Jeffrey Manola is an experienced life insurance agent and the founder of Top Quote Life Insurance. His mission when he created Top Quote Life Insurance was to provide online consumers searching for life insurance with the absolute best quotes for term life insurance, permanent life insurance, no medical exam life insurance, and burial insurance. Not only does he strive to provide you with the ...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Nov 4, 2020

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Planning for your death is one of the toughest things to do. It’s a morbid and sensitive topic that can be difficult to talk about. Most people just don’t like to think about it.

These are perfectly normal feelings to have. However, they will have consequences. Ignoring death’s reality can put a strain on your relatives when you die.

Let’s say you pass away and don’t have financial plans in place. Your family could be left struggling to pay for your funeral bills. Or your sudden departure may make it hard to cope without your income.

43% of people in this study said it would be a financial burden.

This is why it’s important to have life insurance and know how it works. It ensures that your loved ones will be financially okay when you pass. This will give you peace of mind as you live your life.

So how does life insurance work? Read on to find out everything you need to know.

Looking to compare life insurance policies? We can help. Enter your ZIP code to get free quotes from multiple insurers.

Life Insurance Explained

How does life insurance work is a common question in many people’s mind.

Life insurance is a contract between you and a life insurance company. It’s insurance that covers your life.

Just because you pass on doesn’t mean the end of your expenses. Worried about what will happen to your family after you die? This insurance gives your family a monetary safety net for when you do.

Life insurance can cover bills, funeral costs, lost income, and other living expenses. College tuition, a mortgage, retirement are also common uses of life insurance.

So if you were unclear on how does life insurance now you know.

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Key Terms In The Life Insurance Process

There are terms that confuse many wondering about how does life insurance work. Let’s explore their meanings.

Policy owner – This is the person who owns and buys an insurance policy. They are responsible for paying the insurance premium. A parent can be a policy owner. And their child could be the insured.

Premium – This is the payment that the policy owner makes. Monthly, annual or quarterly payments are made to keep the policy active. If premium payments fail the coverage ends.

Insured – This is the individual whose life is covered by the insurance policy. When they pass away a payout is sent to their loved ones. The insured is not always the policy owner.

Beneficiary – This is the person who will receive the insurance payout. It’s who the money paid out to when the insured dies.

Insurer – The life insurance company is also referred to as the insurer. They collect premium payments and pay our death benefits.

Life insurance agent – A life insurance agent can be hired to help a potential policy owner. Agents can help you select the best insurance company. They can also assist you in getting the lowest premiums.

Underwriter – Underwriters work together with insurance companies. They review applications to determine insurance premiums.

Cash Value – Let’s say you cancel your insurance before the insured dies. Money available in the policy is called ‘cash value’. This would be paid out to the policy owner.

Payment And Pricing

When you purchase life insurance you agree to pay a premium. This can be paid monthly, quarterly, or annually.

All you have to do is keep up with your required payments. Your life insurance company will pay your beneficiaries when you pass on. If you stop paying, your provider won’t pay your death benefit.

How much does life insurance cost?

Many people may wonder how does life insurance work on their finances.

Your premium will depend on a variety of factors. Insurance companies use data to determine how soon and likely you are to die. This will affect how much you pay.

Data is collected through medical examinations and risk evaluation by an underwriter. Underwriting involves an insurance company analyzing your lifestyle to decide on your premium. An underwriter will consider several things such as:

  • Health.
  • Age.
  • Gender.
  • Medical history.
  • Results of a medical exam. Taking an exam is optional for certain plans.
  • Potentially dangerous hobbies or occupation.
  • Criminal history.
  • Smoking habit. A smoker will likely have to pay higher premiums than a non-smoker. This is because they’re more likely to pass from smoking-related issues.

Your premium will also depend on the type of insurance coverage you choose.

When Should I Buy Life Insurance?

Wondering how does life insurance work and when you should buy it? The best time to buy is when you’re young and in good health. Young adults are healthier and receive lower premiums. Getting a fixed long-term premium in your 20’s is a smart move.

So what kinds of life insurance can you get? Let’s talk about the types of life insurance next.

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Different Types Of Life Insurance

When thinking about how does life insurance work understand the different types available. The two types of life insurance that you can purchase are temporary and permanent.

Temporary Life Insurance

  • Lower cost and most affordable type of life insurance.
  • Includes term life insurance
  • Provides protection for a period of time but can be renewed.

Permanent Life Insurance

  • This covers your long-term protection for your entire life.
  • Your payments always stay the same. Changes in your health will not affect it.
  • Offers flexible premiums that you can adjust. You can build cash value from your policy that you can access during your life.

Life insurance can be used while you’re alive.

One plus is that life insurance can be used while you’re still alive. Some insurance policies have riders. These will provide you with financial benefits when you need them.

Riders can be added to your policy for more coverage. Some riders come at an extra cost while others do not.

They can be useful for an illness or even retirement income. Using your rider will affect how much is left on your policy.

How Much Life Insurance Should I Buy?

The amount of life insurance to purchase is also a major consideration. People wondering how does life insurance work need to decide carefully.

Not sure how much life insurance will be enough for you? Start out by thinking about the financial needs of your family.

What financial plans do you have for your spouse and children? Would you want college tuition and mortgage paid off? What do you want to happen if you pass?

Questions like this will help you decide how large your policy should be. Find a balance so that you’re not overinsured or underinsured.

How To Get Life Insurance

When considering how does life insurance work you need to know how to buy it.

Many people don’t know the ins and outs of life insurance. This might deter them from purchasing some.

However, there’s no reason to feel intimidated. There are life insurance agents to help you make the best purchase.

Here’s a breakdown of how to purchase life insurance.

  1. Shop around for the best plan. As you research, think about how much you need to cover your family. Keep your temporary and long-term responsibilities in mind.
  2. Compare quotes from different top-rated insurance companies. You can do this yourself online or with an independent life insurance agency. The agent will submit your application for you.
  3. If you’re applying on your own your next step is underwriting. This may include background and medical history check. It will also require you to take a medical exam. An underwriter will look over your application and evaluate your insurance risk. They’ll soon let you know if you’re accepted and what your premium is.

The entire application process can take several weeks or just a few days. If you turn down the medical exam underwriting can happen in two days.

Once a decision is made you’ll receive your policy in the mail. Your life insurance coverage will then begin. Now you begin to pay your premium.

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What Happens When You Die

When you pass away your beneficiaries are paid by your insurance company. They will receive a check for the amount of coverage in your plan.

Let’s say you bought your policy just one month before your death. As long as it was active your loved ones will be paid.

Types of Beneficiaries

There are two types of life insurance beneficiaries.

  • Primary beneficiaries are the people listed on your policy.
  • Contingent beneficiaries are listed as a backup. Let’s say your primary beneficiaries also pass away. A contingent will receive your coverage instead.

What Your Beneficiaries Will Have To Do

When you pass your beneficiary or family member will need to:

  • Notify the life insurance company or your agent that the insured has passed away.
  • Complete all necessary death claim paperwork that will be provided by the insurance company

The typical turnaround time for a paid claim is generally two weeks. The faster the death claim paperwork is submitted the sooner a beneficiary will get a check.

Life insurance payouts are not taxable. Payment to beneficiaries will be free of any taxation.

Outside Circumstances

Sometimes a company will refuse to pay an insurance payout.

They may discover a false claim has been made to receive insurance checks. So insurance companies have to be on the lookout for insurance fraud. If they discover insurance fraud the claim will be denied.

Insurance companies will investigate and contest a claim if:

  • The insured has died within two years of the policy being purchased and there’s suspicion of fraud.
  • If the insured committed suicide within two years of obtaining the policy.
  • If the beneficiary lied about the insured’s cause of death.
  • If the insured lied or withheld information about pre-existing medical conditions. They could deny a claim if you withheld your dangerous hobby.

Are you ready to talk about your life insurance needs? Do you need more info to understand how does life insurance work?

We have licensed insurance agents available to answer all your questions. Get in touch with us today.

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