How Does Life Insurance Work?

Life insurance was originally created to help cover funeral expenses, burial costs, and financial care for widows and children left behind. Today, however, it has become one of the most powerful financial vehicles on the market. More than half of all Americans have some sort of coverage, even if it’s just in the form of employer-sponsored life insurance.

Individuals can purchase life insurance on their own, in several forms. The most common division is the separation of the two main policy types:

·  Term life insurance

·  Whole (permanent) life insurance

As the names suggest, the first is issued for a specific term, such as 20 or 30 years. The latter policy is issued for the entirety of the policyholder’s life from the time of purchase, all the way up until their death. Each policy type has its own pros and cons to consider, but both policies essentially work the same.

Choosing a Coverage Amount

The first thing that you’ll need to do is decide how much life insurance you want. This is where it will be important to factor in things like your budget, your bills and final expenses, and other financial concerns that may arise after you are gone. For example, if you want to make sure that your children have money to go to college, you might want to add another $25,000 to $50,000 in coverage per child, or more, depending on their career dreams and goals.

Take the time to consider a few different levels of coverage. You might be surprised at just how much more you can get without spending but a few extra dollars. And every extra bit of coverage is just more peace of mind for those you leave behind.

Filing a Claim

Once someone passes away, their family will be able to contact the life insurance company and file a claim to start the process of getting their benefits. It’s important to name a beneficiary that will take care of your final expenses and divide any inheritances equally, and for everyone to know who that beneficiary is. In most cases, people choose a spouse or adult children. However, you can pick anyone that you feel comfortable with to be the beneficiary of your life insurance policy.

After you die, the death certificate will be issued. Depending on the circumstances of the death, this may take longer to produce because further investigation is required to determine the cause. Life insurance companies will only pay a claim once they have a death certificate that is finalized with a cause of death listed. They will simply issue a check (or offer direct deposit) to the beneficiary in the amount of the insurance policy, and the process is complete.

Exclusions and Limitations

Of course, there are always going to be exceptions to consider and life insurance is no different. Some policies won’t pay under certain circumstances or for specific causes of death, such as if it’s a suspicious death or if someone dies by suicide. Other policies might offer extra coverage for certain types of losses. There are a lot of variables at play, so be sure to read the fine print and know what you are signing up for.

Perhaps most importantly, it’s essential that you choose a life insurance policy from an insurance company that is reputable and has a good customer service department and claims process. These elements will assure you that when your loved ones do attempt to file for your life insurance benefits, they will not have any issues.