How Does Life Insurance Work? A Simple Explanation for Beginners

Life insurance is one of the most important financial products you can buy to protect yourself and your loved ones from financial hardship in case of your death. It can provide peace of mind, security, and income replacement for your family or beneficiaries.

However, life insurance can also be confusing and intimidating for many people. You may have questions like: What is life insurance? How does it work? How much do I need? How do I buy it? Where do I start?

If you are looking for a simple and clear explanation of how life insurance works and how to buy a policy, this article is for you. We will explain what life insurance is, how it works, and how to buy it in 3 easy steps.

What Is Life Insurance?

Life insurance is a contract between you and an insurance company. You agree to pay regular premiums to the company, and in return, the company agrees to pay a lump sum known as a death benefit to your beneficiaries after your death.

Your beneficiaries are the people or entities that you name in your policy to receive the death benefit. They can be your spouse, children, relatives, friends, charities, or anyone else you choose. Your beneficiaries can use the money for any purpose they choose, such as paying off debts, covering living expenses, funding education, donating to a cause, etc.

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

• Term life insurance: This type of life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. If you die within the policy term, your beneficiaries will receive the death benefit. If you outlive the policy term, your coverage will end and you will receive nothing. Term life insurance is usually cheaper than permanent life insurance for the same amount of coverage. It is suitable for people who only need temporary protection for a specific period of time, such as until their children become independent or their mortgage is paid off.
• Permanent life insurance: This type of life insurance provides coverage for your entire life, as long as you pay the premiums. It also has a cash value component that grows over time and can be accessed through loans or withdrawals. Permanent life insurance is usually more expensive than term life insurance for the same amount of coverage. It is suitable for people who need lifelong protection, cash value accumulation, and various investment options.

There are different types of permanent life insurance, such as whole, universal, variable, and indexed universal life insurance. Each one has its own features, benefits, and drawbacks. You can learn more about them in our guide on how to buy whole life insurance.

How Does Life Insurance Work?

Life insurance works by following a simple process: you buy a policy from an insurer, you pay premiums to keep your coverage intact, and your beneficiaries receive the death benefit after your death.

How to Buy Life Insurance

To buy life insurance, you need to follow some steps or requirements, such as:

• Choose a type and amount of coverage: You need to decide what type of life insurance (term or permanent) and how much coverage (the death benefit) you want to buy. This depends on your needs, goals, preferences, and budget.
• Compare quotes from different insurers: You need to shop around and compare quotes from different insurers to find the best deal for your coverage. The cost of life insurance varies by insurer, as each one has its own underwriting criteria, pricing models, and discounts.
• Apply for and buy a policy online or offline: You need to apply for and buy a policy online or offline from the insurer you choose. You need to provide personal and financial information, answer health and lifestyle questions, undergo underwriting (which may or may not involve a medical exam), review and sign the policy documents, and pay the premium.

How to Claim Life Insurance

To claim life insurance, your beneficiaries need to follow some steps or requirements, such as:

• Notify the insurer: Your beneficiaries need to notify the insurer of your death as soon as possible. They need to provide your name, policy number, date of death, and cause of death.
• Submit the required documents: Your beneficiaries need to submit the required documents to the insurer to prove their identity and relationship to you. They also need to submit a certified copy of your death certificate.
• Receive the payout: Your beneficiaries need to choose how they want to receive the payout from the insurer. They can choose from different options, such as a lump sum, installment payments, annuities, or retained asset accounts.

How to Buy Life Insurance?

Buying life insurance can be easy if you follow some tips or steps, such as:

• Determine your needs: You need to assess your financial situation and goals and determine how much and what type of life insurance you need. You can use a life insurance calculator to estimate your coverage amount or consult a professional for advice.
• Use a life insurance comparison tool: You can use an online tool or broker to compare quotes from different insurers and find the best deal for your coverage. You can also read reviews and ratings of each insurer and check their financial strength and reputation.
• Read the fine print: Before you buy a policy, you need to read the fine print carefully and understand what you are getting and what you are not getting. You need to look for any exclusions, limitations, or conditions that may affect your coverage or claim. You also need to look for any fees, charges, or penalties that may apply to your policy. If you have any questions or doubts, you should contact the insurer or an agent for clarification.
• Check the insurer’s ratings and reviews: Before you buy a policy, you should check the insurer’s ratings and reviews from independent sources, such as AM Best, J.D. Power, NAIC, BBB, etc. These ratings and reviews indicate the insurer’s financial strength, customer satisfaction, complaint ratio, reputation, etc. You should choose an insurer that has high ratings and positive reviews from reputable sources.
• Verify the policy details and benefits: After you buy a policy, you should verify the policy details and benefits and make sure they match what you applied for and expected. You should check the coverage amount, premium amount, payment frequency, policy term, cash value (if any), riders (if any), etc. You should also check the beneficiary information and make sure it is correct and up to date. If you find any errors or discrepancies, you should contact the insurer or an agent immediately and request a correction.
• Update your beneficiaries regularly: After you buy a policy, you should update your beneficiaries regularly and make sure they reflect your current wishes and circumstances. You should review your beneficiaries at least once a year or whenever you experience a major life event, such as marriage, divorce, birth, death, etc. You should also inform your beneficiaries about your policy and where to find it in case of your death.

Conclusion

Life insurance is a simple and effective way to protect yourself and your loved ones from financial hardship in case of your death. It works by paying a lump sum to your beneficiaries after your death in exchange for regular premiums that you pay to the insurer.

Buying life insurance can be easy if you follow these 3 steps: determine your needs, compare quotes from different insurers, and apply for and buy a policy online or offline.

If you are ready to buy a life insurance policy online or review your existing one, we recommend that you use our online tools or brokers to compare quotes and buy a policy today.

Remember, life is unpredictable and precious. Don’t wait until it’s too late to protect yourself and your loved ones with life insurance.