How Does Life Insurance Work?

by Site Manager on April 1, 2015

how does life insurance workLife Insurance Information – How it Works

If you are searching for life insurance information, it is quite likely that you are attempting to uncover how this type of insurance works. Life insurance is a specially-designed insurance type that offers your loved ones protection against the “unknown”. Life is fragile. While we all hope to live a long, prosperous life that is not always the case. Life insurance offers individuals with the peace of mind that their loved ones will be taken care of – financially – in the event of their demise. Not only does it assist the individuals left behind with the funding necessary to cover the end-of-life expenses, but, it is also designed to assist those same people from experiencing the unexpected loss of financial support as a result of their loved one’s untimely passing. When searching for life insurance information, you may be overwhelmed by the vast amount of details currently available pertaining to this type of insurance. We have put together this life insurance information guide to help you understand exactly how this insurance works.

What is Life Insurance?

Life insurance is a type of policy in which an insurance company creates a contract with an individual. In exchange for the payments provided by the individual, which are often referred to as “premiums” – the company providing the life insurance commits to providing the beneficiary listed on the policy with a lump-sum payment in the event of the policy holder’s death. The lump-sum payment is referred to as the “death benefit”. The type of life insurance that is obtained by an individual will be dependent upon their needs and the unique goals that are associated with the policy.

Types of Life Insurance

When searching for life insurance information, you will find that there are many types available. The most common types are referred to as “Term”, “Whole”, and “Universal”. Below, you will find brief information pertaining to each of these types:

  • Term Life Insurance – This type of insurance is provided to those that desire to have financial protection for a set period of time, such as 10 years, 20 years, or 30 years. The premiums that are paid during the time period chosen are guaranteed to remain the same. Once that time has passed, the premium typically increases, yet provides the same level of financial protection. This is considered to be one of the least expensive types of life insurance.
  • Whole Life Insurance – This type of insurance is considered to be permanent life insurance; that is, it provides lifetime coverage. These policies often have higher premiums that do not change throughout the course of a person’s life. These types of policies have a cash value, which allows them to act as a type of savings account and may be tax-deferred, as time progresses.
  • Universal Life Insurance – This type of life insurance is permanent and provides coverage for a lifetime. You have the ability to increase or lower the premiums that you pay as you age. Though more expensive than term insurance, these have a tax-deferred and a savings component that have the ability to build value, over time.

Conclusion

When searching for life insurance information, it is important to research each of the types outlined in this guide. The companies that provide the policies use “rate classes” in order to determine how much you must pay, in terms of premiums. If you are in excellent health and do not engage in risky behaviors, such as smoking, you will pay a lower premium than an individual that has poor health and does engage in risky behaviors. Determining your coverage amount should be based on your income and your financial needs. In the best case scenario, you should opt for insurance that will provide a death benefit equivalent to a year’s income and the amount of your end-of-life arrangements. By using the life insurance information contained in this brief guide, you are sure to uncover a policy that works effectively for you and your family.

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