Life insurance has a somewhat misleading name since it’s actually contingent upon death. Confusing, right? Let’s dive deeper into how life insurance works.
What Is Life Insurance?
Life insurance is an agreement between you and your life insurance company that ensures your beneficiaries will be paid a predetermined sum of money in the case of your death. It is meant to help your family pay for things such as funeral costs, debt, and even replace the income that otherwise would have been earned by you.
Some life insurance policies work by only paying out if your death is caused by unnatural causes and accidents, though some can include natural causes or illness.
Types of Life Insurance Policies
There are two different types of life insurance policies: term life insurance and permanent life insurance. The type you choose will impact both the premium you pay monthly and the timespan that the insurance covers.
Term Life Insurance
As implied by the name, term life insurance only covers you for a certain term or number of years. For example, your term life insurance may only be valid until you are 65 years old. If you outlive the agreed term, then your policy will have no value, and your family will not receive anything in the event of your death. For this reason, term life insurance is cheaper than permanent life insurance.
Permanent Life Insurance
Permanent life insurance covers you until the end of your life. These policies accrue in value as you age, but the monthly premiums you pay can be incredibly steep. Whole life insurance is a type of permanent life insurance.
In both cases, life insurance premiums work by determining the level of risk you pose to the insurance company. In the case of a term life insurance policy, if the insurance company sees that you have health conditions or lead a risky lifestyle that would make it more likely for you to die early, your premiums will be higher.