How Does Life Insurance Work

How Does Life Insurance Work?

by Jeff Root.

For anyone just getting started out on their own and trying to come up with a good financial plan the question always comes up, “How does life insurance work?”

This article will help you break down this question so when you are having the conversation with others you can be the genius that explains the how does life insurance work question.

How Does Life Insurance Work – Term Life Insurance

Term life insurance is the simplest form of life insurance.  You pay a monthly premium and in the event that you were to die your beneficiary (the person you designate to receive the life insurance money) receives payment of the face value of your policy.

The word “term” in term life insurance is used to designate an amount of time in which the premium (your monthly payment) does not change.  So, if you get a $500,000 30 year term policy and the premium is $60 per month, it would stay $60 per month and not go up or down for 30 years.  At the end of 30 years the policy ends and both you and the insurance company are winners.  You, because you are still alive, and the insurance company, because they received thirty years of premiums and did not have to pay out.

Term life insurance is also the cheapest form of life insurance.  If anyone were to ask you “How does life insurance work?” I would only tell them about term life insurance because the next form of life insurance is much more complicated and expensive.

How Does Life Insurance Work? – Whole Life Insurance

There are a few different varieties of this type of insurance (universal, whole life, etc.) but what makes it different from term life insurance is, not only does it have a face value for how much your beneficiary would get if you were to die, but it also has a cash value.  This cash value works like an investment that accrues over time.  This cash value feature costs a lot more money on your monthly premium as compared to term.  Typically at least 3x more expensive – usually more.  It’s more expensive because not only are you paying for the life insurance you are paying for the investment and the management of that investment.

The vast majority of people are better off getting term life insurance and then using an investment house like Fidelity or Schwab to manage their investments.

I hope this article helped you get a better understanding of life insurance.  If you’re ready to take the next step and get life insurance quotes, you can obtain online term life insurance quotes by filling out the form on this page or you can learn more about getting deals on term life insurance HERE.  If you are just starting your research you can check out the best life insurance companies.

Either way I’m certain the next time the question “how does life insurance work?” comes up in your conversation, you will be ready to give the answer.

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