How Does Life Insurance Work? An Informative Guide

No one questions the need for car insurance and health insurance, but life insurance? How does life insurance work?

The concept of “protection against loss of human life” is hardly new. In fact, it can be found as far back as the ancient civilizations of Babylon, Greece, Rome, and China. However, it wasn’t sophisticated enough to help wives who lost husbands in wars and instead reserved for the economic loss of slave lives.

Today’s life insurance is much more complex, but also more comprehensive. Check out the guide below to figure out how it works.

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What Is Life Insurance?

The term ‘life insurance’ seems pretty straightforward. If the insured person loses their life, insurance is paid out. This type of insurance is vital for families left behind when a primary wage earner is lost.

These policies cover many types of death, with a few exclusion and special clauses. When the policyholder dies, the beneficiaries listed on their policy receive a monetary payout.

How Does Life Insurance Work?

There are two main types of life insurance — term life insurance and permanent life insurance.

Term life insurance has an expiration date. The term is often for 10, 15, or 20 years. If the policyholder dies during this period, the benefit is paid out. If the term limit is reached, the policyholder can choose to renew, convert to permanent life insurance, or let the insurance expire.

Permanent life insurance can be more expensive; however, if the insured pays their premiums, it never expires. There is both a savings portion and a death benefit. Policyholders can even borrow against their policy if they need liquid cash for a purchase.

Permanent life insurance may be whole life or universal life. Whole life is fixed, inflexible, but offers a guaranteed return on investment. Universal life is subject to market conditions, but the terms of the policy can be changed at any time as needed. Both types of permanent life insurance incur no tax liability.

Choosing a Policy

For many people, the cost of insurance premiums may be prohibitive. Of all the life insurance options, whole life insurance premiums are often the steepest. However, term life policies usually expire before the policyholder dies.

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Young people, who are healthier and have many years before end-of-life, often have preferential premiums. For those with health issues, term life insurance may be more affordable. Some people choose a term life policy to later convert to a permanent life policy.

You can browse life insurance quotes online to get a sense of what to expect, but make sure to consult with a few different financial experts for a balanced, professional opinion.

Buying Life Insurance Is a Smart Choice

How does life insurance work? It should work for you. This may mean different things to different people with different needs, so make sure to carefully discuss your options with an experienced financial planner or insurance agent.

For more useful personal finance guides like this one, take a second to browse our page.