What Is Life Insurance And How Does Life Insurance Work?
People see life insurance advertisements all around them, but they may wonder to themselves "What is life insurance?" This insurance has two basic types: term life and whole life. Most of the ads are for term life insurance, which is an insurance policy that a person contributes to for a specified period and is paid out to beneficiaries when the person dies.
Whole life insurance, though, is more comprehensive. It covers death benefits, but it is designed to cover the insured person for his whole life, however long that may be. The death benefit is intended to appreciate in value as the policy ages, because the policy is combined with a set investment in the stock market. The goal is that the investment will do well, causing the policy to become more valuable over time.
Most people purchase life insurance as a way of providing financial security to their loved ones after their death. In general, the policies are less inexpensive when the insured person is under the age of 50. As the person gets older and the likelihood that he will become sick increases, insurance companies begin to charge more to provide insurance.
So, how does this type of insurance work? Individuals who apply for life insurance provide information about their overall health and life habits, including their diet, exercise routines, and employment. The insurance company then assesses their probable lifespan based on these criteria. Some unhealthy habits such as smoking or excessive drinking may prevent a person from being insured at all.
Once the person's lifespan is determined, the insurance company sets a monthly premium to be paid to keep the insurance policy current. Before agreeing to the terms of the contract, the insured person also selects a beneficiary, a person or an organization that will receive the proceeds at his death. The insured party then pays the premium each month for the length of the policy, either a set term or the rest of his life.
If a person selects term insurance, he will have to go through the application process all over again when the term expires. The potential danger is that the insured person will have aged or contracted a serious illness by that time, which could disqualify him from receiving a second policy. To avoid this situation, many people begin shopping for life insurance early in their lives and begin with a 30-year term policy.
Another consideration for insurance policyholders is making sure that their death benefit is substantial enough to cover expenses they will leave behind. Each insurance policy explains the payout amount before requiring a person to agree to the contract. Insured persons should have enough life insurance to pay for their loved ones' housing, childcare, and transportation costs.