How Does Life Insurance Work & Why You Need It?

Written by Rob Pinner

Welcome to EasyQuotes4You and thank you for visiting our site. Today we are going to talk about exactly how does life insurance work & why you need it.

How Does Life Insurance Work?

how does life insurance work

Life Insurance is a contract between you (the insured) and the insurance company (the insurer). This contract or policy is a promise from the insurer to pay a designated beneficiary a tax-free lump sum of money in the event you die.

In return, you (the insured) agree to make a recurring premium payment to the insurance company as long as the policy stays active.

Why do I need Life Insurance?

why you need life insurance

Let’s face it; basically, every one of us has heard about insurance and its many types — car insurance, life insurance, health insurance, homeowners insurance, travel insurance and more.

But of course, our focus here is on life insurance. In today’s world, insurance and its processes can seem a bit confusing and difficult to understand.

In essence, some people may actually find it hard to get a grasp on what they really want or need. This is especially true for life insurance.

You should understand that life insurance is very important for just about every household out there. And as you probably guessed, it’s meant for those who have loved ones that depend on them, especially financially.

The key point here is that life insurance covers the financial needs of your dependents (family) in the event of your death.

With this in mind, one can easily tell that life insurance is not an option but a necessity for those who know the importance of having a sound financial plan for now and the future.

Moving forward, the good news is, you don’t really have to spend a fortune to get coverage. Yes, depending on the policy you choose, life insurance is very affordable.

You should take your time to do your research and of course, stick to the coverage that’s sure to work great for you and your loved ones.

Still contemplating getting life insurance today? If yes, here are a few reasons why you should take the plunge right now.

You Need Life Insurance to Protect Your Loved Ones

How Does Life Insurance Work & Why You Need It?

As mentioned earlier, it’s incredibly important for the benefactor of every family to buy life insurance as soon as possible.

Yes, with the right type of life insurance, you can be sure of protecting your family and meeting their financial needs if you pass away.

For the most part, life insurance makes it possible for your partner and kids to sustain their standard of living should you die unexpectedly.

That said, it’s basically your responsibility to quit procrastinating and of course, plan towards getting adequate coverage.

Of course, you wouldn’t want your loved ones to look helpless when bills begin to add up following your death, right? Just get life insurance today and you’re good to secure their future!

You need Life Insurance to pay off debts

How Does Life Insurance Work & Why You Need It?

Here’s the thing; a person’s death doesn’t wipe off debt — in fact, that’s the time when things get more complicated.

For instance, should you pass away, your spouse could end up bearing the burden of outstanding debts like a mortgage, car loans and more.

And unfortunately, these (coupled with other expenses) can quickly add up and leave your family with extra financial burden.

But of course, the good news is, you can be in control of the situation if you can just make the decision to buy life insurance today.

So yes, your family (spouse, parents, and kids) will only have to accept whatever life brings them and of course, worry less about debts and other lingering expenses.

You can use Life Insurance to create an inheritance

use life insurance for inheritance

Do you know that you can create an inheritance for your kids when you buy an insurance policy?

Well, if you didn’t, now you do!  With the right insurance policy, you can leave a legacy for your children even if you don’t have any other assets to pass to them. 

Life insurance can also be used to fund a special needs trust.

The tax free lump sum will come in handy when your family needs money to take care of a thing or two in the future, and if your children are matured enough, they can invest the payout, so it has the potential to grow in value. Life Insurance comes tax free to your beneficiaries!!

Life Insurance helps increase financial security

How Does Life Insurance Work & Why You Need It?

Ever given thought to how your spouse and kids will feel when you’re gone? Well, there’s no doubt that they’re going to feel bad, but of course, you can still do a few things to ensure that they get the best out of life even in your absence.

When you purchase the right life insurance policy, you’ll get to rest easy knowing that your kids and loved ones will be well taken care of when you’re no longer with them.

For instance, with better financial security, your children will get to enroll in college, get the best education and even better, take care of other life necessities like getting married or kick-starting a business.

In a nutshell; it’s crucial to get additional coverage while your children are still with you — their financial future is in your hands.

Life Insurance can be used a savings plan

How Does Life Insurance Work & Why You Need It?

At this point, you should be aware that there are many types of life insurance.  They are Term Life InsuranceWhole Life Insurance, & Universal Life Insurance.

Term Life Insurance covers you for a specific period of time and builds no cash value.

Whole Life and Universal Life Insurance are permanent life products that can build a cash value over time. The good thing is you can borrow from these policies any  time in the form of tax-free loans.

I have seen cash value used to buy a car, a down payment on a new house, and even to pay for college.  If funded properly these types of policies can even add supplemental retirement income.

Life Insurance Provides Peace of Mind

You love your family and of course, wish you could live with them forever — there’s no doubt that. But hey, we’re all going to pass on someday and  we don’t get to know when that is.

Yes, it could be today or even 60 years from now; it’s just going to happen. That said, it’s certainly in your best interest to do what you can to protect your beautiful family from the uncertainties of life.

Getting life insurance is one of the few things you can do to bring you and your family peace of mind.  With this additional coverage, you can be sure that your family will do just fine (financially) in the event of your passing.

Of course, no amount of money can fill the void of the loneliness that comes with losing a loved one, but trust us, having the assurance of financial security will certainly go a long way in making life comfortable in the long-run.

And there you have it! These are the 6 good reasons why you can’t afford to wait any longer.

Now is the right time to buy life insurance — remember, the longer you wait, the higher the chances of something happening before getting covered. Don’t hesitate to reach out for an instant quote today!

What does life insurance cover?

Life insurance covers most causes of death, including illness, accident, or natural causes. In most cases, suicide is not covered the first 2 years of your policy.

If fraud is committed on the application or the beneficiary murders the insured, the insurance company may reduce or not pay out the death claim.

The death benefit from life insurance is paid out tax free to the beneficiary(s) to use as they see fit.

How much life insurance do I need?

life insurance

When you choosing the right amount of life insurance coverage, their is a number of factors you should consider. You will want enough to cover any outstanding debts or loans, burial expenses, and most importantly you loved ones needs.

It’s advised to make sure you secure the coverage for a term that lasts till the end of you longest financial obligation. We recommend that you carry at least 10-12 times your take home income (not gross).

If you gross $100K per year and bring home $70K you should have somewhere between $700K – $840K of Life Insurance Coverage

Not securing enough life insurance could leave your loved ones in a financial bind and completely change their way of living.

What type of life insurance should I buy?

Now that you know why you need life insurance and how it works, you are probably thinking which type of life insurance is going to best.

When it comes to life insurance there are two main types of life insurance:

  • Term Life Insurance
  • Permanent Life Insurance
How Does Life Insurance Work & Why You Need It?

Term Life Insurance

Term Life Insurance is the most basic form of life insurance and probably easiest to understand. With term life, you choose how much death benefit you want and how long you want the coverage for, usually 10, 15, 20, or 30 years.

Your monthly premium is based on your age, health, amount of life insurance, and term length. The premium is guaranteed for the chosen term length.

If you reach the end of your term, you have 3 options:

  • Cancel the policy (No more life insurance)
  • Convert term to a permanent life insurance policy
  • Continue current term but premium is much more expensive and increases annually

Term life insurance does not build up cash value like whole life insurance.

Permanent Life Insurance

Permanent life insurance offers coverage that last the lifetime of the insured. Unlike term life, permanent life insurance does not expire.

Instead of paying the premiums for a set number of years, you pay them for your whole life. Life insurance companies offer 2 types of permanent insurance:

  • Whole Life Insurance
  • Universal Life Insurance

Whole Life Insurance

Whole life insurance is the most popular permanent life insurance offered. If offers guaranteed premiums, guaranteed death benefit, and guaranteed cash value.

Some whole life policies also offer dividends (these are called participating whole life) which you can let accumulate, you can withdraw, reduce your premium, or even buy extra life insurance.

Whole life Insurance can be customized to meet your needs. If you don’t want to pay premiums you whole life, you can choose paid-up whole life insurance. This allows you to pay increased premium for a set number of years, such as 10-pay or 20-pay.

Universal Life Insurance

Universal life insurance is a permanent policy, but that’s about all the similarities it has with its counterpart, whole life.

Universal Life is unique in how it calculates interest on the cash value accumulation. Universal life offers 3 different types of policies. All 3 have different ways of how the interest is calculated.

  • Guaranteed Universal Life
  • Indexed Universal Life
  • Variable Universal Life

Guaranteed Universal Life (GUL)

Guaranteed Universal Life or GUL is the most like a whole life policy. The premiums and death benefit are guaranteed, but the GUL policies don’t build up much cash value. GUL policies are used as a low premium permanent protection plan.

Indexed Universal Life (IUL)

Indexed Universal Life or IUL is used by consumers as a cash value accumulation tool. Indexed Universal Life (IUL) is unique in the way interest is credited.

In an IUL policy, interest is tied to stock indices, such as the S&P 500 and Dow Jones. The interest that you can earn is capped, usually around 11%.

But the unique part is that there is no downside. If the index you chose were to be in the negative, the worst you can receive is 0%. These policies allow you to still invest in the market, without the market risk.

Variable Universal Life (VUL)

A Variable Universal Life or VUL policy functions much differently than the GUL or IUL. The VUL policy allows you to invest fully in the market.

This means you get the full upside of the market, but the full downside as well. These types of policies are geared more towards the experienced investor.

What does life insurance cost?

Most consumers believe life insurance costs significantly more than it actually does. Life insurance can be very affordable for most.

The cost of life insurance is determined by many factors such as:

  • How much coverage you want
  • Your age
  • Your health
  • Your family history
  • Your hobbies

Healthy people will pay less for life insurance as well as consumers who live a less risky or dangerous lifestyle.

Also a factor in how much premium you will pay is the type of policy you purchase. Term life insurance is always going to be cheaper than any type of permanent life. Sometimes as much as 5X cheaper.

Things you can do to save money on your life insurance

There are multiple things you can do to save money on your life insurance premiums. They are:

Buy life insurance early

As you get older, the cost of life insurance is going to get more expensive. And usually the younger you are, the healthier you are. We all know healthy consumers get the best rate.

Sample Term Life Rates By Age

How Does Life Insurance Work & Why You Need It?

Get the right amount coverage the first time

Although your needs may change over time and you need to add extra life insurance, it’s important that when you buy, to get the right amount the first time.

Locking in your rate at your youngest/healthiest age is one way to keep your life insurance premiums low. Remember, the longer you wait to buy life insurance, the more expensive it will be.

Shop around for life insurance quotes

Every life insurance company underwrites risk differently, so it’s important to shop around for life insurance quotes. Using an independent broker, like us, to help shop quotes will insure you get the best possible rate.

Even if you decide to buy your life insurance “locally”, you will want to work with someone who has access to multiple companies. Most consumers needs are different when it comes to life insurance.

Be in your best health

As we have mentioned before, being your healthiest is always going to get you the lowest rate. Before you apply you will want to try and get as healthy as possible.

If you smoke, quit. Smoker rates are usually about 40% higher than non smoking rates. If you are overweight, have high blood pressure or cholesterol, get it under as much control before applying.

Being in your best health is not only going to make your life better, but also save you money on insurance premiums in the long run.

How do I apply for life insurance?

Applying for life insurance is a simple process that starts with getting rates from an independent agent or broker. Once you have chosen the type of life insurance you want, you can get a policy done in four easy steps.

Fill out an application and complete the phone interview

The life insurance application will ask you basic information about your health history, family history, and your hobbies. You will confirm how much coverage you want and who you want as beneficiaries.

Once the application is completed, some companies (especially no exam life insurance) will require a phone interview to be completed.

Complete the required medical exam

If you decide to go with a traditionally underwritten life insurance policy then an exam will be required. A nurse will come to your home or work and complete a basic health checkup (similar to the one you would get from your doctor).

You also have the option of a no exam life insurance policy if you not to keen on being poked. The no medical exam life policy still requires a thorough evaluation of your health before being approved.

Go through underwriting

After you have completed the application, phone interview, and exam the underwriting process starts. The underwriter will access all the risks to insure based on the information provided from above.

The underwriter will also look at your driving record, credit score, and prescription list before making an offer. Most consumers are approved with no problems, but some may be rated or declined.

Pay the initial premium

After being approved, the final step is to pay the initial premium to place the policy in-force. Once the payment is received you are protected. A policy will mailed out for your records.

When does life insurance kick in?

Most consumers want to know when does there life insurance kick in or become effective. After you have gone through underwriting and been approved, you will then make the first premium payment.

After making the first premium payment, you are covered.

Final Thoughts

Thanks for taking the time to read our article. We hope we explained how life insurance works and why you should definitely own have it in your portfolio.

If you have any questions or would like a quote, you can give us a call or use one of our fast instant quoters on the left side of each page.

Rob Pinner
Rob Pinner

My name is Rob Pinner and I own EasyQuotes4You. At EasyQuotes4You we aim to make your life insurance buying process a smooth and stress free transaction.  We are independent life insurance agents servicing all 50 states. I have over 15 years of experience and have focused solely on life insurance for the past 5 years. If you have any questions or comments please don’t hesitate to give us a call.

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