How Does Life Insurance Work?

Life insurance can be a very complex topic. There are numerous types of policies on the market today, and each has its own set of features, benefits, and other characteristics. Some life insurance policies provide only a set amount of death benefit, while others can be highly tax advantaged long-term savings vehicles.

One part of life insurance which makes it so confusing is all of the options.

Understanding how life insurance works – as well as why life insurance is needed as an overall part of financial planning – can make this topic much easier. In addition, you have to understand the benefits of life insurance.  It can help a policyholder’s loved ones to avoid financial hardship can help to truly pinpoint where this important financial product fits into one’s financial life, and their overall lifestyle objectives as well.

Analyzing The Many Potential Life Insurance Needs

Everybody’s needs are different. This is one reason why there are so many types of life insurance products that are available today. What does not work for one person’s situation may be the perfect solution for another.

While many people understand that they need life insurance, it may not be clear just exactly how much coverage is appropriate. When determining the right amount of coverage, there are many criteria that should be factored in. These should include the cost of a funeral – including burial and headstone expenses – as well as any unmet medical costs, estate taxes, and possible costs of probate.

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Thankfully, adding up insurance needs is easier than most people think. You don’t need any fancy algorithm or programs. You can probably do the math with a pen and paper (we suggest having a calculator on hand).

To begin, you need to know how much debt you have. If you don’t know this number off the top of your head, you should get all of the info together and add the numbers up. This HAS to include your mortgage and other large debts.

After you’ve added up debts, you should multiply your annual income by how many years you need to protect your family.

There are other expenses you should look at, like paying for childcare or tuition, but these are based on each situation.

Related: Insurance Basics: How Insurance Works

It’s Not Personal – It’s Business

Many people think that life insurance is only used for the needs of individuals in protecting their families and other loved ones. However, life insurance is not just for individual needs. It can also solve many types of business liquidity needs as well.

Life insurance can play a major role in the financial stability of a business. Having proper insurance in place for your business can keep it from shutting down with an untimely death.

Because businesses can be structured in a variety of ways, there are different life insurance solutions that can be put into place in order to protect them. In addition, life insurance can also be used as a form of executive deferred compensation.

Businesses can avoid many possible negative financial consequences from the loss of key people by using life insurance. Therefore, this important product should be a primary component of every business’s planning process.

Key man life insurance coverage will guard your organization against major debts from having to pay others to do your job or find a replacement. Key man life insurance operates like a typical policy, except the business or business partner is named the beneficiary.

The Working Parts Of Life Insurance

There are several components that are involved in life insurance. Some of these pieces will be dependent upon the type of life insurance policy that is being determined. The main types of life insurance include:

  • Term – Term life insurance is oftentimes referred to as being “pure” insurance. This is because, in return for a premium payment, term life insurance pays out a death benefit to a named beneficiary. This type of coverage does not include any type of cash value or investment build-up within the policy. Therefore, term life insurance simply insures against the loss of a policy holder’s life if the individual dies within the stated “term,” or time period, that the policy is active.
  • Whole Life – Whole life policies can cover an insured for the “whole” of his or her life. This means that there is no set time period in which the policy will expire, and – provided that premiums are paid – the plan will remain in force. One bonus is whole life plans build value. Should the policyholder need cash, he or she can access some or all of the policy’s cash value through a policy loan.
  • Universal Life – Universal life insurance also provides a savings component, along with a death benefit. Yet, while the cash value growth in a whole life insurance policy is guaranteed, the interest rate on the savings portion of a universal life insurance policy can fluctuate. In addition, policyholders who own universal life insurance also have more flexibility with regard to their premium payment.

You need a good understanding of the goals and needs that the policy should cover. This will help to pin down which type of policy – as well as how much coverage – will best fit the specific situation.

Each kind of plan has different advantages that you’ll need to consider based on your needs and preferences. Our agents can help walk you through the decision process and help you decide which plan works best for you.

No Exam Life Insurance

Every year, no exam life insurance becomes a more popular choice. Applicants love how easy the policy is to apply and get accepted for.

The name says it all – life insurance with no health physical. Instead of having to have a nurse come into your home and do the medical exam, all you have to do is the phone interview and fill out the paperwork.

It’s not all pros with no exam life insurance, there are quite a few downsides as well.

If you want a cheap plan, don’t even bother looking at no exam policy. They have become cheaper over the years, but they are still more expensive. Depending on the carrier and the size of the plan, most are going to be around two or three more expensive everything month.

Working With An Independent Insurance Broker

As you can see, there are several moving parts to an insurance plan. Each of them has variations and different factors to consider. If you shop for a policy, you could end up with thousands and thousands of options.

Hopefully, you understand how life insurance works and you can make a good choice for your family.

If you have any questions, even basic ones about life insurance in general, please call us. We want to be your life insurance encyclopedia. You don’t have to be an insurance experts, you just have to call us.


Susan Wright, CLU, ChFC, RHU, REBC, ADPA, CITRMS, CIPA has been in the insurance and financial field for over 27 years. Even with years of experience, she continues to create new resources for others. Everything from books to training material.

Susan received her MBA from St. Louis University and her BA from Michigan State University.

She has worked in several areas but excels in writing material for both finances and insurance. Her goal is to give professionals credibility and assist in streamlining the sales process.

She has written countless articles for a variety of websites.

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