How Does Life Insurance Work? 5 Basics You Need to Know

Posted : June 06, 2017

how life insurance works

How Does Life Insurance Work? 5 Basics You Need to Know

Have you been wondering whether or not to get life insurance? Wanting to know how does life insurance work? Click here! We're sharing 5 basics you need to know.

Keyword(s): how does life insurance work

Shockingly, about 30% of American households don't currently have life insurance!

Even those that do have coverage have about a $320,000 gap between the amount of coverage they need and the amount of coverage they currently have.  

Often, it's because they don't understand life insurance, or think they can't afford it.

In this post, were answering the question, "how does life insurance work?"

We're telling you the 5 basics of life insurance you need to know. 

1. You Need It

Before we answer the question, "how does life insurance work?" we're going to hit you with a hard truth: 

You need it. 

If even one person relies on your income, like a spouse, parent, or child, not having coverage is incredibly dangerous to them. 

Without life insurance, your loved ones could lose their home, face financial ruin, and even have other investments seized.

Remember that life insurance isn't saying "Your life is worth $200,000." 

Instead, helps to protect your family if you die early and leave them without your income. Especially if you have debt, mortgages, and education savings plans for your children, you need it.

2. Know The Characters

There are 4 main people involved in life insurance. They are:

The Insurer

The insurance company giving you coverage.

The Beneficiary

The person who will get the death benefit when the insured dies. 

The Owner

The person who owns the policy and makes payments to the insurer.

The Insured

The person who is being covered by the insurance plan.

3. There Are Two Main Types

These are term and whole life (sometimes called permanent) insurance

Term insurance is the most affordable option, and covers you for a specific period only (like 20 or 30 years.)

Whole life insurance covers you for the entire length of your life. It also comes with a cash value to help you save a certain amount.

There are lots of different type of whole life insurance, which will also include an investment component. 

4. It's A Contract

We know you've probably heard the term "policy" thrown around a lot in discussions of life insurance. 

Essentially, a "policy" is a type of contract. 

This contract exists between the insurer (again, that's the life insurance company itself) and the insured. 

Your premium payments are the amount of money that you put towards paying for your insurance plan. The insurer holds onto these premiums and in return, gives you a death benefit when you die. 

A death benefit (usually a lump sum) can either be paid directly to the beneficiaries, or to lenders or creditors if you owe any debt. 

The type of death benefit you get depends on your specific policy.

5. It's Not An Investment

Life insurance isn't a strategy to add to your investment portfolio

Instead, it's used to manage the risk in your life.

Sure, some policies may offer tax benefits or even have an investment strategy involved in them. Still, this isn't something you should see as a part of your investment plan.

You Can Answer The Question "How Does Life Insurance Work?"

Thanks to this post, you're no longer in the dark about the benefits and facts of life insurance. 

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