How Does Life Insurance Work?

How Does Life Insurance Work – Overview

Life insurance is one of the most common aspects of many people’s long-term financial planning. Buying a life insurance policy is an excellent way to protect your loved ones with significant financial support in case you meet an untimely death. For instance, a life insurance policy helps your partner cover mortgage payments and even regular bills and funds your child’s college education.

However, buying a life insurance policy is a major financial decision that must be made after careful consideration of all its aspects. In this article, we have covered the basics of life insurance, its different types, and how it works.

What Is Life Insurance?

How Does Life Insurance Work

How Does Life Insurance Work – What Is Life Insurance?

Life insurance is a type of contract of insurance. When you buy a life insurance policy, you agree to pay a premium, which can be monthly, quarterly, semi-annually, or annually, to maintain insurance coverage. In case of your death, the insurance company will pay out a death benefit to the person(s) you nominated as the policy’s beneficiaries. Some life insurance policies, particularly permanent life policies, offer both a death benefit and a living benefit option.

A living benefit rider allows you to access part of the death benefit under certain conditions, such as terminal illness, while still alive. This policy is beneficial when you are terminally ill and need finances to pay for medical care.

Before buying a life insurance policy, consider factors such as your financial needs, the type of policy (term or permanent) that suits you, the amount of premium you can afford, potential riders for additional protection, and comparing rates from different providers.

  • The extent of coverage you need
  • If a term life or permanent life policy is more suitable
  • How much premium can you pay
  • If you want to add new riders/benefits
  • Differences between life insurance policy rates from different providers

Regarding coverage amount, you should know that a term life insurance policy offers coverage for a fixed term period. In contrast, a permanent life insurance policy offers coverage for as long as you keep paying a premium. Term life insurance is generally less expensive than permanent life insurance, which offers lifelong coverage and additional features like cash value accumulation.

The cost of life insurance premiums will mostly depend on the type of policy, the amount fixed for the death benefit, the riders you choose to include, and your overall health. Buying a life insurance policy often requires a medical exam to assess your health, though some policies may offer simplified underwriting with no exam required.

What Does Life Insurance Policy Cover

The death benefits and other coverage mainly depend on the type of life insurance policy you purchase. A life insurance policy mainly helps to fill the financial gap posed by the death of a family’s breadwinner. It helps cover financial obligations, such as mortgage and rent costs, funeral and burial expenses, tuition, personal debts, etc.

Most people who buy life insurance policies do so intending to provide their family and loved ones with a safeguard against financial hardship in the event of their untimely death. People even buy life insurance policies as an inheritance to leave to their children, grandchildren, extended family, and even non-profit organizations.

Whole or universal life insurance policies allow policyholders to access their benefit funds while alive. As long as you continue making the premium payments, you may be able to borrow against the life insurance policy to pay for the mortgage or child’s tuition. If you take a loan against your life insurance policy’s cash value and cannot repay it, the outstanding loan amount plus interest will be deducted from the death benefit.

Life insurance policies typically cover deaths due to natural causes, accidents, and homicide. Still, they may exclude deaths caused by suicide within the first two years of the policy or other specific exclusions outlined in the policy.

Term Life Insurance

Term life insurance policies are designed to provide coverage for a fixed period and can usually be bought in 15, 20 or 30-year durations. However, these periods can vary, depending on the insurance providers. Term life insurance does not provide a death benefit if the policyholder outlives the term, but it offers affordable premiums compared to permanent life insurance.

Term life insurance is also useful for providing financial protection to your spouse and family.

Permanent Life Insurance

You can buy permanent life insurance policies in two types—universal and whole. Permanent life insurance policies include a death benefit as well as a cash value component that can grow over time. This type of insurance allows you to borrow against the policy. If you cannot pay back, the policy’s beneficiaries will receive a smaller payout. Some permanent life insurance policies, particularly participating policies offered by mutual insurance companies, may pay dividends, which can offset premiums or increase the policy’s value.

How Much Does a Life Insurance Policy Cost

The cost of a life insurance policy depends on several factors, such as the type of insurance, the insurance company you buy it from, and your overall health status.

So, for instance, if you are overall healthy, you can buy a 20-year life insurance policy for as low as US$ 30 per month and set a half-million-dollar death benefit. However, though term life insurance is less expensive than whole/universal life insurance, any insurance policy will become more expensive as you age.

Generally, universal or whole life insurance can cost as much as US$125 or more than US$200 per month, depending on your age, health status, and death benefit amount.

How to Choose a Life Insurance Beneficiary

When you purchase a life insurance policy, you must designate one or more beneficiaries to receive the policy’s death benefit in the event of your death. These individuals, you want to receive the death benefit of your life insurance policy in case they die.

For instance, a life insurance beneficiary can be:

  • Spouse
  • Parent
  • Sibling
  • Adult Child
  • Business Partner
  • Charitable organization
  • Trust

You can also choose a main (primary) beneficiary or multiple contingent beneficiaries. A contingent beneficiary receives death benefits from your life insurance policy if the primary beneficiary dies.


Life insurance policies are excellent ways to form financial protection for your loved ones in case you happen to die unexpectedly. This insurance policy can be for a fixed period or continue for as long as you pay the monthly premium amount. Life insurance policies are a great way to ease unexpected financial burdens from your loved ones in case you, the breadwinner, meet an untimely death.

See Also

What is Supplemental Life Insurance

How Much Life Insurance Do I Need

Is Life Insurance Taxable

Life Expectancy After ICD Implant

No Medical Exam Life Insurance for Seniors

Medical Insurance for College Students

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