HOW DOES LIFE INSURANCE WORK

In this article, you will learn about what life insurance is, the different types and how they work.

We live in a world filled with risks and uncertainties. We can’t predict what will happen the next day or even in the next few minutes. For example, the Covid-19 pandemic was an unforeseen disease outbreak that crippled a lot of daily human activities and business organizations worldwide. Insurance companies help individuals and businesses establishments cushion the effects of these unforeseen/unwanted events for an agreed amount of paid premium.

In the United States, there are a host of Insurance policies that protect its citizens against the financial burden caused by unplanned events. One insurance plan that stands out from the rest is life insurance. 

We work so hard to make sure we keep our loved ones happy and comfortable, far away from the hardships of this world. We want to make sure that at the end of the day our toils are not in vain. A life insurance policy might be your only security that doesn’t happen.

Life insurance is an agreement between individuals and an insurance company to insure listed beneficiaries in the eventuality of death. Just like every other type of insurance, insurance companies collect premium payments in exchange for providing financial support for your loved ones or as the case may be, anybody you like when you are no more.

TYPES OF LIFE INSURANCE AND HOW THEY WORK

There are basically 7 types of life insurance and they all serve different purposes. Some of them last for a lifetime and the others last for a short term. Confusing right? Not to worry we will simplify everything here and make you understand them.

TERM INSURANCE (PURE LIFE INSURANCE)

This is a more familiar type of life insurance it expires over a period of time. Here is how it works: you pay a premium to an insurance company to be insured for a period of time. If you die within that time your listed beneficiaries will receive a sum of money called death benefits. 

The death benefits can be paid as a whole or spread out in monthly instalments. Sometimes it can also be paid as an annuity. 

In a scenario where the policyholder lives beyond the year, the insurance policy covers the policy expires without the beneficiary being able to make claims to the money paid.

WHOLE LIFE INSURANCE

Whole life insurance like the name implies lasts for the policyholder’s whole life, it doesn’t expire like Term Insurance as long as you keep paying your agreed premium.

The rate of your premium also never changes over time and it comes with a fixed rate cash value that can be used to acquire loans or pay for the policy.

What this means is that the premium is divided into two, one for the death benefits and the other for a saved cash value which accumulates interests. 

The downside to this kind of insurance policy is that it is expensive.

UNIVERSAL LIFE INSURANCE

Just like the whole life insurance, it comes with an unfixed cash value which can be used to pay for the low premium rate. You can decide to change the death benefits and cash value at any time you like without getting a new policy.

INDEXED UNIVERSAL LIFE INSURANCE

This is a type of universal insurance but it differs in a way. It’s a peculiar type of policy because the cash value is linked to stocks and bonds. The S&P 500 is an example of this type of life insurance.

If the stock market performs well it means the policyholder will get gains on the cash value.

VARIABLE LIFE INSURANCE AND VARIABLE UNIVERSAL LIFE INSURANCE

When you buy this type of life insurance policy the premium will be divided between the death benefit account and the cash value account. The cash value is then invested in mutual funds.

If the mutual funds market does well you can get a sizeable amount of gain on your investment but can also run at a huge loss if the market crashes so this requires constant monitoring.

FINAL EXPENSE LIFE INSURANCE

This kind of life policy is best suitable for older citizens. It covers costs a policyholder incurs during the process of and after death. The medical and funeral bills are covered by this policy. 

This policy is expensive and covers little compared to the other types of life insurance policy. There are two types of final expense life insurance. Simplified and Guaranteed issues are the two types of Final expense life insurance.

Basically, with the simplified issue, you won’t be medically examined to get the insurance but you will have to fill a questionnaire and if you have a chronic disease or are over a certain age you might not qualify for this policy.

For the Guaranteed issue you do not go through a medical examination and also do not have to fill any questionnaire but people with dementia or Alzheimers won’t be able to qualify for this policy because they won’t be to answer questions when questioned by insurance companies.

GROUP LIFE INSURANCE (GROUP TERM LIFE INSURANCE)

This type of life insurance gets more expensive as the policyholder gets older. It is provided to employees by their employers. It doesn’t cover much as it only provides the policyholder’s beneficiaries can only access death benefits that are equivalent to 1-2 months of the deceased salary.

 All in all life insurance policies help lessen the emotional trauma of losing a loved one, employee or even a mentor.