How Does Life Insurance Actually Work?
You apply for coverage. The insurance company reviews your application and decides what it can offer. If you accept the policy, you keep the coverage in force by following its terms.
That is the basic idea. Here is the entire process in simple language.
Life Insurance in 6 Simple Steps
This is what normally happens from the time you start looking until a policy is in place.
Decide What You Want to Protect
Think about your spouse, children, mortgage, final expenses, income, or what you want to leave behind.
Apply for Coverage
You provide information about yourself, your health, and the coverage you want.
The Company Reviews You
The insurer decides whether it can cover you and what the price may be.
You Receive an Offer
If approved, you see the coverage, premium, and policy terms being offered.
Your Policy Begins
You complete the carrier’s requirements for the coverage to go into force.
The Policy Can Pay a Benefit
If an eligible covered claim occurs while the policy is in force, the policy pays according to its terms.
Three Things to Understand
Premium
The premium is the amount you pay for your insurance coverage.
Policy
The policy explains the coverage, requirements, benefits, and other terms.
Death Benefit
The death benefit is the money payable under the policy when an eligible covered claim is approved.
A $250,000 death benefit does not mean you paid $250,000 into the policy. Your premium and your death benefit are two different numbers.
What Does the Insurance Company Look At?
What Is Underwriting?
Underwriting is simply how the insurance company
evaluates your application.
It helps the company decide
whether it can insure you,
how much coverage it can offer,
and what your premium may be.
Depending on the policy,
the carrier may use health questions,
prescription history,
medical records,
electronic information,
or a medical exam.
An Approval Is an Offer
Applying does not mean you are required to buy the policy. The carrier reviews the application first.
As Requested
You may be offered the coverage you requested at the expected price.
Different Price
The carrier may offer coverage at a different premium based on underwriting.
Different Coverage
In some cases, the amount or policy offered may differ from what you requested.
Declined
A carrier may decide it cannot offer coverage under its rules.
You decide whether you want to accept the offer that is made.
Applying Is Not the Same as Being Insured
Submitting an application does not automatically mean permanent coverage is already in force.
The actual effective date of the policy matters. Always know when your coverage is officially in force.
Three Roles Can Mean Three Different People
Policy Owner
The person or entity that owns and generally controls the policy.
Insured
The person whose life is covered by the insurance policy.
Beneficiary
The person, people, trust, or eligible entity named to receive the proceeds.
Keep the Policy in Good Order
Pay Premiums as Required
Coverage can be affected if required premiums are not paid according to the policy terms.
Keep Information Current
Make sure the insurance company has current contact information.
Review Beneficiaries
Marriage, divorce, births, deaths, and other family changes may be good reasons to review your choices.
Make the Policy Findable
Make sure someone you trust knows that the policy exists and where important information can be found.
Review Your Needs
Your coverage needs may change as your family, finances, and responsibilities change.
The Beneficiary Files a Claim
The beneficiary contacts the insurance carrier
and provides the requested claim information.
The carrier reviews the claim.
If an eligible covered claim is approved,
the death benefit is paid
according to the policy
and beneficiary designation.
Meet David
Here is the entire process with one simple example.
Temporary or Permanent Coverage
Term Life
Term life generally provides coverage for a set period, such as 10, 20, or 30 years. It is often used for temporary protection needs.
Permanent Life Insurance
Whole life, universal life, and other permanent policies are designed for longer-term or lifelong coverage when policy requirements are met.
A Few Common Misunderstandings
That’s Really the Basic Idea
You decide what you want to protect.
You apply.
The insurance company reviews the application.
You decide whether to accept the offer.
You keep the policy in force.
And if an eligible covered claim occurs,
the policy pays according to its terms.
The next question is which type,
amount,
and insurance company may fit your situation.
This page provides general educational information. Coverage, pricing, policy terms, underwriting, eligibility, and availability vary by applicant, carrier, policy, and state.