How Does Life Insurance Work?

How Does Life Insurance Work
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    For peace of mind, people buy insurance. If you endure a car accident, you want to take comfort in knowing you’ll be financially protected. This is no different for health issues or property damages.

    Likewise, some people buy cheap term life insurance to secure themselves and their loved ones at the lowest price. Some buy permanent life insurance at a higher price. But what exactly is life insurance, how do you choose from the top 10 life insurance companies, and how does life insurance work?

    How Does Life Insurance Work?

    Let’s cover the basics first. Should a life insurance policyholder pass away, a life insurance policy can provide financial support for your beneficiaries with a death benefit. For the most part, life insurance protects them if you can’t. The death benefit can take care of bills, funeral expenses, college tuitions, mortgage payments, and more.

    See related: Life Insurance 101

    How To Buy Life Insurance

    Buying life insurance can get pretty confusing too. Should you buy direct, from a call center or an agent? You should always work with an independent life insurance agent like Life Insurance Blog.

    Most shoppers are unaware that life insurance rates are fixed by law. There is no difference in price if you buy directly from the company, a call center or an agent/broker. The major difference is availability. If you buy direct, you’re stuck with one company.

    If you work with an independent agent like Life Insurance Blog, you get access to the best life insurance companies. Using an independent agent will make sure you’re applying with a company who will offer you the best rate.

    The Process

    The following steps should be taken to obtain life insurance. We will address the life insurance process below.

    1. The initial step is to shop online for life insurance, but you must know what to look for to do that effectively.
    2. Conduct a detailed assessment to figure out how much life insurance you will need to cover your obligations in the event of your passing. This assessment includes the policy’s duration and amount.
    3. Several of your financial commitments will be short-term and some are long-term.
    4. After you determine what you require, you can look over quotes from the top A-rated life insurance companies and choose the one with the best rate that accommodates your needs.
    5. Shop over the internet with a third-party life insurance agency like Life Insurance Blog. You are advised to do this with life insurance agents who are experts – not a call center.
    6. Afterward, you’ll need to fill out an application and complete the underwriting process. This will be comprised of a detailed background check, assessment of medical records, and possibly a paramedical exam. There may be a No Exam life insurance option available to you depending on the policy type and benefit amount. If your policy requires a medical exam, Life Insurance Blog will schedule it with you at a time and place of your choice. There is no fee for the exam.
    7. After everything is done and completed, the life insurance company will take approximately 6 weeks to make their decision. No Exam policies can vary in length from instant to a few weeks.
    8. Once approved, the carrier will send out the policy by email or traditional mail and your coverage will be activated.
    9. After approval, your life insurance policy can be paid for either monthly, quarterly, or annually. The latter option comes with an approximate 3 to 5% discount, so I suggest that option if you can manage it.

    TIP: Compare life insurance rates with all top rated companies with our instant life insurance quoter and ask for an online application.

    Who Should Purchase Life Insurance?

    There are several good reasons to purchase life insurance, but if you don’t require it, is it still worthwhile?

    Yes, because if you’re someone with optimal health, you’ll never be as healthier than you are today. You may not be preparing for your future right now, but if you intend to get married and start a family, your rates will increase with each passing year. Your financial requirements change as you get older.

    If you already have children, or you care for someone with special needs or a family member- a life insurance policy is vital. If you’re married to someone already and your spouse is dependent on you, life insurance is even more important.

    If you’re someone who is worried about being placed in a seniors care facility because of your inability to pay for a decent one, consider purchasing Long-Term Care insurance. You can also look at buying a life insurance policy with a long-term care rider. What if you require an SBA loan for a collateral assignment to launch your company or purchase property? Then you may need a life insurance policy in the event that you die prior to the loan being repaid.

    Life Insurance Types

    Let’s go over the various life insurance types and how they differ from one another:

    How Does Term Life Insurance Work?

    If the insured passes away within a specific term, a term life insurance death benefit is paid out. For instance, if you bought a 20-year policy, your beneficiaries will get paid if you die within that period. If you survive past the the term period, there will not be a death benefit available. The amount of premiums paid during that duration is gone. Term life insurance is short-term life insurance.

    To reacquire life insurance coverage, a new policy must be bought. You can purchase one at the end of the period or before it ends so you’re not getting a gap in coverage. The premium rate of your life insurance may increase or be hard to get if your health has taken a turn for the worse.


    Term life insurance is less expensive in comparison to whole life insurance. Cheap term life is usually only a few hundred dollars, depending on your age and health.  This is opposed to whole life coverage. A whole life policy might be ten times that number, or thousands of dollars annually.


    Life insurance shoppers who are younger might have a greater need for life insurance. This is particularly true if they have dependents, but currently might not have a high income. Therefore, term life insurance might be better suited since it offers security for a specific duration. That said, it might be prudent to change from term to whole so that the coverage period lasts forever.

    With regards to beneficiaries, some are contingent, and others are primary. Contingent beneficiaries are individuals on your policy that are known as a ‘backup’ in the event of something occurring.

    How Does Whole Life Insurance Work?

    Sometimes referred to as permanent life insurance, whole life insurance provides coverage for the remainder of your life. There is a guaranteed life insurance payout amount and it doesn’t expire after a set term. This is assuming that all life insurance premium payments are met.

    Whole life or Permanent Life insurance is comprised of several subcategories—Conventional whole life, universal life, variable life, survivorship life, and variable universal insurance. More information about these forms can be found here.


    Whole life insurance is quite costly and is usually the most expensive type of life insurance. The premium is sometimes paid annually, and the rate tends to remain the same each year.


    Whole life insurance grows cash value while you pay into it, and it comes with an investment component. The value increases at a consistent rate and is tax-deferred, so you needn’t pay taxes as the money builds. The surplus of funds can either be borrowed as a loan with interest or can be added to the death benefit.

    If your situation changes, you can close the policy for its cash value—but that will nullify your coverage. Several people with life insurance also have yearly dividends paid out on whole life policies. This is based on the annual financial surplus for the past year.

    What Type of Life Insurance Policy is the Best?

    Term life insurance tends to be less expensive than whole life since it’s only for the short-term. That said, term life insurance isn’t the better option by default.

    There is no one size fits all life insurance type. No policy is better when compared to another. Instead, the optimal option for you is based on your specific financial needs. Think about your life stage, finances, and long-term objectives. Term life insurance might only set you back $300 annually. A term life policy might be more suited for coverage requirements that are immediate or short term.

    Alternatively, there are shoppers who would prefer to buy term life insurance and have the difference invested for a greater return.  However, some opt to pay into a permanent policy with an existing lifetime investment component. Consider these options and select the right one for your needs.

    Don’t forget: your life insurance premium is established by underwriting. Underwriting includes your health, age, lifestyle, location, and other aspects. There’s not an individual set rate. Make sure you compare several life insurance quotes prior to making a choice.

    How Does Life Insurance Work When You Die?

    When the insured dies, their beneficiaries – generally their friends or family, would receive a check from the insurance company for the total coverage amount. It doesn’t matter if they purchased the life insurance policy a week or 5 years ago. The policy just needs to be in force.

    With that said, several things must occur for that to happen.

    The money must be claimed by your beneficiaries. The insurance company won’t seek the beneficiaries out. As such, it’s ideal for the beneficiaries to have a claim filed with the organization right away.

    The claim documentation is a basic form which must be sent in addition to a copy of the death certificate. The faster this is sent, the quicker the life insurance company can send you a check. It’s vital that you explain this to your dependents you have a policy with and tell them the amount of life insurance you own. This is something your agent can help you with.

    The life insurance carrier has a right to dispute a claim. If the insured passed away within the first 24 months of the date the policy was bought if the company things fraud is at play. Many companies will deny a claim as well if the death is ruled a suicide within the first 24 months (this is known as a suicide clause). If the death claim is standard, the organization can send a check to the beneficiaries almost immediately.

    What are Life Insurance Beneficiaries?

    The life insurance beneficiaries are who receives the death benefit if the insured were to die. A life insurance beneficiary is an entity, trust or any person that is listed by the insured to receive all or a part of the assets if the insured passes away.

    Life insurance beneficiaries are made up of Primary Beneficiaries and Contingent Beneficiaries.

    • Primary Beneficiary: This is the “primary” or first to receive the death benefit. You can have more than 1 primary beneficiary. You can also select different benefit percentages. For example, if your primary beneficiaries are your siblings- You could select a 50% split between the two. You could also select a customized percentage like 25% and 75%.
    • Contingent Beneficiary: This is the “secondary” beneficiary or next in line beneficiary. If your Primary Beneficiary were not able to receive the benefit, you Contingent would receive. An example scenario would be if you selected your spouse as the Primary Beneficiary and your 2 siblings as the Contingent Beneficiaries. If you and your spouse were to get in a car accident and pass away, your spouse (Primary) would not be able to receive the benefit and your contingent would get the death benefit.

    The life insurance death benefits will be paid when the insured passes away and the beneficiary or beneficiaries file the claim with the carrier. A copy of the death certificate that is certified needs to be submitted.

    How Much Life Insurance Do I Need?

    One of the most common questions asked is, “How much life insurance do I need?

    The easiest method to find your target life insurance benefit amount is by a basic calculation. Calculate all of your short and long term financial obligations. Take that sum and subtract all of your assets – and this will be your initial life insurance benefit target.

    Knowing what to include in your benefit calculations can be a bit confusing. In order to simplify this, we’ve put together some popular rules to calculate an appropriate coverage amount.

    1. DIME Formula
    2. Buy 10 Times Your Income
    3. Buy 10 Times Your Income and Add $100,000 per child for college

    DIME Formula

    With the DIME Formula (Debt, Income, Mortgage, Education), you’ll use a more detailed approach than just multiplying your income.

    • Debt: Calculate all of your debts, but exclude your mortgage. You will also want to estimate what your funeral costs will be.
    • Income: How long will your family need your income to be replaced? Take your income and multiply it by the number of years your income will be replaced.
    • Mortgage: Find out how much in remaining on your mortgage.
    • Education: How much will it cost to send your children off to college?

    Work With Life Insurance Blog

    Choosing the top life insurance company is difficult when shopping by yourself. You should always work independent life insurance agents who are licensed and experienced.

    At Life Insurance Blog, we don’t work for any life insurance company -we work for you. We have access to dozens of the best life insurance companies and impartially shop your case. We’ll provide you customized quotes so you don’t waste time applying with a company that may rate you up resulting in a more expensive policy. We’ll research the best companies that you can qualify for.

    Our service is free and we’ll help you from start to finish. We’ll provide you quotes, answer all your questions, help you apply and update you throughout the process up to your approval.

    Give us a call or fill out our free instant life insurance quoter on this page. Let’s see how we can help you protect your loved ones today.

    Thank you for reading our post, How Does Life Insurance Work?. Please leave a comment or question below.

    Michael Quinn

    Michael Quinn

    Michael is a licensed life insurance agent, expert & owner of Life Insurance Blog. LIB has helped thousands of shoppers understand life insurance and secure affordable coverage.

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