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How Life Insurance Works

How does life insurance work?
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At first glance, life insurance might seem like a relatively simple concept. However, things can get a little more complicated when you take a closer look. Perhaps you’re a young individual who has never considered it before. Maybe you’ve been thinking about getting some for many years. You may even be someone who has had life insurance for many years, yet you wonder how life insurance works. 

If you’re feeling a little befuddled about life insurance, don’t worry. You’re not alone, and even the most accomplished financial experts can get a little confused by all of the various ins and outs. That being said, it’s definitely a good idea to try and learn a little bit more about life insurance, especially if you’re considering getting life insurance for yourself or your family. When you learn more about it, you can approach this in an efficient, informed manner. Knowledge is power, and a basic understanding can help you make a better decision.

Learning more about how life insurance works is even more important when considering how many insurance companies are in operation today. Each company may have a unique approach, and they may specialize in different types. For example, Helm Financial offers premium financing, while other companies may not offer this type of service. Establishing a basic understanding of how insurance works can help you compare and contrast the various companies and their services. 

With all that said, let’s dive into the complex world of insurance. With any luck, we’ll help you make sense of life insurance all by the time you’ve finished this article.

A Basic Definition 

Think of life insurance as a contract. In exchange for regular payments (called premiums), a company agrees to pay your beneficiaries a lump sum when you pass away. This is known as a “death benefit.” Obviously, the goal is to provide for your family after your passing. Also, the assumption is that this “death benefit” will be large enough to cover all of your family’s foreseeable expenses. The people who receive your death benefit are known as “beneficiaries.” 

Who Needs Life Insurance?

The most obvious candidates for life insurance are those with families. However, you may also choose to get life insurance if you are married without children. A life insurance policy can provide for your spouse long into the future. Even single individuals sometimes get life insurance. These singles may want to plan for the future, especially if they expect to have children or get a mortgage down the line. 

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Also, single individuals with large amounts of debt may choose to get life insurance, as some debts are passed on to family members after an individual passes away. Insurance can help family members deal with these debts. Finally, young people often enjoy some of the best premiums because of their age and excellent health. Sometimes, it makes sense to get it early in life to take advantage of these low premiums. 

Does Life Insurance Always Pay Out?

You might have heard that life insurance companies sometimes refuse to pay out the death benefit. This might happen for several different reasons. Generally speaking, it covers individuals for virtually every single type of death imaginable, including accidents, illnesses, or natural causes. However, an insurance company will likely refuse to pay out the death benefit if the policyholder commits suicide within two years of creating the policy. Application fraud may also be a reason for withholding the death benefit, and things can get complicated if a beneficiary murders the policyholder. 

Life Insurance vs. Wills and Trusts

Now that you know a little bit about life insurance, you might be wondering what the benefit of this system is compared to something like a will or trust. Why not just put a little bit of money aside each month for your beneficiaries? Then, you could just leave that money to your family in a will or a trust, and it would achieve the same effect. Right? 

First of all, you might not be able to save the same amount of money that would be guaranteed to your beneficiaries in the form of a death benefit from an insurance company. Secondly (and this is the big one), the death benefit is completely tax-free. Inheritance tax and estate tax are some of the most frustrating things for beneficiaries to deal with, and you can help them avoid these taxes with a life insurance policy. 

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What Are the Different Types?

There are two main types: 

  • Term Life Insurance: is generally the most affordable type of life insurance. This option only provides you with insurance for a certain amount of time, and your policy stays the same throughout this period. Once the term expires, you can renew your insurance at a higher rate. 
  • Permanent Life Insurance: As the name suggests, permanent which provides lifelong coverage. This is the more expensive (and less popular) option because it increases cash value over time. Life insurance is a common part of a wealthy family’s estate planning process. Life insurance almost acts as a savings account, and it doubles as a trust that accumulates value on a tax-deferred basis. 

In Closing

Life insurance might not be for everyone, but it plays a surprisingly large role in our society. It has helped millions of people when accidents happen. In some situations, life insurance companies have helped families survive after losing a loved one who was “bringing home the bacon.” In many ways, life insurance is a sign of a civilized, advanced society. We put systems like this in place to minimize risk, increase peace of mind, and mitigate the potential negative consequences of unforeseen events. Yes, life insurance works.