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How Does Life Insurance Work?

According to the Insurance Information Institute, only about 54% of American adults have life insurance at this time. This is concerning since life insurance can really work wonders for families in the aftermath of the deaths of their loved ones.

If you don’t have life insurance at the moment, it might be because you don’t fully understand just how important it can be. There are so many life insurance benefits that you might be missing out on right now as a result.

So, what is life insurance, and how does life insurance work? We’ve put together a complete life insurance guide that will help answer these questions for you. We’ve also sprinkled in some life insurance tips that will help you choose the right policy based on your specific needs.

Check out our guide on how life insurance works below to get better informed on it.

What Is Life Insurance?

Before we get into answering the question, “How does life insurance work?”, it’s important for you to know what life insurance is. It’ll help illustrate just how important it is for people to strongly consider investing in life insurance for themselves or their loved ones.

Life insurance is quite literally a type of insurance that you can take out to insure your life. It’s a contract that is created between you and a life insurance company that calls for you to make insurance premium payments and for a life insurance company to pay a lump sum to a beneficiary that you choose in the event of your death.

As you can probably imagine, this kind of arrangement has proven to be very beneficial for families. They’re often able to overcome the financial hurdles that can be associated with a loved one’s death through the use of life insurance.

What Can Life Insurance Be Used For?

In a perfect world, families wouldn’t have to worry about what life insurance policies can be used for. But there, of course, more than 3.3 million Americans who die each year—and many of them die from something other than just old age and/or natural causes.

When they do, these people often leave families behind who struggle to take care of their expenses. The loss of their incomes puts their families into a very difficult position and sometimes makes it almost impossible for them to start putting the pieces of their own lives back together.

This is where life insurance benefits can really pay off. Families will be able to use the funds associated with life insurance to pay for almost anything that they want.

At first, families can use the money that they receive from their loved one’s life insurance policies to cover things like funeral costs. But they can also use them to:

  • Pay off mortgages
  • Cover the cost of college for children
  • Keep up with monthly expenses

No amount of money can take away the pain that comes along with losing a loved one. But it can make life just a little bit easier for families when they’re trying to heal from a loved one’s loss.

How Does Life Insurance Work?

Now that you know a little more about what life insurance is and what it could potentially help cover, let’s get into answering the question, “How does life insurance work?” It’s not nearly as complicated as you might think.

If you’re interested in signing up for a life insurance policy, here are the steps that you’ll need to take:

  1. Deciding which type of life insurance you would like (more on this in a moment!)
  2. Figuring out how much life insurance coverage you need
  3. Reaching out to different life insurance companies to obtain quotes
  4. Comparing the life insurance quotes you receive to see which ones look the best
  5. Picking out a life insurance policy and signing up for it
  6. Starting to pay life insurance premiums
  7. Waiting a certain amount of time before getting full life insurance coverage
  8. Renewing your life insurance policy on a regular basis to ensure it remains intact
  9. Altering your life insurance coverage over time based on different life changes that you go through
  10. Filling your family in on what kind of life insurance policy you have and who the beneficiary for it is (this is another thing we’ll cover shortly!)

It all starts with choosing which type of life insurance you would like. You’ll be able to get things moving in the right direction by taking this approach.

What Are the Different Types of Life Insurance?

When you go to sign up for a life insurance policy, you’ll be able to decide between two main types of life insurance. They are called term life insurance and permanent life insurance.

Term life insurance is typically the more affordable of the two options. It’s designed to provide you with life insurance coverage for a set amount of time. It’s also designed to keep your life insurance premium payments the same throughout the duration of your policy.

Permanent life insurance, on the other hand, often costs a little bit more than term life insurance. But the good thing about it is that it provides you with life insurance coverage right up until the end of your life. It also has a cash value to it that you can cash out at different times throughout your life if you would like.

It will take decades for a permanent life insurance policy to build up a large cash value. But it’ll still be nice knowing that you have this cash value to fall back on during your later years if you would like.

One last thing that’s worth noting with regards to term vs. permanent life insurance is that you might be able to obtain what is called convertible term life insurance. It’s a type of term life insurance that can be converted into permanent life insurance down the line. It’s a nice option to have if you suspect you might want permanent life insurance eventually.

Who Is Eligible for Life Insurance?

Anyone can apply for a life insurance policy at any time. But you should be aware of the fact that you might have to undergo some medical testing in order to qualify for life insurance.

If a life insurance company finds out that you have a medical condition that could potentially put your life at risk, they might not want to extend a policy to you. Or at the very least, they might hike up the cost of life insurance on you.

Here is what you can expect from the medical testing that you’ll often have to go through to get life insurance:

  • You’ll be asked about your family’s medical history
  • You’ll have your height and weight recorded
  • You’ll have your blood pressure taken
  • You’ll get your heartbeat examined
  • You’ll give a blood sample and a urine sample

There are some life insurance companies that will extend policies to people without putting them through any medical testing. But more often than not, they’ll only do this when they’re insuring someone who is on the younger side. 

Who Should You Trust to Provide You With Life Insurance?

At this point, you know what life insurance is, you’re familiar with how it works, and you have some general idea as to whether or not you will be eligible for it. The only thing left to do is to begin working towards obtaining life insurance.

To do it, you’re going to need to track down a life insurance company that you feel as though you can trust. And this is often easier said than done!

There are approximately 750 life insurance companies scattered throughout the country at this point. It could make it very difficult for you to find one that you can rely on to provide you with the best life insurance possible.

But you should be able to locate a life insurance company that you like by doing the necessary research. Here is what you should look for in a life insurance company:

  • A wealth of experience in the life insurance industry
  • Capable of providing you with both term life insurance and permanent life insurance based on your needs
  • Offer affordable life insurance policies
  • Able to deliver top-notch customer service to you
  • Make it simple for you to get a life insurance quote from them on the spot

Bottom line: You shouldn’t ever trust just any life insurance company to set you up with a policy. You should look high and low for one that’s going to give you access to the best life insurance policies around.

How Much Does Life Insurance Cost?

There is a simple reason why more Americans don’t have life insurance policies. They don’t want to have to pay for yet another form of insurance.

People already have to pay for home insurance, auto insurance, health insurance, disability insurance, and more. The last thing that they want to do is have to shell out more money for life insurance.

But you’ll be happy to know that life insurance isn’t that expensive in the grand scheme of things. The price that you’ll pay for life insurance will depend on factors like:

  • Your age
  • Your medical history
  • Your family’s medical history
  • Your commitment to keeping yourself in good shape
  • The regularity of your doctor’s appointments
  • And more!

On average, you should be able to get a decent life insurance policy for under $100. This will be especially true for those who will be buying life insurance policies when they’re still young.

There are some people who will have to fork over hundreds of dollars every month for life insurance. But most people can find life insurance policies that will fit into their monthly budgets with ease.

How Much Life Insurance Coverage Do You Need?

When you go to sign up for a life insurance policy, you’re going to have to let a life insurance company know how much coverage you would like. You can choose everything from a basic $10,000 life insurance policy to a life insurance policy that’s worth millions of dollars.

You should keep in mind that the value of your life insurance policy is going to have a direct effect on how much it costs you. But you should also remember that a very basic life insurance policy might not help your family much if something ever happens to you.

You want your life insurance policy to make a real difference for your family if the need should arise. Here is how to figure out how much life insurance coverage you’ll need to do this:

  1. Add up all the different expenses that you would want your life insurance lump sum to cover (mortgage, college tuition, monthly expenses, etc.)
  2. Subtract any savings, existing life insurance policies, etc. that you already have
  3. Come up with a total amount of life insurance coverage that you would like

You’re more than welcome to take out a larger life insurance policy if you would like. But you should try not to cut any corners by taking out a smaller life insurance policy that won’t check all the boxes for your family.

Who Should Be Your Life Insurance Beneficiary?

After you’ve picked out which life insurance policy you would like, you’re going to be asked a very important question. A life insurance company will ask you, “Who would you like your beneficiary to be?”

The beneficiary for your life insurance policy will be the person who will receive your life insurance benefits. You’ll need to give some serious thought to who you would like this person to be.

If you’re married, choosing your spouse to be your life insurance beneficiary will be a no-brainer. You also won’t have to put too much thought into who your life insurance beneficiary will be if you have children.

But if you aren’t married and/or if you don’t have kids, the decision won’t be quite so simple. You’ll have to spend some time soul-searching to decide who you would like your beneficiary to be.

You can literally choose any person that you would like to be your beneficiary. It can be a sibling, a best friend, or even a charitable organization if you would prefer to go in that direction.

You should also be able to choose multiple beneficiaries if you have multiple children, siblings, friends, etc. that you would like to receive your life insurance benefits. It’s going to be up to you to iron out the details so that you have your beneficiary or beneficiaries in place.

How Can Your Beneficiary Make a Life Insurance Claim?

You obviously aren’t going to need to know how to file a life insurance claim. If a claim is being made on your life insurance policy, it’ll be your beneficiary making it, not you.

But even still, you should have a good idea of how to make a life insurance claim. It might come in handy if you’re ever named someone’s life insurance beneficiary. It would also be a good idea for you to let your beneficiary know what they’ll need to do if they ever have a file a claim.

Here is how your beneficiary can make a life insurance claim:

  • Sending a copy of your death certificate to your life insurance company (the company will not usually send this certificate back, so it’s important for them to make several copies of it!)
  • Connecting with your life insurance company to make sure they received the death certificate and to get further instructions
  • Fill out paperwork to ensure that their claim is filed properly in the end

From there, your beneficiary will simply have to sit back and wait to hear from your life insurance company about the claim they put in. But in most cases, they shouldn’t have to wait for too long. Most life insurance companies will approve claims and pay them out quickly within just a week or two.

That being said, your beneficiary shouldn’t wait too long to get the claim process going. They should start as soon as they possibly can in the aftermath of your death to guarantee that they’re able to get access to the funds that they’ll need fast.

Which Types of Death Aren’t Covered by Life Insurance?

A good life insurance policy is going to cover almost every type of death imaginable. You won’t have to worry too much about your beneficiary not receiving a lump sum following your death as long as you obtain life insurance through a reputable company.

But—and this is important, so please pay attention!—there are some types of death that certain life insurance companies might not cover. You should make sure they’re on your radar so that you don’t put yourself in a position that could compromise your life insurance policy.

If you lie about your medical history or your family’s medical history while applying for life insurance, it could void your policy in the future. You might also void your policy if you die while taking part in a risky activity like skydiving, bungee jumping, or scuba diving.

Additionally, you may void your life insurance policy if you die by suicide shortly after signing up for the policy. It might also get voided if you are killed by an act of terrorism or if you are murdered by the person who is the beneficiary of your life insurance policy.

The good news is that most other types of death will be covered by life insurance. But these exceptions can complicate things when your beneficiary attempts to collect a life insurance lump sum following your death.

Is Life Insurance Worth It?

There isn’t anyone who is going to force you to get life insurance if you don’t want to do it. You’re allowed to walk around without life insurance if you so choose.

But you should know that getting a life insurance policy is almost always worth it. You’re going to enjoy a long list of life insurance benefits when you take out a policy in your name.

First and foremost, you’ll get peace of mind knowing that your loved ones won’t have to worry too much about their finances in the event that you die. You’ll also get the satisfaction of knowing that your family will be able to continue to carry out their life plans even if you aren’t around.

You might even come to find that having a life insurance policy will make you look at life in a whole new way. You’ll be less likely to take uncharacteristic risks when you have a life insurance policy in your back pocket.

It wouldn’t hurt to, at the very least, look into getting a life insurance policy if you don’t have one already. You might be able to secure one that won’t break the bank while providing you with all the coverage that you’ll need.

Look Into Purchasing a Life Insurance Policy Today

Have you been toying with the idea of signing up for a life insurance policy for quite some time now? If so, you have come to the right place!

We can provide you with life insurance quotes so that you can see how much a life insurance policy will cost you. We can also answer any and all questions that you might have about life insurance like, “How does life insurance work?” It’ll make picking out the right life insurance policy a breeze.

Contact us today to get more information on term life insurance and permanent life insurance policies.

How Does Life Insurance Work? - Your Ideal Term Life Insurance Policy | Outset Insurance