How Life Insurance Works
How does life insurance work?
An introduction to life insurance
Life insurance is defined as a contract between an insurer (the insurance company) and a policyholder (you) in which the insurer guarantees the payment of a death benefit to named beneficiaries upon the death of the policyholder. Put simply, life insurance provides your loved ones with a tax-free cash payment if you pass away.
There are three different types of life insurance: term, whole, and universal. Each has its own unique qualities that make them suited to different kinds of situations. But, all three of them provide financial protection and peace-of-mind for your loved ones.
How does life insurance work?
There are three main components to a life insurance policy: the premium, death benefit, and cash value (if you purchase whole or universal life). Once you purchase a life insurance policy, you have several different options for paying premiums: every month, quarterly, twice a year, or annually. You will then designate beneficiaries who will receive the death benefit. If you purchase whole or universal life, you will also have a cash value component. Part of your premium will go toward cash value, which will grow over time and can be borrowed.
Premium
Your premium payments are determined using statistics. The insurer determines the cost of insurance, which is the amount required to cover mortality costs, administrative and other maintenance fees. Other factors include age, health, medical history, occupational hazards, and other risks. If you purchase a term policy, your premiums are 100% the cost of insurance. If you purchase whole or universal life, part of your premium will go toward the cost of insurance, and the other part will go toward building cash value.
Death benefit
The death benefit is also referred to as the face value of the policy, and reflects the amount the insurance company guarantees to pay your designated beneficiaries upon your death. You decide the death benefit amount at the time of purchase based on the estimated needs of your beneficiaries. Our life insurance specialist can help you determine the appropriate amount.
Cash value
Cash value is a component of whole and universal life insurance that serves two major purposes. First, cash value serves as a type of "savings account" that policyholders can borrow against for future expenditures. This cash accumulates tax-deferred. The second purpose of cash value is to purchase additional coverage if you have a guaranteed insurability rider.
Read more about cash value here.
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