how does life insurance work

How Does Life Insurance Work?

You have an insurance policy for your house and your car, but have you ever considered getting a policy for your family’s financial security? There are a lot of misconceptions about what life insurance provides, but our guide will help you understand the basics and decide if it’s right for you.

What Is Life Insurance?

Life insurance is a contract between you and an insurance company. In exchange for paying premiums, the company will pay out a lump sum to any beneficiaries upon your death. This sum, called a death benefit, acts as an income replacement for your loved ones. Life insurance is a safety net that helps ensure your family can stay in their home and pay their bills.

A life insurance policy may be right for you if:

  • You have people in your life who are dependent on your income.
  • You cosigned a mortgage, credit card or auto loan with your spouse or partner.
  • You have children.
  • You have student loans.
  • You own a business.

A life insurance policy will protect your loved ones from becoming responsible for your debts after you’ve passed, providing peace of mind and security. 

Types of Life Insurance

There are two main types of life insurance: term and permanent. As the name implies, term life insurance is active for a set amount of time. Permanent life insurance lasts for your entire life. Because permanent is more expensive, 70% of policy holders choose term life insurance. Your premiums stay the same for the duration of the policy when you sign up for term life insurance, and you can choose from a wide range of term lengths (10, 15, 20, 25 or 30 years). If you pass away during the term, your insurance company will pay out your death benefit. If you’re still alive at the end of the stated term, your policy ends. You can renew for one-year increments after that, but it’s usually at a much higher rate.

Permanent life insurance requires you to pay premiums for your entire life. Once you pass, your death benefit will be paid out. This type of policy usually comes with a cash value component that increases in value as you pay your premiums. Eventually, the cash value component may increase the amount of the death benefit.

There are several types of permanent life insurance:

  • Whole life insurance: The cash value grows at a fixed interest rate.
  • Universal life insurance: The cash value is tied to a stock index. If the index underperforms, you might pay higher premiums to cover the difference.
  • Variable life insurance: You decide which assets you’d like to invest in.  
  • Paid-up whole life insurance: You pay increasing premiums over several years, after which you are covered for the rest of your life.
  • Single premium life insurance: You pay one premium at the beginning of the policy, after which, you are covered for the rest of your life.

What Kind of Policy Should You Purchase?

Most people benefit from purchasing a term life insurance policy. Permanent life insurance policies are more expensive, and the cash value often reverts back to the insurance policy upon death. A term life insurance policy is the right choice if you only need coverage for a certain amount of time (i.e., your “working years”) or if you have a limited budget. As your needs change, you can likely convert your term policy to a permanent one. You won’t be required to take a new medical exam or re-apply.

However, if you make the maximum contributions to your retirement plan and are looking for ways to increase your money, a permanent policy may be the right choice for you.

How Much Does Life Insurance Cost?

The price of life insurance is variable and depends on your lifestyle. If you are healthy and don’t take any risks — like skydiving or mountain climbing — your premiums will be lower than if you have a health issue or high-risk hobby. A good rule of thumb is to calculate what you’d like to cover (income replacement or a mortgage, for example) and then subtract any savings you already have. While this number may seem high, the benefits will help to support your family for years to come. In addition, it’s free to get life insurance quotes, so it won’t hurt to look into different policies.

Find Your Perfect Policy With True Texas Benefits

If you’re interested in a life insurance policy but are unsure where to start, True Texas Benefits can help. We are here to help you decide which types of coverage are right for you and your loved ones. Give us a call at 469-672-6950 or visit truetexasbenefits.com for more information.