An industry official explains how life insurance works


If you are like most American adults, chances are you have heard of life insurance and know it is what you need. But what is it and how does life insurance work?

Life insurance is a way for you to leave money to someone you care about when you die.

At a basic level, it is an agreement between you and the life insurance company. You agree to pay them, and they in turn provide you with insurance. You can think of it as a subscription service: as long as you pay the premium, you will be protected.

What to cover? Well, it really depends on you. Maybe you want to make sure that your spouse can pay the mortgage, no matter what happens to you. Maybe you want to make college affordable for your kids. Or, if you are not around, you may just want to make sure that your employees can pay daily bills.

No matter what your goals are, the right life insurance should be a simple and affordable way to reduce the risk of reaching your goals.

Notice clause

Premium: The amount you paid in exchange for insurance.

Guaranteed amount (Also called denomination, death benefit or expense): The amount your person (beneficiary) receives if you die. You set it up in advance when you buy the policy, and it will be passed on to them tax-free.

Beneficiary: The person who will receive the insurance amount.

the term: The length of time your policy is in effect-usually 10, 15, 20, 25 or 30 years, but you can also choose to be covered for life, depending on the type of insurance that is right for you.

Propose compensation: If you pass away, your beneficiary can apply for the insurance amount process.

How does life insurance work?

Life insurance works like a subscription model: as long as you pay the premium, you will be protected. This means that if you die, your beneficiaries should receive the money (tax exemption), but it is worth noting that the claim may be rejected for various reasons, such as fraud or material misrepresentation (basically, in the application or claim dishonest).

The amount of premiums you pay depends on three factors:

  • Your personal characteristics (age, health, gender, etc.)
  • The type of life insurance you choose, mainly between regular and perpetual
  • The amount/scale of your insurance policy (how much do you want to leave the beneficiary)

The life insurance company will collect all this information when you apply to determine your premium. This process is called “underwriting.”

Once you are approved and accept your offer, you will start paying premiums. If you die during the effective period of the policy, your beneficiary can file a claim to obtain the amount of insurance you purchased.

Do I need life insurance?

Now that you have mastered the basics, you may want to know if you need life insurance. To find out, ask yourself the following questions: Will your absence cause financial pressure on anyone? If so, the answer is yes, you need life insurance. Let’s take a look at five main reasons you might need life insurance.

1. You contribute a substantial portion of your household income

If you die during the validity period of your policy, you can think of life insurance as an alternative to income. If you support (or will support) your spouse, children, parents, grandparents, siblings, or others, and your loss of income will affect whether they can pay for food, housing, or childcare, you need life insurance.

2. You have children

Anyone with children should consider life insurance, regardless of whether they have a salary. Even if you do not lose income to replace it, you may still provide the care that your family has to pay when you are away. Life insurance can also make a meaningful contribution to college savings.

3. You have a mortgage or other joint debt

If you have a loan signed by someone else, they may need to repay the loan in full after your death. For example, if your parents signed a student loan for you, or if you and your spouse, partner, or siblings jointly borrowed a mortgage, personal loan, or home equity line of credit, consider life insurance.

4. You run a business

Life insurance is especially important for small business owners. You may have used personal assets (such as your house) as collateral to assume business debt. In this case, life insurance can help pay off debts that your family may have to bear.

In addition, if you jointly own the business, a life insurance policy in which your business partner is the beneficiary may allow him or her to purchase your shares from your heirs at the price you decide now. This can prevent situations in which your partner cannot afford your share of the business, and your child has no business income or part of your sales income.

You may need to consult a lawyer to ensure that the settings are appropriate.

5. Life insurance through work is not enough

Probably not. If you can get a group life insurance policy at your workplace, there is usually no harm in participating, especially if it is included in your benefit package. However, if you fall into any of the above categories, the death benefit included in your work insurance policy may not be enough to meet the needs of your beneficiaries.

The group life insurance provided by the employer is usually at a lower fixed dollar amount or one to two times your annual salary, rather than the 10 to 15 times that financial experts usually recommend.You can use a more accurate calculation of your needs Online calculatorAs provided ladder.

None of the above apply?

If you don’t belong to any of these groups, you may not need life insurance now, but make sure to reassess when there are major changes in your life, including when to assume debt. Also, remember that buying life insurance when you are young can help you lock in a better price.

This is a guest column written by Liana Corwin for The Penny Hoarder. Ladder is a digital life insurance company that sells term life insurance rates that can change with the changes in the financial needs of customers. She is Ladder’s communications director and financial knowledge blogger edit.


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