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How Life Insurance Works

The insured pays premiums to an insurance company to purchase and keep a policy in force. When the insured dies, their beneficiaries will receive a death benefit payout.

Coverage Basics

In very simple terms, life insurance is a contract between an insured individual and a life insurance company. Generally, it works like this:

While the insured is alive: Insured pays premiums to the insurance company in exchange for an insurance policy. At the Insured's Death: insurance company pays death benefits to the beneficiaries.

As illustrated above, while the insured is alive, they pay premiums (often very small relative to the death benefit promised) to an insurance company. The insurance company issues an insurance policy in exchange for those premiums. If the insured dies while the policy is in force, the insurance company pays the death benefit outlined in the policy to the insured’s named beneficiaries.

This last point is extremely important so bares repeating. Life insurance benefits are paid to whomever you have named as beneficiary at the time of your death.

Key Takeaway: It’s extremely important to make sure you keep life insurance beneficiary designations up to date and in alignment with your current wishes and life situation..

Getting Coverage Isn’t Always Guaranteed

Insurance companies aren’t required to issue coverage to anyone who wants it. Instead, individuals apply for coverage and, based on the information they provide, the insurance company decides whether or not to issue them coverage and at what cost.

Many factors play into an insurance company’s decision to issue a life insurance policy or not. Two of the biggest are medical history and responses to medical and lifestyle questions. In some cases, medical tests are even requested to help the insurance company determine if they will issue the policy.

Medical history and health condition are weighted heavily in the decision to issue a policy, so younger and healthier individuals generally have an easier time getting life insurance than older or less healthy individuals.

The Basics of Life Insurance Cost

Medical history and health condition also impact the cost of life insurance. At a basic level, life insurance companies base the cost of coverage on the likelihood of a covered individual dying while the policy is in force and the company then having to pay death benefits.

Tip: Younger and healthier people generally get charged less for life insurance than older and/or less healthy people.