If you drive a car, you need car insurance. If you own a home, you need homeowner’s insurance. If you are someone who prioritizes his or her health, then you’ve probably found a way to obtain health insurance. The point is, you have insurance for almost everything… but what about your life? As an adult navigating life insurance, the most common questions are what is life insurance and how does it work?
So, read on as our Principled Life experts explain life insurance and answer some commonly asked questions about how life insurance works.
What is insurance?
Before talking about how life insurance policies work, it would be helpful to explain insurance in general. Insurance is a contractual arrangement between a policyholder (you) and an insurer (the insurance company). The policyholder, also known as a subscriber, agrees to pay premiums, which are scheduled periodically (usually monthly). If a specific event ever occurs, then the insurer provides a lump sum payment.
What is the purpose of life insurance?
As an adult, you likely have people that depend on you financially (children, spouse, parents). When is the last time you thought about who would provide for them if you were gone? While it’s not something that most people would like to spend time thinking about, it is something that you should be prepared for in the unlikely event that you die unexpectedly.
If the unexpected happened, you’d want to have an insurance policy on your life. In a traditional sense, this means that if you die, the policy pays out to your family to cover end-of-life costs, outstanding bills, and debts, and to comfortably live on for a little while.
How does life insurance work?
Okay, so you understand what life insurance is. Now you need to know how life insurance works. In general, the policyholder pays a monthly premium. In return, if the policyholder dies, then a lump sum will be paid out to the beneficiaries who are listed on the policy. Policy coverage, which is the lump sum that is paid to your beneficiaries, typically ranges anywhere from $5,000 to one million dollars, depending on your policy. There are three primary types of policies:
How does term life insurance work?
Term life insurance is a life insurance policy that covers a specific period, or term, in your life. The terms are specified by your insurer, and it often comes in set increments, such as 10-, 15-, and 20-year policies. Often, the longer the term, the lower the premiums.
If you pass away during the term, then your beneficiaries will receive a payout. If you outlive your term, then you may or may not receive some of your money back. That is dependent on the conditions and additional riders you may have on your term life policy. Additionally, once your term is up, you’ll have to reapply and potentially pass another medical exam to qualify for another term life policy.
How does whole life insurance work?
Whole life insurance is the most traditional form of life insurance. In contrast to term life policies, whole life insurance policies last for the entirety of your life, as long as your premiums are paid. Whole life insurance typically has a death benefit and a cash value. This means the money paid into your policy covers your premiums and is also put into an interest-earning saving account.
Whole life insurance tends to be one of the more expensive forms of life insurance because the premiums and death benefits never change. Whole life policies typically mature around the 100-year mark, however, if you somehow outlive the policy, then the premiums you paid for coverage are returned to you.
How does universal life insurance work?
Whole life and universal life policies are very similar. They both:
- Last a lifetime
- Have a death benefit and cash value
The primary difference is that universal policies have more flexibility with premiums, death benefits, and how the cash value is invested. You can raise or lower the premiums and death benefits (to a certain extent) at any time during the policy. Additionally, the cash value component is invested with the opportunity to grow. For example, you can choose whether you want the money to be invested in mutual funds or stock market indexes.
Life Insurance FAQs
How does life insurance payout?
Life insurance policies usually pay out with a lump sum. There are, however, other payout options. The beneficiaries can collect the benefit through a series of payments spread out over time or the payment could be put into an interest-bearing account to generate more money before it is paid out. It is all dependent on the policyholder’s wishes.
What does life insurance cover?
In most cases, the beneficiaries of the life insurance policies dictate what it covers. Usually, beneficiaries will use the money to pay for burial costs, outstanding bills, debts, mortgages, college tuition, or other financial obligations.
How does life insurance work after death?
Once the policyholder has passed away, it is up to beneficiaries to reach out to the insurance company and begin the claims process. For this process, the beneficiary needs the policyholder’s death certificate. It is also helpful to have documentation of the policyholder’s life insurance policy for reference.
Most claims are paid within 30 to 60 days, but there are instances where claims are delayed or denied. In this case, the insurance company will provide a clear reason why the claim was delayed or denied.
What if you outlive your policy?
If you outlive your policy, which you are more likely to do with term life policies, then you won’t collect any money. There are loopholes to this, such as adding riders (ie. Return of Premium Rider) to your life insurance policy.
However, it is typical that you won’t receive anything in return if you outlive your policy because the primary reason for life insurance is to protect dependents in the case of your death.
What kind of death does life insurance cover?
Generally, life insurance policies cover deaths from natural causes and accidents. Depending on the policy, suicide is not covered within the first year to three years.
Please note that if you are dishonest on your initial application, then insurance companies can refuse to pay your beneficiaries. Other factors that may cause insurance companies to refuse to pay death benefits include:
- If you’ve faked your own death,
- If your death occurs as part of an act of war or in a restricted country, or
- If you were involved in dangerous or illegal activity when you died.
Is life insurance difficult to get?
Generally, life insurance is not difficult to get, especially if you buy it while you are young and healthy. However, the older you get, the more health complications you are likely to have, which can have a huge impact on what life insurance you are eligible for and what you can afford.
At Principled Life, we believe there is a plan for every budget and every condition. You could easily obtain coverage for your family within a matter of minutes when one of our expert life insurance brokers connects you to the right policy. Contact us today to discuss your options and find insurance that fits your life.
