How Does Life Insurance Work?

If you’ve never purchased life insurance, you may be wondering where in the world to start.

The good news for you is that life insurance is actually pretty simple to maneuver once you understand a few basic ideas about how it works.

In this article, we’ll unpack how life insurance works, what you need to do to apply for life insurance, and the steps you should take to guarantee you get the best rates possible from a reliable insurance provider.

Do You Need Life Insurance?

The first thing you should understand is the importance of purchasing life insurance. To do so, you need to ask yourself a simple question: If you were gone tomorrow, would your family be okay financially?

Life insurance can give you the freedom and peace of mind to answer that question with a resounding yes.

With an adequate life insurance plan in place, you can protect your family or your business in the event of a premature death. The truth is, anyone who has people financially dependent on them should have life insurance.

With that being said, not every person needs life insurance. As you decide whether or not you need coverage right now, consider the following:

  • Co-signed debt: Would your family or friends be saddled with the debt from, say, a credit card or a student loan they co-signed on if you passed away?
  • Mortgage: Would your loved ones rely on your income to pay the mortgage if you passed, otherwise having to move?
  • Estate taxes: Do you have estate or inheritance taxes that would burden your family?
  • Inheritance: Do you want to leave an inheritance to your descendants, or perhaps fund their college education?
  • Business: Do you want to ensure your business would stay afloat financially in the wake of your death?
  • Income replacement: Most significantly, would your spouse, children, or others who depend on your income struggle to pay for everyday needs?
  • Continued care: Do you have children, a spouse, or parents who will need funds to be cared for after your death?

While some individuals may not need life insurance, chances are you do. If you have debt, dependents, or a business to protect, you should consider purchasing life insurance today.

The Basics

The general answer to “How does life insurance work?” is this: you pay your life insurance premiums to keep your policy in force and when you die, your beneficiary(s) get the death benefit of the policy you purchased, TAX-FREE!

You’re basically transferring the risk from your family carrying the burden to the insurance company in case something (god forbid) happens unexpectedly.

Life insurance policies come in all shapes and sizes as you can choose the length of time your policy covers and the amount of coverage you need. You can also add additional benefits to your life insurance policy called riders.

In that respect, life insurance is flexible. As you age, your family grows, and your needs change, so can your life insurance needs. Before we delve too deeply into all the possibilities, let’s take a look at the process of getting covered, from applying to paying your premiums.

How Obtaining Life Insurance Works

The process of obtaining life insurance can be broken down into four easy steps, which are outlined below.

  1. Apply for life insurance: Complete an application and take a medical exam. You have to qualify for coverage based on your health and lifestyle.
  2. Receive an offer: The life insurance company will make an offer after looking at your labs and reviewing your medical records.
  3. Accept the offer: By making your first payment, you’ve accepted the offer and your policy is now in force.
  4. Pay your premium: As long as you pay your premiums, the coverage stays active. It’s that simple.

It really is as simple as meeting the requirements for application and making your payments to keep your coverage up to date.

Step one and step two above are known as the underwriting process, where the life insurance company sets out to determine how much of a risk you are to their company.

Using the results of your medical exam and your application answers, they will place you in a rate class that dictates how much you will pay each month, known as premiums.

How Life Insurance Companies Assess Your Application

The riskier your health and overall lifestyle are, the higher premiums you can expect to pay.

Your application will most likely look at the following criteria in an attempt to get a clear image of what your health looks like:

  • Age: the older you are, the more expensive your life insurance premiums will be. That’s why we recommend getting coverage as soon as you need it.
  • Height and weight
  • Medical conditions: diabetes, high blood pressure, liver problems, etc. could impact premiums as well.
  • Family health history: if there is a history of cardiac disease or cancer that led to death in an immediate family member, your rates could be affected.
  • Tobacco, drug, and alcohol use
  • Hobbies, profession, driving record, and even travel destinations: the more dangerous these are, the more impact you’ll see on premiums.

The underwriting process will involve a medical exam as well. While you can opt for a no exam policy (it’s the best case for people who might not be able to get covered otherwise), the elevated risk of foregoing an exam means higher premiums.

So if you’re in good health, you probably want to opt for coverage with a medical exam. Once your results are in, you’ll be classified into a specific rate class.

While different companies weigh some factors more stringently than others (like specific health conditions or habits), they all place applicants into really similar categories.

These categories usually range from Preferred Plus to preferred to standard plus, standard, and substandard categories.

Typically, there is an addendum for smokers, with preferred tobacco and standard tobacco rates which are more expensive than regular preferred and standard rates.

Important Information

Life insurance is a unilateral contract, meaning you can cancel your individual life insurance at any time with no fees – you just lose your coverage.

In other words, you’re NEVER locked into a life insurance contract. The life insurance company, on the other hand, is.

If you have an in-force life insurance policy, your life insurance company cannot cancel on you no matter what your health situation is.

If it’s a 20-year term, they have to insure you throughout the full 20 years regardless of future health or lifestyle. It doesn’t matter if you were in excellent health when you applied and take a sudden turn a few years down the road. You’re covered.

You also have full coverage from day 1. If you buy a $500,000 policy and get hit by a bus the day after you accept the offer, the life insurance company is on the hook for the full $500,000 of coverage. You get the full peace of mind knowing your family is protected.

The ONLY 2 reasons a life insurance policy won’t pay out is if you commit suicide within the 1st 2 years (in most states) or if you lied on your application.

After 2 years of your life insurance policy being in force, your coverage is out of the contestability period, which means the life insurance company has to pay the death benefit for any cause of death and cannot contest it.

If you have any other questions about how life insurance works, please don’t hesitate to pick up the phone and give us a call.

We are happy to answer any questions and get you on the path to affordable life insurance rates with a solid provider.

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About Jeff Root

is the owner of He's an independent life insurance agent who has helped 1,000's of consumers purchase life insurance online and over the phone.

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