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What is a Life Insurance Policy and How Does it Work?

couple puzzled
Fiona Staff1/6/2022

There are many reasons for obtaining life insurance coverage, whether you have a spouse and children to protect or simply want to leave behind a legacy. Before you can choose and buy the right policy for you, you need to understand how a life insurance policy functions in the first place.

Here’s a look at how life insurance policies work, what sort of benefits they offer, and how they can provide for you and your loved ones before and after you pass away.

How Life Insurance Policies Work 

Most people purchase life insurance so their family is financially protected when they die. The premise for obtaining coverage is pretty straightforward:

  • Calculate your desired coverage amount

  • Choose your policy type, coverage limits, and any supplemental coverage (riders) you want to add.

  • After obtaining coverage, pay your monthly premiums for the duration of your policy term.

  • When you pass away, your loved ones file a claim on your active policy.

  • Once approved, your carrier will pay your loved ones a death benefit according to your policy’s contract.

As long as your policy remains active and in good standing — and the circumstances of your death do not fall under any exclusionary provisions — your beneficiaries will receive the full death benefit under the policy.

Picking your coverage amount and what type of policy you want has never been easier ― thanks to Fiona (in partnership with LeapLife). Get started on protecting the ones you love, today.

How Your Beneficiaries File a Claim

The process for filing a life insurance claim is usually quite simple. Your loved ones will first need to notify the carrier of your passing. Depending on your carrier, this can be done: 

  • Over the phone

  • By mail

  • With an app

  • Via email

  • Through a local agent

Your family will also need to provide any necessary documentation. This usually includes a death certificate and claim form, though other information may also be required.

Then, once the claim has been approved, your named beneficiaries will receive a payout of your policy’s death benefit (minus any accelerated benefits you may have already utilized, if applicable). If you do not have a living beneficiary named, the proceeds will transfer to your estate and next of kin. 

How the Benefit is Used

While you can specify that your life insurance proceeds be used in certain ways, it’s actually up to your beneficiaries to follow through with those wishes. 

For instance, if you want a portion of your policy’s benefit to be donated to a specific cause or charity, but name your spouse as your only beneficiary, you’ll need to make sure that he or she knows about your wishes beforehand.

Living Benefits Explained

The emotional benefit of buying life insurance is that it offers peace of mind. You can sleep soundly each night knowing that your assets are protected, your loved ones can be provided for without your income, and that you have provided a nest egg for other expenses like an unpaid mortgage and college tuition. 

Your life insurance policy’s death benefit is provided to your loved ones tax-free. Because of this, it provides them with a secure safety net, making it easier to accurately determine how much life insurance coverage you should buy.

Beyond that, though, your life insurance policy may also provide what are called living benefits.

Living benefits are supplemental life insurance features, intended to be used while you’re still alive. This could include things like:

  • Accelerated death benefits for terminally, chronically, or critically ill policyholders

  • Cash value

  • Disability and long-term care provisions

The living benefits available to you will depend on the type of coverage you choose as well as the riders added to your policy.

Bottom Line

When it comes to financial preparation, life insurance is more simple than you may think. You pick a policy, you pay for the policy, and your loved ones can file a claim on that policy in the event of your passing. It’s important to know all of the details, namely how much coverage you will need and which policy type suits you best. Once you figure that out, you’ll be on your way. 

Not sure what type of life insurance coverage you need or where to start with buying a policy? Fiona, in partnership with LeapLife, offers an easy and comprehensive way to get matched with personalized life insurance quotes from A-rated (or higher) carriers in all 50 states.

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Disclaimer: The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the suitability of any Even Financial product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional. Any information or statistical data sourced by Even Financial through hyperlinks, from third-party websites, are provided for informational purposes only. While Even Financial finds these sources to be accurate, it does not endorse or guarantee any third-party content.