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What is life insurance and how does life insurance work?

A life insurance policy is a contract with an insurance company. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured's death. That's how life insurance works.
Jan 29th 2019
2 min read
How does life insurance work?

Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance is designed to help provide financial protection for a specific period of time, such as 10 or 20 years. With traditional term life insurance, your premium payment amount stays the same for the coverage period you select. That’s why term life insurance is generally less expensive than whole life insurance. After that period, policies may offer continued coverage, but usually at a higher premium payment rate.


Term life insurance proceeds could be used to replace lost potential income during working years. This could help provide a possible safety net for your beneficiaries and could also help ensure the family's financial goals may still be met—goals like paying off a mortgage, keeping a business running, and paying for college.

It's important to note that although term life could be used to replace lost potential income, life insurance benefits are paid at one time in a lump sum, not in regular payments like paychecks.

Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. Because of the lifetime coverage period, whole life usually has higher premium payments than term life insurance does. Policy premium payments are typically fixed and unlike term life insurance. Whole life has a cash value that could function as a helpful savings component and may accumulate tax-deferred benefits over time.

Whole life may be used as an estate planning tool to help preserve the wealth you plan to transfer to your beneficiaries.

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