How Does Life Insurance Work?

Life insurance works by providing a death benefit to the beneficiaries of the policy upon the death of the insured individual. The policyholder pays premiums to the insurance company, typically on a monthly, quarterly, or annual basis, in exchange for the guarantee of the death benefit.

There are two main types of life insurance: term life insurance and permanent life insurance.

  • Term life insurance provides coverage for a specific period of time, such as 10, 20, or 30 years. If the insured person dies during the term of the policy, the death benefit is paid to the beneficiaries. Once the term ends, the coverage typically ends as well, unless the policy is renewed.
  • Permanent life insurance, such as whole life or universal life, provides coverage for the entire lifetime of the insured person. These policies typically have higher premiums than term life insurance policies, but they also build cash value over time. This cash value can be borrowed against or used to pay premiums, if necessary. Additionally, the death benefit is guaranteed.

When the insured person dies, the beneficiaries file a death claim with the insurance company, providing proof of death and other required documentation. The insurance company will then pay out the death benefit to the beneficiaries. Some policies have waiting period before the death benefit is paid out, like accidental death policies.

It’s important to remember that life insurance policies have terms and conditions, such as exclusions, and it’s important to read and understand the policy before purchasing it.