How Does Life Insurance Work?

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Life insurance might not make headlines or trend on Twitter, but it is important to talk about. Forty-three percent of Americans say they would feel a financial burden within six months if the chief wage earner in the family died. Yet, just 59% of Americans have life insurance.

To help consumers understand various policy options, here are 10 questions you should know the answer to before buying life insurance:

1. How does life insurance work?

At its core, a life insurance policy provides your family with an amount of money, called a death benefit, should you as the insured die.

2. My employer offers life insurance. Why should I buy an additional policy?

Your employer’s plan may be affordable and easy to enroll in, but the policy may not provide enough of a monetary benefit to your family should you pass away. In addition, you may not be able to continue the policy if you change jobs.

3. From whom should I buy life insurance?

Look for a reputable company with name recognition and a history of serving consumers.

4. How much life insurance do I need?

There are two major factors to consider here: your debt, and your family’s needs.

You want enough life insurance to pay off all of your debts – such as your mortgage and car loans. Life insurance will also cover final expenses, such as funeral costs, medical bills, and legal help to settle an estate. Even if a person doesn’t have a lot of assets, sorting out the final paperwork can get expensive. Life insurance funds can help pay for these expenses without them being a financial drain on the survivors.

In addition, you want to leave behind enough money for your family to continue their current lifestyle. Life insurance can also help cover:

  • Funding college/paying off student loans: Federal student loans can be discharged upon death if the family member requests it. Private lenders, however, don’t always discharge the debt.
  • Covering stay-at-home parents: If the at-home parent doesn’t earn a salary, it still costs money to do that job if that parent dies. The expenses of engaging babysitters, nannies and day care organizations can be covered if the children of the deceased are still minors.
  • Leaving inheritance: If you want to leave money to your heirs but you don’t have a lot of money or other assets, a life insurance policy is a good way to leave an inheritance economically. You put money away in a life policy and make your heirs the beneficiaries.

5. What’s the difference between term and permanent life insurance policies?

Term life insurance provides a death benefit for a certain period of time, usually 10, 20 or 30 years, and is typically less expensive than permanent life insurance.

Permanent life insurance provides both death benefits, and sometimes may build up cash value. It’s more expensive than term insurance but never expires, provided you pay your premium.

6. Why are there so many permanent life insurance options?

Permanent life insurance can help achieve many different goals. Different goals often require different product structures. Determining which policy is right for you is something you’ll want to discuss with your insurance agent.

7. Will my life insurance premiums increase?

It’s important to know what your premiums will look like in the future. Some policies are designed to have guaranteed premiums that will never increase, and others are designed to be flexible.

8. What is involved in purchasing life insurance?

Life insurance companies will want understand the health of the individual applying for insurance coverage. This underwriting process will typically involve speaking with a medical professional to gather personal information such as height, weight, blood work and medical and personal questions. It may require a blood draw to determine certain health risks.

9. When is the best time to buy life insurance?

The sooner you buy life insurance, generally, the less it will cost. Young, healthy policyholders get great rates, but older consumers need protection, too. Bottom line – if you don’t have life insurance, talk with an agent today.

If you still have questions about life insurance, check out these helpful resources which can help you find out more about different types of life insurance and how much insurance you’ll need.