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A couple talking to an insurance rep, learning about how life insurance works

Life Insurance 101: Rates, Policies, and Proper Coverage

How Does Life Insurance Work?

Death is not an easy topic for many people, whether you’re discussing plans for yourself or a loved one. Many people find the subject of death incredibly uncomfortable and tend to avoid it altogether. Unfortunately, this is not a topic that you can just ignore.

If you wait to deal with death until it is too late it will put a lot of extra stress on you and your family. While death is traumatic, it is also incredibly expensive to deal with. This is why many people decide to enlist in a life insurance policy before the unthinkable happens.

What is Life Insurance?

Life insurance is a kind of contract. Those who have a life insurance policy make an agreement with a life insurance provider that they will pay out money to designated beneficiaries upon death.

How Does Life Insurance Work?

Life insurance works differently between policies and companies. Ultimately, the result is the same. Policies are taken out before the individual passes. For the most part, this is done long before you think that a problem may arise (as this can affect rates).

If something happens, you contact the policymakers and they fulfill their end of the contact. Often, this amounts to a lump sum of money given to one or several beneficiaries you name in your will. Investigations may ensue following death as certain circumstances (such as suicide) can make a contract obsolete.

How are Life Insurance Rates Determined?

Of course, these contacts are not free. All life insurance policies require some kind of payment. You can’t get something for nothing. Not everyone pays the same rate, and rates are largely calculated from a business perspective. That means that it makes more sense to make someone who is more likely to die pay more.

Individuals who have preexisting conditions or family histories of complications often have higher rates. Likewise, older individuals tend to have higher rates than children. Not disclosing this information accurately can result in them failing to pay out the other beneficiary.

They also don’t all pay equally. You can expect that the amount you pay into a policy will offer a higher payout in the end. Paying for longer periods of time (or higher monthly premiums) means that you will likely get a bigger payout.

What to Look For in a Policy

When finding a policy that is right for you, there are a few factors to consider.

  • Debt: How much debt do you currently have that would be pushed off to your loved ones in the unfortunate event of your death.
  • Income: Do you support a family on a certain income? Consider having a policy that could act as income replacement.
  • Mortality costs: How much is the average funeral? What are the expenses for your desired burial?
  • Descendants: Do you have children or grandchildren? If you have people that rely on you, look into life insurance that would keep them covered.

What to Avoid

Make sure you find a company that appears to have your best interest in mind. As morbid as it sounds, offering life insurance policies is still a business. Make sure to do your research and find companies that do not have a lot of complaints against them.

There are several companies out there who will make payouts a struggle and end up causing more stress than anything to a family. Consider getting in touch with a life insurance agent for them to help you get what you need.

Term Life Insurance vs. Permanent Life Insurance

Life insurance can be set up in one of two ways. With term life insurance, you only get coverage for a certain period of time. Term life insurance policies are often taken out to offer some additional coverage in the event that an untimely passing would leave your loved ones with enormous amounts of debt.

Many parents take out these term life insurance policies for the duration that their children are not old enough to support themselves. Some even only take out these temporary policies if they are currently in the middle of big debts (such as with a big mortgage).

In many cases, though, people want to have coverage that covers the span of their entire lives. Permanent coverage is often taken out as a precautionary measure for individuals to ensure that their funeral costs (and a little extra) are completely covered. These policies offer the ultimate coverage for beneficiaries.

The downside here is that these policies are a lifelong obligation.

Top Life Insurance Policies

Consider looking into these top insurance companies if you don’t know where to start.

Everyone has different needs when it comes to finding a life insurance policy, so be sure to ask the right questions and find what works best.