How Does Life Insurance Work - Really ?
Although we are by no means an insurance agency or even affiliated with one, we do seem to get a lot of questions about how exactly life insurance works. As it is a frequent question, we thought we'd give it the honor of being our first blog post! If you have any questions following it, please be sure to let us know and we'll do our best to answer them.
How does life insurance work can have a simple explanation or a complicated one, depending on the type of insurance one chooses and the nature of terms, exemptions and inclusions that are stipulated in the policy by an insurance company or provider.
Typically, there are two parties engaged in any type of life insurance, the insurer or the insurance provider and the insured or the insurance policy holder. At the time of applying for life insurance, an agent or broker may be involved but only as a facilitator and not as a decisive party.
The concept of life insurance is pretty simple. An insured or insurance policy holder makes payments, known as premiums, towards a policy that assures a sum of money at the time of maturity of the policy or at the time of death of the insured. Some policies however pay a sum at the maturity of the policy which is the end of the term as well as another sum of money at the time of death of the insured.
Any life insurance policy is defined by its type, the coverage amount and the term it is valid for. Life insurance can be short term, long term, temporary or permanent and there are several types of concepts engaged in different policies. Usually, the coverage amount and the number of years a policy is for determines the premium. For instance, a policy of $200,000 for a period of 20 years may require an individual to pay $5,000 premium every year. The same policy for a period of 10 years may need one to pay $10,000 premium a year. The coverage amount is directly proportional to the premium and vice versa. The premium to be paid is inversely proportional to the term of the policy and vice versa.