for named conditions. These are less common, but do exist.

Three common types of riders are:

  • Guaranteed Insurability Rider: With this rider, the insured person can buy additional insurance coverage without a medical exam during a stated period in their active policy. This is beneficial for people who have had significant life changes, such as marriage or the birth of kids, or who have seen a decline in health with age.
  • Accelerated Death Benefit Rider: This rider allows an insured person who has been diagnosed with a terminal illness to use some of the death benefit in life in order to pay for medical bills or improve quality of life. The amount used will be subtracted from the death benefit your beneficiaries receive, though.
  • Long-Term Care Rider: This rider helps the insured take care of nursing home or at-home care costs by way of monthly payments. Long-term care insurance can be purchased separately from your life insurance policy, but many insurance providers offer this type of rider.

How Much Does Life Insurance Cost?

The cost of life insurance varies widely from person to person. The larger the death benefit you want, the higher premiums you will pay. The best chance to lock in a good life insurance rate is by purchasing a life insurance policy when you are young. Young, healthy people pay significantly cheaper premium payments for their insurance products because they theoretically have more years ahead of them in which to keep paying.

The different types of life insurance also differ in affordability. Term life insurance is the most affordable because it only covers you for a set number of years (the policy “term”). Whole life insurance is more expensive than term insurance because it is a form of permanent life insurance. So, even though you pay premiums for your entire life with a whole life policy, it is more expensive due to its permanence and cash-value component.

Whatever policy you buy, though, make sure to look for life insurance discounts from your life insurance company. Life insurance companies won’t usually come right out and offer them to you, but if you do your research, you could end up saving a lot of money. You can get discounts for everything from not smoking and being married to owning a home or belonging to AARP.

Paying for life insurance can be a bit tricky, though. Most carriers accept electronic funds transfers and checks. Some accept credit cards or debit cards, but this is less common. The high fees and state-specific regulations are common reasons providers don’t accept credit cards. If you know you would like to pay for life insurance by way of recurring online payments, be sure to have your bank account number and routing number when you apply.

How Do You Get Life Insurance?

To get a life insurance policy, you will have to follow the basic steps:

  • Then, you apply for policies from various providers to get quotes. However, instead of spending time applying through every provider individually, you could save time by using a life insurance comparison site online. Life insurance quote comparison sites like Insurify make it easy to get quotes from many providers at once, which simplifies the process and saves you time.
  • After applying, representatives from the insurance providers will call you to discuss the information on your application.
  • Once that is complete, you can schedule your medical exam. This medical exam is a basic health checkup that allows the insurance provider to get current information on your health. The medical technician will check on the severity of any medical conditions you mentioned on your application in addition to checking for ones that weren’t mentioned. If you don’t need much coverage, are very healthy, or have a virtually clean medical history, you might be able to skip the medical exam. However, most types of life insurance policies require an exam; those that don’t are usually more expensive.
  • After all that, the insurer will use all your information to calculate a premium. In general, the younger and healthier you are, the cheaper your premium will be.

It’s up to you whether or not you want to speak with a licensed life insurance agent who can help you along each step of the journey.

Filing a Life Insurance Claim

If you are the beneficiary of someone with a life insurance policy, you may be wondering how to file a claim in the case of their passing. To begin the process, you will need three documents: the policyholder’s death certificate or certified copies of it, the policy document, and the claim form.

The insurance company needs the death certificate to ensure that your claim for the death benefit is legitimate. The policy document has all the information about the life insurance policy, which informs you and the insurance company as to what you’re entitled to. The claim form is what you will fill out in order to request your benefits. Once the claim has been submitted, the settlement funds should be issued within a few weeks.

If you are just getting started exploring possible policies, Insurify’s life insurance quotes comparison platform can help you get quotes from multiple providers and compare them all in one place.

Updated May 3, 2019

Sabrina Perry is a writer with experience in data journalism and a passion for translating complex topics into insightful and engaging stories. She has a degree in neuroscience from University of California, Santa Barbara and can often be found reading books about behavioral economics, decision-making, and personal finance.