How Does Life Insurance Work

by | Dec 26, 2015 | Types Of Life Insurance


Life insurance is not high on the list of things people walk to think about, or chat with friends about in their spare time. Anything that involves acknowledging our own mortality is by definition hardly a recreational activity! However, rather than letting it get you down or having the question of “How Does Life Insurance Work” in the back of your mind as something you are putting off, if you will take just a little time to find out how life insurance works, you can actually turn the whole prospect into something positive, and here’s how: [ad#ad-2]
From the moment you buy your policy, you and your loved ones will have the peace of mind that comes with knowing that in the event of your death they won’t be additionally burdened by financial hardship or uncertainty. It’s worth it, and a good site on life insurance will help you to cut the learning process from weeks to days or hours.

There are two main types of life insurance policies that you can choose from: term life insurance, and permanent life insurance, which has several subtypes like whole life, universal life and variable universal life.

So how does term life insurance work?

Term life is the simplest form of life insurance, where the policyholder buys a policy for a given term, usually between 10 and 30 years, with a monthly premium to be paid to the insurance company and a defined amount to be paid out to the policyholder’s beneficiaries (his/her loved ones), in the event of his/her death. Long sentence, but it’s a simple concept. If the policyholder survives the term policy nothing is paid out. The fact that most people with term life insurance do outlive their policies keeps their cost low. However, unlike permanent policies this policy does not have any kind of investment aspect to it, so you cannot borrow money against it or use any positive cash value that may have accrued in the policy, for investments.

How does whole life insurance work?
Whole life, as the name suggests, is in effect for your entire life. A payout will be paid to those you list as beneficiaries, upon your death, as long as your monthly payments or ‘premiums’ are kept up to date. The main thing to know about whole life insurance, or other permanent life insurance types for that matter, is that the cost of your premiums is usually quite a bit greater than they are for term life insurance, for similar coverage. Sometimes this difference amounts to several times the cost of a term life premium. However, with whole life you do get some benefits: you can borrow against the cash value that builds up in the policy over the years, and there are other ways you maybe able to use this cash value to invest. Many experts (who aren’t actively engaged in selling whole life insurance!) point out that there are probably better ways to save and invest for retirement than buying a whole life policy. At least the whole life premium normally stays the same for the life of the policy.

How does universal life insurance work?
Universal Life, is permanent insurance like whole life, except that the cash value is adjusted each month with interest, and debited by a so-called cost of insurance (COI) charge, plus miscellaneous fees. The upshot is that the premium payments are usually flexible with universal life insurance, depending on how much the interest credit adds to the cash value. ‘Universal’ refers to this flexibility one has in the premium payment amounts each month.

How does variable life insurance work?
The investment component of this policy usually allows the insured to be more aggressive with the cash value of his own policy, and invest in a separate account containing financial instruments like stocks, bonds, etc. within his insurer’s own portfolio. As you might imagine, with this flexibility comes increased risk, depending on the performance of the underlying securities. The ‘variable’ in the name refers to the fact that he overall value of the policy will fluctuate for this reason.

If the answer to the question of how does life insurance work can be largely given in a short article, you can see that deciding on the right policy might not be as difficult as you might have feared either. You should have a general idea already of what will work for you. Keep reading!

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