Do you have plans to financially support your family in the case of your untimely death? A funeral alone can cost thousands of dollars, but they’ll also have to potentially deal with a loss of monthly income and health insurance coverage.
One way to ensure that your family still has some level of support is through your life insurance company. While a life insurance policy doesn’t do much to help them while you’re alive, it kicks in as soon as you’re gone.
But how does life insurance work, and how do your beneficiaries get what they’re owed?
Basics of Life Insurance
Life insurance is a type of policy offered by certain companies. Like other forms of insurance, you pay a monthly premium to maintain the coverage. However, life insurance only grants a payout after your death.
In some rare cases, you can access living benefits which may help if you’re terminally ill and need medical care.
The reason you get life insurance is if you want to provide financial support for your family when you’re gone. It can also go towards repaying any debts that your family members may get saddled with.
How Does Life Insurance Work?
How life insurance works will depend on the type of coverage you get, the amount you pay, and how you want the payout distributed. The kind you can purchase will also depend on your current status. Anyone that is severely ill will have a much more difficult time acquiring life insurance coverage than someone in good health.
What It Covers
Although life insurance coverage is meant to provide income for your family members, it may not work as intended in some situations.
For example, natural and accidental causes of death and homicide are covered. This is useful if a person works in a job that is particularly dangerous, like law enforcement or construction. However, not all policies cover suicide.
Types of Life Insurance
There are two main types of life insurance: term life coverage and permanent insurance.
Term life insurance only offers coverage for a set amount of time. This can be anywhere from 15 to 30 years. However, benefits are not paid out as soon as the policy ends.
The tradeoff is that term life insurance is often more affordable. It’s a good option for older adults who want to support their families.
Permanent life insurance provides a death benefit as well as cash value based on how long you’ve held onto it. Premiums are often higher, but so should the payout.
Cost of Life Insurance Policy
How much you pay on your life insurance will depend on the type of coverage as well as the company. A 20-year term policy can cost as little as $30 a month. Permanent insurance can cost upwards of $200 per month.
Choosing a Beneficiary
One of the most important parts of setting up your life insurance policy is assigning a beneficiary. This is who will receive the death benefit when you pass away. You can name multiple beneficiaries, as well as contingent ones that would receive the benefits if the primary beneficiary passes away.
The person who gets your death benefits can be anyone from a spouse, parent, sibling, or even a business partner. If a beneficiary is not chosen, the money will get paid out to the insured’s estate. The proceeds are then distributed accordingly, but your estate may need to go through probate.
Filing a Claim
Payouts from your life insurance policy do not go out as soon as you pass away. It’s up to the designated beneficiary to file a claim with the life insurance company. They can do this either online or through the mail.
The insuring company will require certain paperwork as well as proof of your passing before they can confirm the payout. Part of the proof is a certified copy of the death certificate. They can obtain this through the county, nursing home, or hospital.
Although there is no set deadline for filing a claim, it helps to do it as soon as possible. It could take as long as two months for someone to receive death benefits.
There are a few different ways to distribute your death benefits after you die.
A lump-sum payment is the default option. In this case, your beneficiary will receive a single payment instead of installments.
Installments and annuities allow the beneficiary to receive payments over the course of their life. They can select a few different options and space those payments out however long they want. This is a good option to avoid heavy taxation.
Finally, there’s a retained asset account. This works similarly to a bank account in that you can withdraw money. However, you cannot deposit money into it.
Who Needs Life Insurance?
Life insurance is a good option for anyone that has family members or even charitable organizations they want to provide money for when they’re gone.
However, whether or not you have preexisting conditions can affect it. At best, it’ll be difficult to purchase insurance. People with conditions such as diabetes or anxiety may have higher premiums.
Additionally, permanent life insurance won’t pay as much if you haven’t had it for very long.
It helps to take the time and shop around. Different insurance carriers may offer better deals, while others will be more accepting of those with medical conditions.
Get the Best Life Insurance Policy Around
So how does life insurance work? It provides financial support for your family and loved ones in the case of your death. However, the benefits paid out may vary depending on the company, the type you purchased, and how long you’ve had it.
Wise Money Life provides the best consumer financial information so you can make an educated decision. We allow you to get quotes on credit cards, mortgages, home insurance, and more. Compare your different life insurance options today.