What is Life Insurance and how does it work?

The real basic behind the myriad complexities of life insurance is simple. Any life insurance company sells you a promise. You pay them little sums of money, they pay you a big sum back either when you die or when you die early. The lives of those dependent on you will be secure even if you die.

What is the buying process in life insurance?


Most people buy insurance in one of two ways. They either buy it through an agent of a single company or from someone who sells policies of different companies.

Workplaces also offer insurance to the whole lot of their employees, called group life insurance.

Since those selling you insurance get paid varying commissions based on the scheme, they get you to buy, keep in mind that there’s always a chance that the chap is selling you something that fills his pockets deeper.

Do your own research before buying any policy.

Once you have decided which policy to buy and submitted the application, the company decides whether they should insure your life or not and if so for what rate.

The rate will be higher depending on how old you are, if you have any medical conditions, whether you are a smoker. Other factors may involve family health history and other risk factors according to the discretion of the company.

Depending on the type of policy you buy, insurers might want to cross-check everything and thus require you to produce corresponding documents like medical records.

They may also do the following:

1. Request you to take a life insurance medical exam which may include the testing of your blood and urine samples

2. Use a prescription history database to check on the medications you have taken in the past.

3. Check if you have had any drunk and drive penalties in the past.

4. They may also check your credit score if the sum involved is very high.

5. Business credit reports if available will also be checked in some cases.


After the purchase


Things become a little easy after the purchase of the policy. The rates won’t change even if you start smoking or develop a new medical condition and you are not required to tell the company about it either.

Most insurance companies bet on you not developing new bad habits or medical conditions but that’s the risk they take and we have nothing much to do with it.

Policyholders when insuring their lives, choose a beneficiary(could be a spouse), who receive the benefit from the policy in the event of death. This can pay various expenses like college and tuition of the child, cover debt and many other needs.

Most insurance companies these days check public death records and pay the family of the insurer if any name matches with their records.


Types of life insurance


Two types of life insurance are term insurance and permanent insurance.

Term life insurance pays the amount insured if the policyholder dies during the term of the insurance taken. These are often terms that do not cover the entire life period of the insured person, have lower rates and are much simpler to grasp by the layman.

Permanent life insurance such as whole life insurance combines insurance and a cash value. This cash value is generally invested in stocks and the gains add up to your policy. Whole life insurance covers the entire life of the person involved provided that all premiums are paid on time.


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