How do most life insurance policies work? I know nothing about them, and I just need the basics?

Question

P.S. My screen name is from a song...I am not dying (that I know of). Well, I guess we are all dying, but I have no ailments that I am aware of!

Answer 1

The very basic - it's a bet between you and the insurance company, whether or not you're going to die during the policy term.

Term insurance is PURE insurance. You have a set time period - 5 years, 10, 20, whatever. You're betting you're going to die, the insurance company is betting you're going to live. It's the CHEAPEST life insurance, because the odds are, you're going to live. Or, you pay a lot more, LOL.

Whole life costs about 10X as much. But it doesn't "expire" until you hit 100. So you pay a lot longer - and a lot more - and if you KEEP paying it, most likely, you're going to win the bet (ie, you'll die before 100). Meanwhile, it ALSO builds "cash value", which is sold as a type of savings - but don't be fooled, you can save more yourself in the 20 years than you EVER would save on "cash value". So it's more gimicky - but DOES suit some needs, especially for ESTATE PLANNING purposes when you KNOW you're going to need a hunka change to avoid estate taxes, or to pay them.

Then there are all kinds of in between, gimickly policies - variable life, universal life, etc, which are supposed to cost less, invest more, give better returns, etc.

Your BEST bet, is decide what the goal is. Then visit a local agent or two, and get a variety of quotes for products that MEET THAT GOAL.

And remember, life insurance is a crappy investment tool. That's NOT what it's main purpose is, and that's not what it does best.

Answer 2

The type of life insurance depends on the type of need. If you are just looking to cover a mortgage, or the kids until they are old enough to support themselves, a term policy will usually do the trick. If you need to cover longer terms, or estate taxes, etc.. maybe a permanent policy is for you.

get a good agent and compare.


1. Get quotes for yourself.
2. Complete application for the company you choose.
3. Go through a paramed exam.
4. Wait about 6-8 weeks.
Your agent may come to you a few times throughout the process to ask additional questions, clarify answers, etc..

Once you are approved, you will receive the policy and have a chance to review it. Laws vary by state, but typically you have 10-30 days to review and decide whether to accept it.

Once you decide you want it, sign off on the delivery documents and pay the premium and you are done. Good luck

Answer 3

Most life insurance policies work like this. A large number of insureds pay premiums that amount to huge piles of cash for the insurance companies. Truth is insurance companies expect the life of the policy to be less than 5 years. If you maintain the policy for 5 years or more you get into the red zone. That means you will most likely keep the policy to death and you will be a claim paid. If you cancel the policy after 39 months every and die in month 42. The company made out like bandits. If you pay the premiums for 6 months and drop dead you finally beat the system. One problem. You had to die to do it. I have found the people at http://www.lvhealthins.com to be very helpful in my health insurance needs I think they also sell life insurance.

Answer 4

There are 2 kinds of policies. Term insurance is for a set period of time. You pay a lower price and if you die or lose a limb during the term it pays. When the term ends the policy is worthless.

Permanent insurance cost more and builds up a cash value. You can borrow against it or cancel and get some money back. After a period of time you can even convert it to a term policy with no payments.

There are many variations on permanent or whole life policies.

Answer 5

Good question that everyone needs to know about eventually. Most life insurance policies have the basis of a premium that is paid monthly and when the holder dies, a certain amount will go to his or her descendants.

I actually found a blog that has a few good articles on the basics of life insurance. They have a few articles like "Various types of life insurance", "Key Life Insurance Terms to Know, and "How much do you need?". They are all good simple atricles to help you get the basics down.

Here is a link to the homepage: http://www.finance-your-life.com

Happy Thursday!

Dave

Answer 6

Basics of life insurance, well you have two types of life insurance, Term insurance and Permanent insurance. Let’s start with Term insurance.

This is the most basic for of life insurance. You pay a monthly premium, and the insurance company promises to pay your beneficiary(ies) the agreed death benefit should you die. The “term” of the policy is with respect to how long the premium remains level (5, 10, 20 or 30 years), once the term is up, you do not necessarily loose coverage, but the premiums will be increasing at a very high and fast rate. It is for this reason that most people give up their term insurance and thereby loose their coverage because they stop paying the premiums, and this is why there is the saying “die to win” with term insurance. The best way to think about it is that you and the insurance company are on opposite sides of a bet, you bet that you die with in the term of the policy before your premiums go through the roof, and the insurance company (aka the house for betting purposes) is betting that you will live longer than the term of the policy. 85% of term policies are not paid because the policy is dropped after the term has expired. That translates to the house winning 85% of time… if I was a betting man I would like those odds.

Permanent or Cash Value insurance is further broken down into three types: Whole Life, Universal Life, and Variable Universal Life.
• Whole Life: This is where you have two separate accounts- One that is the death benefit, one that grows tax deferred. The second account is known as the Cash Value account. The Cash Value is calculated by adding together the dividends (participating companies only can give dividends) and guarantees. Guarantees are just that, the company guarantees that the account will grown by X% each year. Dividends are never guaranteed, it is similar to how a stock pays dividends, based upon profitability of the company. The cash value in the account can be borrowed against at anytime for any reason, and as long as it is taken as a policy loan it can be taken out tax free.

• Universal Life: Still have two accounts, the difference is how the Cash Value is accumulated. Here it is based on Units. So many premium dollars go to the Unit values, and here you have options when it comes to paying premiums. It is in many ways like Negative Amortized loan, where you get three different payment options, really high, middle of the road and very low. Most people will pay the really high for a couple of months, but after that real life happens and they start making only the minimum payments. This is where trouble happens for Universal Life policy holders because the policy can implode on them if they are not disciplined. The reason for the implosion is because of the maintenance fees associated with these types of policies.

• Variable Universal Life: Again like the Universal Life policy, the Cash Value is built with units rather than guarantees. These Units are then tied to the mutual fund markets. This type of policy is geared for the experienced investor who has a base life insurance policy already but is looking for the added advantages of having life insurance as an asset and wants to have market exposure at the same time.

Hope this helps.

Answer 7

You pay premiums each month, whether it is term or whole life, the company agrees to pay the face amount of the policy to your survivors.

As has been stated, you need to figure out what you want the insurance for and what you want it to do for you. Do you have others that depend on your monthly salary? Kids? A lot of debt or house payment? These are several questions to ask. How long will you need it? How much will you need?

If you have a financial needs analysis completed for you, these questions and others will be answered.

Answer 8

The simplest answer is this: you buy coverage for a particular amount, say $10,000. You pay premiums for the coverage while you're alive. When you die, the beneficiary - the person you want the money to go to - will receive a check. They can do what they want with the money, but it's usually used for burial expenses and other living expenses for the beneficiary and your other dependents.

Answer 9

im not an insurance sales person however i did take the test a while ago...and passed.
i think someone that has no life insurance is one card short of a deck.
you pay the monthly fee and thats all you have to do.
when you die your family can chill and relax for a little while.
they are gonna be really sad so the least you can do is pay for your fees.

Answer 10

Basically you are betting that you will die, and the insurance company is betting that you won't. ( at least until they've collected enough money to be ahead when they pay off your policy.)