how does life insurance work answersLife insurance is an important purchase and one that people often think is very confusing.  Of course, it doesn’t have to be confusing, as a matter of fact we try to make it very understandable.  So just in case you are still wondering…How does life insurance work?, here’s a brief tutorial.

Term Life Insurance vs. Permanent Life Insurance

To begin answering the question, How does life insurance work? we have to start with the two basic types of life insurance.  These are term life insurance and permanent life insurance. Term insurance provides coverage for a set period of time (the term), while permanent insurance is meant to cover you for your lifetime.

Cost Factors of Life Insurance

There are four key factors tha will influence the amount of life insurance premium you will pay:

  • Length of Your Coverage—Term life insurance is generally less expensive than permanent coverage.  The coverage is guaranteed for a shorter period of time. As the term period gets longer, the premium cost will increase along with it.
  • Your Age When You Apply—As people grow older, the statistical likelihood of death occurring during a particular period of time increases.  We are closer to our life expectancy. Therefore, the older you are, the higher the cost of life insurance.
  • Your Health When You Apply and Before—When underwriting your application, insurance companies consider your health, health history and your management of any health issues.  These factors will impact the rating and your subsequent premium.  When life insurance requires a medical exam and blood work, it helps the insurance carrier guage your health risk.  They may order medical records as well to get a more complete picture of your health. (This is one reason why non-medical policies have higher premiums- they don’t have as much information on your health risk.)
  • The Amount of Coverage You Apply For—As with anything, the more you buy (in this case, the death benefit), the more you will pay.

What You’re Insuring

How does life life insurance work? isn’t answerable by focusing only on what carriers do.  The applicant and their family factor into this equation.

You have to understand what your need is before you consider buying any life insurance in the first place. Do you have family to protect?  A business to protect?  Estate taxes to prepare for?  A pension to maximize?  A special needs child to take care of?  Children to support through college and perhaps professional school?  Who do you need to be sure is taken care of if/when something happens to you?

For many people, it seems counterintuitive that a person just out of college in a starter home would need more life insurance than a senior in a million-dollar home—but that may be the case…or not!  Every situation is unique and needs to be considered on it’s own.

When you are younger, often the primary purpose of life insurance is to secure future income. Therefore, for example, a person with a new family and their entire career ahead of them will want to consider a 20-25 year term with a death benefit that’s sufficient to replace anticipated future earnings through the time the children are out of college. This is a ballpark figure and not written in stone.  Perhaps you can’t afford that right now…so we look at alternatives and ways to get you some coverage now, and increase it as you can afford more!

That’s not to say that seniors don’t need life insurance. There are many reasons seniors need life insurance.  Many seniors are still working and earning income, and their spouse may need continuing income. In such cases, permanent coverage or a permanent/term combination may be called for.  Again, it’s all about what you are trying to achieve and what you can afford.

An independent agent can help you figure out your insurance needs and help you understand what you can buy within your budget.  They represent many companies and will be able to help you get the most affordable coverage available to you based on the factors listed above.

The Bottom Line

Now that you have a basic understanding of How does life insurance work? you have decisions to make. But you don’t shouldn’t do it alone. Consult with an experienced independent life insurance agent to help you choose between term and permanent (or a mix of both), to find the carrier(s) that offer the best pricing for your cost factors, and determine the type of policy you need. Insurance works when you work it!