- How does life insurance work? It gives your loved ones an income source if you pass away.
- Getting life insurance is easier than many people realise, but rates typically increase with your age.
- Signing up for term life insurance now locks in your rate for the duration of the policy’s term.
- Policygenius can help you find a life insurance policy that fits your needs. Get a quote today »
Life insurance is a personal finance cornerstone that’s important in protecting your loved ones. While no one likes to think about dying, it happens to about 150,000 people around the world every day.
Life insurance provides income for your loved ones in the unfortunate event that you pass away.
Here’s how term life insurance works and how you can sign up to make sure your family is covered in the event of a worst-case scenario. (Whole life insurance policies are six to 10 times more expensive than term life insurance policies and are appropriate for a very small number of people, so we’re focusing here on term life insurance.)
How does life insurance work?
1. Shop around for a policy with the best rate for your needs
There are a handful of companies that provide life insurance policies, and many agents who sell those policies.
I found my life insurance policy through a friend who is a financial adviser, but there are many ways to find life insurance.
What’s most important when looking for life insurance is that you compare different policies to get an idea of what monthly cost is reasonable given your health history and policy value.
2. Apply for a policy with a quality insurer
Using an online comparison tool, you should have been able to find a list of potential insurers and identify the lowest potential monthly cost. Once you’ve picked your favourite, ideally a reputable company with a strong financial rating from AM Best, it’s time to apply.
The application process can be very detailed, so carve out some time to get it done. Once you’ve done some due diligence and have decided on a trustworthy insurer, you can go on to the next step.
3. Complete the application and schedule a medical exam
Life insurance applications ask you about things you’ve probably never thought about. You’ll need to input information on your health, your family’s health history, your lifestyle, and other questions. Never lie on an insurance application. That is considered fraud and against the law.
Questions include things like your family’s history of cancer and heart disease, whether or not you participate in extreme sports like rock climbing, and if you’ve had any major illnesses or surgeries in the past.
4. Complete medical underwriting
Once you finish your application, you should hear back from the agent or insurance company about scheduling a medical review. This appointment is free to you and paid for by the insurer. They will usually send a nurse to your home or work at a time that is convenient for you.
The exam usually includes a blood test, peeing in a cup, and more questions. My exam took less than an hour and was relatively painless, except for the needle to take my blood.
Going through this process qualifies you for the best rate for your health and lifestyle and shouldn’t scare you off from applying.
5. Accept your policy and make your first payment
Hopefully, you don’t have to wait too long to hear back with your final rate. Most insurers use a formula that gives you a rate per thousand dollars of coverage. This is your chance to lock in your policy for the term you picked.
Term life insurance policies give you a rate that’s good for the entire life of the policy. Even if you have other health issues come up in the future, your rate is fixed once you sign and make your first payment.
6. Keep paying to keep your policy active
As long as you keep paying, your policy stays active. The monthly premium is what you pay to give your family financial protection.
I signed up for a policy in my late 20s and pay around $US75 per month for a $US1 million policy. Depending on your age, underwriting results, and the policy value and term, your monthly payment may be a lot lower or higher.
As a general rule, life insurance gets more expensive as you get older. That’s why it’s smart to lock in your rate as young as possible. Odds are your cost will only go up in the future, so if you’ve been on the fence about life insurance, don’t delay. The cheapest policy you will probably get is the one you get today.
7. If you pass away, your beneficiaries get a payout
Hopefully, you will outlive the term of your life insurance policy. If you do, you can stop paying at the end of the term and be thankful your family never needed to cash in. But if something does happen to you, your beneficiaries get paid out the policy’s value.
Also called a death benefit, the payment goes to the people named as beneficiaries on your policy regardless of what it says on your will.
If you ever get married, divorced, or want to make a change, be sure to contact your insurer to make an update. Make sure it goes to the right people by keeping your beneficiaries updated.
Life insurance protects your loved ones from a loss of income
Car accidents, unexpected illnesses, and major injuries happen all the time. Just like you get auto insurance to pay for car repairs in the event of an accident, you need life insurance to guarantee your family has money if your paychecks suddenly stop.
In an ideal world, your loved ones will never get a life insurance payout. But for peace of mind, it’s good to have life insurance. Just in case.