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Do You Really Know How Life Insurance Works?

How Life Insurance Works

Life insurance is an important part of a family’s financial foundation – even more than auto or home insurance. Life insurance provides additional financial support to your family should you pass away. So, it’s pretty important that you understand how life insurance works.

First, like other forms of insurance, you’ll start with a quote. At the time of quote you are given the opportunity to select the product, possibly the term, the amount of coverage, and your beneficiary. Additionally, the insurance company will want to know general questions about your health, pre-existing conditions, and some personal details. All this is to secure a lump sum payout to your loved ones upon your death.

It all seems super simple right?

Well, as with all important choices in your life, it’s a bit more complicated. Given the importance of getting this right you should begin by understanding how it works.

What is life insurance?

Before you can fully appreciate how life insurance works, you have to know what it is. In formal terms, life insurance is an insurance contract between an insured (you) and an insurance company. The insuring agreement created by the contract, simply put, is the exchange of premium paid for a specified amount of coverage – in this case a death benefit. That death benefit is a lump-sum payment to your designated beneficiary.

There are two major types of life insurance policies: term and permanent. Term life insurance is a popular selection and typically provides coverage for 10, 20, or 30 years. Alternatively, a permanent policy lasts for your entire lifetime. Permanent life typically comes with a savings component, while term only provides a death benefit. Term life insurance is the more affordable policy, but you run the risk of passing away after the protection has expired – leaving your beneficiary without any benefit.


Typically, life insurance underwriting will require a medical exam to start your policy. However, some some insurance carriers or plans allow you to waive the exam in exchange for a higher premium.

When is the right time to buy life insurance?

One of the benefits to understanding how life insurance works is getting a sense when to buy. Frequently, people choose to buy life insurance when they get married, have children or buy their first home. This makes sense because life insurance is a good option any time your financial needs change. Additionally, it’s best to purchase life insurance when we’re young and healthy. Here are some things to consider when thinking about life insurance:

Major consideration for life insurance:

  • Do you have a mortgage: Think about how many years of mortgage payments you have left. If selecting term insurance, it’s best to get a policy for at least that number of years. Also, consider the outstanding balance on the mortgage, and choose a coverage amount based on payoff or making the payments.
  • Children at home: If you have children, consider how long they will depend upon your support. How long will it be before your kids can support themselves? Before you choose the coverage amount, consider how much it will cost to support your children.
  • Children’s tuition costs: If you have children in private secondary school, or you intend to pay for their college education, you’ll want enough coverage to provide for these goals.
  • Are you the breadwinner: If your goal is to help maintain your loved one’s lifestyle in your absence, then you need to consider the totality of a lifetime without your financial contribution. Think about what your family’s total expenses will be until retirement.
  • Recent inheritance: If you’re considering leaving an inheritance, you may want a policy that lasts for the remainder of your life (a permanent life insurance policy).
  • End-of-life expenses: If you only need to cover funeral and burial costs, you can simply get a final expense life policy. Final expense is usually more affordable than other types of life insurance and can last for a set number of years or your lifetime.

Explore more details on how much life insurance you need. Or, simply get a life insurance quote online to compare prices.

Will pre-existing conditions exclude me from coverage?

If you have a pre-existing conditions, you are not prevented from getting life insurance. For instance, people who have diabetes, elevated cholesterol, or blood pressure issues, can get life insurance. When you have certain pre-existing conditions, the insurance company will likely evaluate these conditions cautiously to evaluate your overall health risk. If you have certain pre-existing conditions, you can help improve you chances of acceptability or controlling your premium, or amount of coverage by doing the following:

  • Keep your condition under control
  • Take your prescribed medications per doctor’s instruction
  • See your doctor regularly

Along with understanding your pre-existing conditions, your insurance carrier will also want to know if you have had a recent health issue that caused you to see a doctor, get additional testing, or receive treatment.

Is it important to disclose your health history?

Nobody wants to share their medical history. It can feel like an invasion of privacy. However, sharing your health history with your life insurance carrier is the best way to get and keep your life insurance protection. Moreover, if you don’t honestly share your health history or pre-existing conditions, you are at risk of a material misrepresentation that can cause your policy to cancel or application to get denied.


You can modify the terms of a life insurance policy by adding a rider. A rider is can add benefits to the standard policy and coverage, expanding your options and providing greater flexibility. For example, with some polices you can add a guaranteed insurability rider to your whole life or universal life policy, which allows you to add more coverage without a medical exam.

What things affect life insurance prices

Understanding how life insurance works is helpful, but knowing what affects the price is good to know as well. Two of the biggest factors affecting life insurance rates are age and sex, and these factors are out of your control. There are some things, however, that are within your control. For instance, risky employment or hobbies can increase premiums. Additionally, your overall health, financial history, and history of smoking are important factors as determining your life insurance premium. Learn more about the cost of life insurance.

The most common types of life insurance policies

Term life

Term life is the most common and the most affordable option. With term life you select the number of years, typically between 10 to 30 years, and that will be the coverage period. If you pass away after the term coverage period (or term), your beneficiaries will not receive a death benefit payout. Term life is good for things that have a specific duration or payoff. For instance, you can choose term life to help pay off things like a mortgage or to pay for college tuition.

See more on term life insurance.

Permanent life

Permanent life tends to be a bit more costly than term life because it lasts your entire lifetime. It also pays out no matter what age you are when you pass away, if the premiums are paid of course. Some types of permanent life allow you to withdraw funds early or change your payout amount over time. If your looking to add to your estate planning, permanent life is a good addition to a portfolio.

See more on permanent life insurance.

Final expense

Final expense insurance is the cheapest of all products. It’s designed for a very specific purpose, end-of-life expenses, and therefore has a lower amount of coverage. Final expense policies are used for things like funeral and burial expenses, medical bills, credit card debt, and other expenses. These types of policies are good for those looking to unburden family members or their beneficiaries with outstanding bills or funeral costs.

See more on final expense life insurance.

Not sure which policy type is right for you? Check out our breakdown of the different types of life insurance.

How do I get life insurance or start a quote?

The internet always makes things a bit easier. You can easily get a life insurance quote online and compare the rates of several insurance companies. You can even complete the application and begin the buying process online by answering a few extra questions questions, then select your payment amount, term length, and other policy details.

If you would like our assistance, you can also call 1-877-334-7646 to speak with a licensed insurance agent who can help you find the right policy for you.

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