How Life Insurance Policies Work


Insurance provides financial protection from damage or loss. Most people are familiar with homeowners insurance or car insurance, but life insurance is also very common. A life insurance policy offers protection from lost of income due to death. Many adults buy insurance policies as a way to help their families financially after their deaths. Life insurance policies pay out specified amounts of money to beneficiaries after the insured person dies. Insurance is an important part of financial planning, but not everyone knows how life insurance works.

How Life Insurance Works

Life is uncertain and no one knows when he will die. Many people accept this fact and want their families to be taken care of should they die unexpectedly or at an early age. When a person dies, his income stops, but the bills continue. Death has many financial consequences, such as funeral expenses and perhaps medical bills. By purchasing life insurance, a person enters in a legally binding contract with an insurance company. The contract is called a policy. The individual agrees to make regular payments (called a premium) to the insurance company in exchange for a guaranteed payment to the beneficiaries named in the policy. The beneficiaries are the people who will collect the money. When the insured person dies, one of his beneficiaries files a claim. This notifies the insurer that a life insurance policy will be paid out. The beneficiary provides a copy of the death certificate as proof. Within a few weeks, the beneficiaries get a lump sum payment.

The Life Insurance Policy

An insurance policy is one way to protect survivors or dependents from undue financial burdens. The person who buys the insurance is called the policy holder. This document describes the rights, obligations and limitations of the insured person and the insurer (insurance company). One obligation for the insured person is to pay premiums on time. The amount of the insurance policy is called the coverage. This amount can be anything from $5,000 to $1,000,000, depending on the amount the insured person wants, what his family needs and how much he can afford to pay in premiums. The larger the amount, the more the premiums will be. Insurance companies use statistics to decide on the amount of the premium. Statistics of how people die and at what age are important in determining the premiums. The credit history of the insured person and how many other insurance claims he has filed may also determine the rate of the premium. Life insurance policies are ones that will always pay out assuming premiums are paid and up to date.