How Life Insurance Works — A Jargon-Free Explanation

Find out the options available to you and how you can protect your family.
Last updated Sep 13, 2020 | By Lindsay Frankel
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Most people have insurance policies that protect them in the case of an unexpected event, such as a health issue or a car accident. But fewer Americans (57 percent) have secured life insurance policies that will protect their families in the event of their death. That’s likely because 54 percent of adults aren’t knowledgeable about how life insurance works.

If you’re curious about life insurance, we’re here to explain it — without all the jargon. It might be easier (and less expensive) than you think to protect your family’s financial future. Read on to find out whether life insurance is right for you.

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How life insurance works

A life insurance policy represents an agreement between you and an insurance company. You agree to pay monthly premiums. In exchange, the insurance company agrees to pay out an amount of money to your beneficiaries (family members who you want to benefit from the policy) if you die.

The two most popular options for life insurance are term life insurance and whole life insurance. Here’s how those work.

Term life insurance explained

Term life insurance offers protection for your family for a specific time period. For example, you might choose a policy that lasts 10, 20, or 30 years. For most policies, your monthly payment will stay the same over the course of the term. If you die during the term, your family will receive a payment equal to the value of your policy.

Term life insurance is typically much less expensive than whole life insurance. Choosing a term that covers your peak earning years can ensure that your family isn’t stuck with financial obligations (such as a mortgage) without access to your income.

Whole life insurance explained

Whole life insurance is permanent, which means your family will receive a payout no matter when you die. Monthly payments for whole life insurance can cost three to 10 times more than term life insurance monthly payments.

When you make monthly payments on your whole life insurance policy, a portion of the money is deposited into an interest-bearing, tax-deferred account. The cash value of the policy accumulates over time. You have the option to borrow against that account or use it to pay monthly premiums when it reaches a certain amount. Just be careful when taking out a loan against the cash value, as this will reduce the payout for your family if you die while the loan is outstanding.

If you purchase a whole life insurance policy, your family will receive a death benefit (equal to the value of your policy) when you die. They won’t receive the cash value amount in addition.

How to purchase life insurance

Once you’ve decided which is the best life insurance policy for you and how much protection you need, you can contact a broker or use an online tool to compare quotes from different life insurance providers. You can also research and contact life insurance companies individually.

Many providers will require paperwork, an interview, and even a medical exam to assess your risk and determine your monthly premium. But applying for life insurance doesn’t necessarily need to be that involved. With Bestow, you can apply for coverage in minutes by answering a series of simple questions, and you don’t necessarily need a medical exam. Not only is it easy to apply, but the coverage is also inexpensive. Life insurance coverage through Bestow costs as little as $5 per month for some applicants.

The final word on life insurance

No one likes to imagine the worst-case scenario happening to their family, but it’s important to be prepared. If you don’t want to risk leaving your spouse alone with your financial obligations, you should consider applying for life insurance. Your monthly premium depends on several factors, including your health, history of tobacco usage, and the amount of coverage you need. But you might find that achieving peace of mind is more affordable than you expected. It’s worth exploring your options, especially because you can get an estimate without leaving your home.

Once you’ve decided on a life insurance policy, be sure to inform your family. They’ll need to know the name of the company to access the benefit in the event of your death. Hopefully, the policy you choose will offer you the peace of mind you need to live a long, healthy life with your family.


Bestow Benefits

  • Leave your family up to $1,000,000 in life insurance
  • Apply for a policy in under 5 minutes
  • No medical exam required
  • Policies start at just $8/month