How Does Life Insurance Work?

By Patrick Cooper Posted in Life Insurance News

The Necessity Of Life Insurance

According to a funeral director in New Hartford, Connecticut, the average price of a funeral in 2009 is $7,000. If you die, could your family afford to have you buried? For most people the answer is no, and this is only the beginning.

Once you die, your spouse or significant other and children face life without your income. They become responsible for your debts. Unless you have huge bank accounts, most families face bankruptcy when left with mounting debts and reduced income. Social security may offer survivor benefits, but the amount varies and may not be enough. This explains the importance of life insurance.

The Facts About Life Insurance

When you purchase life insurance policies, companies group similarly aged people together and then calculate the chances of people in that group dying against the money they would have to pay out. They use this information to come up with your monthly, quarterly or yearly premiums.

If you do pass away, the company must pay the face value of the policy to the beneficiary listed on the application. This money is not taxable and helps keep surviving family members or loved ones from financial ruin.

Types Of Life Insurance

Most people purchase term or whole life insurance policies. Whole life policies are beneficial in that they accrue interest over time. You can take out loans against the money you’ve paid, you can also request the interest you earn be used to pay your monthly premiums. Because they act like a high-interest savings account, you do pay more in premiums. However, they also guarantee that your premium will never change, no matter how old you become.

Term insurance policies have a set time frame, often 20 years. For 20 years, you make monthly payments towards your life insurance policy. If you die in those 20 years, your beneficiary receives the face amount. If you don’t, you must renew the policy or find new insurance. The rates will increase because you are older.

In addition, most term life policies will not offer life insurance policies to those who are 80 years or older because of the higher risk of dying during the life of the policy. Those that do offer policies will charge exorbitant rates. The exception to this are companies that offer miniscule policy amounts, usually no more than $25,000.

Applying For Life Insurance

To receive a life insurance policy, you fill out an application. The application asks for basic information, such as:

  • Name
  • Address
  • Date of Birth
  • Gender
  • Marital status
  • History of smoking, drug or alcohol addiction, if applicable
  • Family’s health history
  • Basic health history
  • If your application passes the first round, you will be asked to set up a health exam by the insurance company’s paramedical. That person comes to your house to draw a blood sample, collect a urine sample, measure your blood pressure, get your weight and height and then take your pulse. High policy values may require additional tests like a cardiac stress test and EKG.

    Related posts:

    1. What Is Universal Life Insurance?
    2. What Is Whole Life Insurance?
    3. What Is Life Insurance?
    4. What Is The Cheapest Kind Of Life Insurance?
    5. What Is A Mortgage Life Insurance Policy And How Does It Work?

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