How Does Life Insurance Work?

If only financial planning was a required course of study at every school, everyone would grow up knowing the benefits of life insurance. They would also jump at the chance to start their policies as early as possible to give loved ones the best possible chance at life.

It requires a level of selflessness to commit to though. After all, you don’t get to live through the payout. If you really care for your loved ones, that shouldn’t matter. What should matter is the parting gift of a chance at a great life, and the ability to pay for some very important things.

Like any other kind of insurance, after you buy your policy, you begin to pay a premium at a recurring interval. Premiums are usually paid on a monthly basis. While your policy is active, your loved ones receive a lump sum of money that is not taxed. Note that this can be provided as an annuity instead of as a lump sum. In that case, it would feel as if a salary is being paid.

If you were the primary breadwinner, then this acts as a buffer until someone else can step up to the plate.

There isn’t one universal life insurance policy. People have unique needs and situations, which means that a single set of terms can’t work for everyone. The recurring cost is not usually very steep; however, there are several factors that can lead to a premium that is easy or difficult to handle.

An insurance company makes the consideration based on the kind of coverage you want, your health, your risk of death, and the length of the policy. This is a look at everything you need to know about the concept of life insurance, as well as how the whole process works.

Life Insurance Workflow

A life insurance contract is one just like any other insurance type. Once you are ready to get the policy going, you review the terms to ensure that you agree to all the stipulations. Of course, one such stipulation is the premium that you’re required to pay monthly.

The life insurance provider is also a part of this agreement. The institution agrees that, in the event of your death during the policy’s tenure, your beneficiaries receive an agreed payout.

Before you decide to buy the policy, remember that you should shop around. This is a rule of thumb in the world of insurance because you can potentially miss out on some amazing benefits when you don’t. While there are agents who genuinely care about a customer’s needs, others are simply working for the commission that they can get. Therefore, they may try to influence you to buy policies that work in their favor.

After your application is submitted, there is a review process that typically spans several weeks. Note that any new health complications or issues have no bearing on a policy that already exists. So if you were to develop some illness after you put pen to paper, not informing the insurance provider is not a crime.

The default premium recurrence on most policies is monthly. However, you may elect to pay bi-annually, annually, or even quarterly. The main thing is that you should choose a policy that best fits your needs.

The life insurance provider doesn’t just take your money and let it sit until you claim. If that were the case, the company would have nothing to gain from the agreement. Additionally, your coverage amount is usually way more than the sum of your paid premiums.

Therefore, the money is used for various investments behind the scenes. The idea is that the ROI should make for a great profit. This goal is for the profit to exceed what needs to be paid in claims.

Insurance companies also profit in other ways. There are situations in which the beneficiaries passed away before the insured person. A profit is also made when getting to the beneficiaries isn’t possible because of other reasons. Also, when payments are not made, a policy can lapse. When this happens, the insured person cannot get a refund for all the payments that were made in the past, which means that the company gets to retain those funds.

The payment that the company gives to your designated beneficiaries is known as a death benefit. Of course, it is used at the discretion of the beneficiaries, but funeral expenses for the insured person tend to be at the top of the list.

Remember that insurance companies have no way of knowing that someone who is insured has passed. At best, the assumption would be that payments have ceased, and the policy goes into a lapsed state. This means that you need to let your beneficiaries know that it exists and where they should go to redeem the benefit.

It’s best to get the claim process going as soon as possible. As soon as the insured person dies, beneficiaries should contact the insurance providers. There was a time when you would have to go through the whole process with a visit, but online services make everything easier now. Some insurance companies can do the entire claim process from an online application, but there are others that require you to come in for a part of the process. Note that some level of paperwork is required regardless of how the claim is filed.

While the policy document may not be needed, there needs to be proof that the insured person has passed on and that the beneficiaries are who they say they are.

Payment for the claim can be issued in as little as two weeks or as many as 90 days. When the documentation is provided, the insurance company goes through a process of review. After reviewing, the insurance company either asks for missing information, approves the claim, or denies it. If the claim is not approved, you are given a reason why so it can be addressed if possible. After the approval is successful, beneficiaries usually receive a check. Note that there are interest charges that the insurance company must pay if the payment takes too long after approval, so there is that motivation to get payments sorted.

If an insured person dies within the first two years of the policy’s establishment, the beneficiaries may find that collecting the payout is delayed. This delay can go on for as long as a year. When someone dies so quickly after establishing a policy, there is always the chance that fraud was being committed. This is called enforcing the two-year contestability clause. Once there is no evidence of fraud, the payout is made.

There are also delays if the company deems that the insured person withheld information or died during participation in illegal activities.

Homicide is another cause of delays. Whenever there is a homicide, anyone who interacted with the deceased before the incident is considered a suspect. This means that friends, family, and enemies are all investigated. The insurance company tends to wait until the police investigation is done before issuing a payout. This is because the company wants to rule out the possibility of beneficiary involvement in the crime.

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Who Should Buy Life Insurance?

Some people would say that everyone should purchase life insurance. However, this may not necessarily be the case. Remember that the point of life insurance is to leave funds for your beneficiaries. If there is no one in your life that you desire to care for after your passing, then there’s no point in getting the policy.

However, once those people exist, there’s no doubt about it. This is even more so if these beneficiaries depend on you financially. If you were to pass away, you could no longer provide that support. The bills and financial responsibilities don’t go away when the insured person does, so this is a great way to provide a lucrative buffer until someone else can pick up the responsibility.

Even if the beneficiaries aren’t children, any important person to you fits the bill. A great example of this is the person you are married to. The chances are that you co-operatively handled many of the responsibilities in your lives. If one person were to pass, a life insurance policy would be the perfect thing to offset the financial burden that would instantly fall on the other.

Note that you can make changes to your beneficiaries, so if you just want to get the policy rolling, you can add beneficiaries later. Of course, the earlier you start life insurance, the better the terms you get.

What Does Life Insurance Not Cover?

First, you should know that the policy insures deaths caused by almost anything. There are a few cases in which beneficiaries cannot make a claim. They can, but it is likely to be denied.

Crime is one of the biggest no-nos. If an insured person dies during willing participation in a crime, then there is no payout.

Hazardous activities are also not covered. Some activities put a person at a higher risk of death than the average person. One such activity is skydiving. If you’re jumping out of planes for a hobby, you may end up dead if something goes wrong. If someone reads as a hobby, many things could go wrong without putting the person in danger. Some insurers put a clause in the contract to exclude a dangerous activity that the insured person admits to taking part in. Should the death come from the said activity, there is no payout.

If any information is misrepresented, the insurance company reserves the right to deny the application for a payout to beneficiaries. You may think that this information needs to relate to the cause of death, but it doesn’t. If the insured person dies on a construction site from a cave in, the insurance company can deny a claim because it discovered that the said person didn’t disclose an affinity for sky diving.

Note that misrepresentation investigations don’t only happen when the insured person dies. Even if you haven’t died, your policy could be canceled because of misinformation. Insurance fraud is more common than you may think, and insurance companies need to protect themselves from being swindled out of money.

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