How Does Life Insurance Actually Work?

We know life insurance isn’t an easy topic to discuss. And, if you’re reading this while trying to navigate the life insurance policy of a loved one who has passed away, you have our deepest sympathy.

How Does Life Insurance Work?

To sum it up, you pay for a life insurance policy, and when you die, that policy will pay the designated individuals or organizations (beneficiaries) the dollar amount specified within the provisions of your policy.

The death benefit, for a personal policy, is mostly used by family members to help cover funeral expenses, pay off debts and help replace lost income for daycare or other everyday expenses. Depending on how the policy was set up, the funds may also help pay for a dependent’s education and other legacy planning priorities specified in their trust.

Here are some important variables to consider when choosing a life insurance policy.

  • How long you need to be insured
  • The amount of the death benefit
  • Whether or not the policy builds cash value
  • How long you are required to pay for the policy

Depending on your life stage, certain types of coverage may be more appealing to you such as: whole life, term life, and universal life insurance.

How Does It Work Upon Death?

After the person that is insured under the policy dies, a family member needs to call in a claim to the insurance company. They will likely need a copy of the death certificate and the policy number.

Once the claim is submitted, the designated individuals can generally expect to hear back from the insurance company within a few days with further instruction. Once the funds are distributed, they can use the money to cover costs such as: funeral expenses, pay off debts, help replace income and any other needs they may have.

If the deceased person wanted certain funds set aside for specific needs, they may have designated their trust as the beneficiary of their policy. In this situation, their trust will provide instructions on how the funds are to be used and you will need to refer to those documents to allocate the funds as specified.

Does Life Insurance Actually Pay?

Yes, it does pay! Our experts are passionate about helping families during these difficult times.

However, there are situations when a life insurance policy may not pay the beneficiaries, which may include, but are not limited to:

  • Death from suicide, if within the contestability period
  • Material misrepresentations on the policy’s application that affect eligibility
  • Required premiums were not paid to keep the policy in force
  • The policy was through an employer’s group plan and the person that is insured under the policy is not employed with that company at the time of their death
  • The person insured under the policy died while participating in illegal activities

Review the policy carefully for full payout limitations and conditions.

Can I Cash In My Life Insurance Before I Die?

Some policies build a cash value. Permanent life insurance policies, like whole life and universal life insurance policies, offer this but term life insurance policies don’t. As you make payments on your whole life or universal life policy, part of your payment goes toward building your cash value. For whole life policies, your cash value builds at a guaranteed interest rate that is assigned when you purchase your policy.

You can withdraw the cash value or take a loan against your policy’s cash value to pay for a large expense such as college, a house, etc., while the policy is still in force. Both of these options will decrease the lump sum your beneficiary receives. With the loan option, you will be charged interest on the loan. Other charges may also apply when withdrawing from the policy’s cash value.

The cash value is really supposed to function as a legacy planning account, not a personal loan, but it can be used that way if needed!

Contact Us

If you have questions regarding your policy or want to learn more about the options available, contact one of our life insurance experts today! You can reach us at 712-277-2424 or fill out this form online.