How Does Life Insurance Work? [Complete Guide]

Life insurance is a unique type of insurance because it doesn’t necessarily protect you as the policyholder. It is more beneficial to your loved ones in the event of your death. 

Life insurance is an agreement between you and the insurance company that states in the event of your death, they will provide death benefits to your designated beneficiary. This contractual agreement stipulates that as long as you make the monthly payments, known as premiums, your designated beneficiary will receive a lump-sum, tax-free payment in the event of your death. 

Term Life Insurance

With a term insurance policy, if the insured dies within the term limits agreed upon in the contract, the beneficiary is entitled to the amount of the insurance policy or the face value. Term life insurance is, by far, the cheapest type of life insurance available.  

Whole Life Insurance

For a whole life insurance policy, an individual covered under this type of insurance policy is covered for their entire life as long as they are current on their payments. Whole life insurance can be very expensive depending on the amount of coverage you purchase. 

Does Everyone Need Life Insurance?

– People depend on them financially and their death would substantially impact the quality of life for those left behind – They are not “self insured,” meaning they do not have a large enough nest egg to pay off outstanding debts that may be transferred to heir

People should only buy life insurance under the following circumstances: 

How Life Insurance Works If You Outlive Your Policy

This is an excellent question and goes back to the previous statement regarding term life insurance policies. Typically with a term life insurance policy, if you outlive the term of the insurance policy, you forfeit all of your premium payments. 

Adding Riders To Term Insurance Policies

To alleviate forfeiting term life premiums, there are options to attach specific “riders” to term insurance policies. This can protect the contract holder in the event they outlive their policy. 

Return Of Premium Rider

One rider that can be added to a term life insurance policy is a return of premium rider. This protects the insured in the event they outlive the term of the policy. 

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