MoneyLife

How Does Life Insurance Work?

By Marc Guberti
how does life insurance work

It’s common for people to wonder how does life insurance work. Although you continue paying premiums to keep your life insurance, your beneficiaries only receive the payout only after your death. The payout will provide your loved ones with a financial safety net to protect them from the unexpected. 

What is life insurance?

Life insurance provides your loved ones with an extra layer of financial protection. The windfall in cash from a life insurance claim can help your family cover their living expenses. When you can no longer produce income for your family and are no longer with them, your life insurance can pick up the financial slack.

What are the different types of life insurance policies?

You can choose from various life insurance policies. It’s important to review each life insurance policy and determine your needs before selecting the right policy for you. 

Whole life insurance

Whole Life Insurance is the most expensive life insurance policy, but it covers you for life. Once you get a whole life insurance policy, you do not need to worry about the life insurance payouts going through. As long as you continue paying the premiums, your beneficiaries will get the payout they deserve.

Best For: People who want a set-and-forget approach to life insurance.

Term life insurance

While Whole Life Insurance is set-and-forget, Term Life Insurance is the opposite. Rather than guaranteed life insurance payouts, Term Life Insurance only covers you for a set timeframe. If you select a policy with ten years and die 11 years from now without renewing, your policy will have expired. A poorly timed policy expiration will prevent your loved ones from making a successful life insurance claim. Term Life Insurance premiums are lower than Whole Life Insurance premiums, and you can renew your policy to mitigate risk.

Best For: People who want to save money with their life insurance policy.

Universal life insurance

Universal Life Insurance is a lifelong policy similar to Whole Life Insurance. However, Universal Life Insurance starts with flexible premiums that start low and rise over time. If you pay over your premiums, those additional proceeds grow at a minimum of 2% each year within your policy. This growth will make up for rising premiums in the latter years of this policy. 

Best For: People who want lower premiums at the start of their policy and a way to earn a guaranteed return from excess proceeds.

Variable universal life insurance

Variable Universal Life Insurance is similar to Universal Life Insurance, but with a distinct difference. While Universal Life Insurance offers a guaranteed rate of return, Variable Universal Life Insurance places the excess proceeds into a mutual fund of your choice. Rather than get a guaranteed return of at least 2% per year, the mutual fund’s performance dictates the return on your money. Historically, the stock market outperforms Universal Life Insurance returns, but the past is no guarantee of future results.

Best For: People who want the benefits of Universal Life Insurance but are willing to take on more risk to potentially exceed an annualized 2% return on their excess money.

Group life insurance

Some employers offer life insurance as a perk to their employees. Most employers provide basic coverage. You can add to your policy if you need additional coverage. Group Life Insurance offers lower premiums per individual due to the group discount.

Best For: Employees within a company that provides Group Life Insurance.

What to expect when applying for life insurance

A deep dive into the question “How does life insurance work?” requires an understanding of each policy. Not every life insurance policy is for you. Browse through several policies and find out what they offer. Determine your budget for premiums, so you never miss a payment. Consider your medical status and other factors when deciding on the best life insurance policy.

Application process

Although most people know they need life insurance, not everyone knows about the application process. You will meet with a paramedic for a medical exam and answer a series of questions about your lifestyle, health, and other personal information. Some life insurance policies require additional tests to get approved.

Health screening interview and medical exam

Most life insurance policies will require a health records interview or health examination. Life insurance health screening helps a company decide what premiums to charge if they approve your application. Not all life insurance policies require health screening interviews and medical exams, but these policies come at higher premiums. 

Determining coverage

When deciding how much coverage you want in your life insurance policy, you should consider your family’s cost of living and any current debts. The loss of an income source can hurt any family. Your life insurance policy can alleviate that pain. If you find yourself struggling to get the right life insurance policy because of a bad credit score, you can use MoneyLion’s Credit Builder Plus to build up your credit.

Deciding beneficiaries 

Deciding which loved ones receive the life insurance payouts is a big decision. Some policyholders split the proceeds amongst their children, but plans can change for various reasons. It’s important to review your beneficiaries list from time to time to confirm your feelings. You’ll invest considerable money into your life insurance policy. Make sure it’s going to the right people.

Budget for monthly premiums

If you miss a single monthly premium, your life insurance policy can get revoked. The risk of losing your life insurance is why you can never miss a single payment, and you should budget accordingly. You don’t want years of premium payments and hard work to go in vain. Budgeting for monthly premiums is a concern among people considering life insurance. It’s important to consider whether you should buy life insurance or not.

Understanding life insurance payouts

When you die, your beneficiaries can file a life insurance claim and claim their payout. Life insurance companies delay the payment to review the information and avoid fraud. Only then will the life insurance claim result in the payout.

Build your safety net one premium at a time

Not every life insurance policy is right for you. Finding the one policy that fits your needs provides your loved ones with a safety net when they’ll need it the most. Now that the question “How does life insurance work” has been answered, it’s time to strengthen your safety net further.

A MoneyLion investment portfolio can complement your life insurance policy and help protect your loved ones from financial hardships. MoneyLion offers fully managed ETFs so you can invest in a diversified basket of securities with no work on your end. Get started with MoneyLion investing today.

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