What Is Life Insurance and How Does It Work: Exploring the Basics

Life insurance is a topic that often brings discomfort to conversations. If you ask your friends or family about life insurance, they might tell you that it's a policy that pays your family in the event of your death. However, beyond this basic understanding, many individuals tend to avoid discussing the other benefits and intricacies of life insurance. 
If you're considering getting life insurance, it is crucial to fully understand its significance. In this article, we will explore what life insurance entails and the key factors you should know before getting a plan.
At its core, life insurance is a contract between you (the policyholder) and an insurer. In exchange for regular premium payments, the insurer promises to provide a set amount of money, known as the death benefit, to your beneficiaries upon your death. The purpose of life insurance policies is to offer financial protection and support to your loved ones in the event of your passing.

To better understand what life insurance is and how it does work, it's essential to familiarize yourself with key terms associated with it:

  • Insurer: The insurance company that offers the life insurance policy and assumes the financial risk.
  • Policyholder: You, the individual who purchases the life insurance policy and pays the premiums.
  • Insured: The person whose life is covered by the insurance policy. In most cases, the policyholder and the insured are the same person.
  • Death Benefit: The amount of money the insurance company pays out to the beneficiaries upon the insured's death.
  • Beneficiaries: The parties designated by the policyholder to obtain the death benefit upon the insured's death. Beneficiaries can be family members, friends, or even charitable organizations.
  • Policy Length: The duration for which the life insurance policy remains in effect. This can range from a few years to a lifetime, depending on the type of insurance.
  • Premium: The regular payments made by the policyholder to the insurance company to maintain the life insurance coverage. Premiums can be paid monthly, annually, or in other agreed-upon intervals.
  • Cash Value: Some life insurance policies, such as permanent insurance, accumulate cash value over time. This feature allows you to access a portion of the policy's value while you're still alive, through withdrawals or loans.

This type of insurance provides coverage for a specified period, usually ranging from 10 to 30 years. It offers a death benefit if the insured passes away during the insured period.

Term insurance is often more affordable than permanent insurance, making it an attractive option for individuals seeking temporary coverage. If you wish to renew your term policy once it expires, you can do so by renewing one year at a time. However, each renewal year will be subjected to a higher rate.

As the name suggests, permanent insurance provides coverage for the entire duration of the insured's life. This type of policy can further be categorized into two kinds.

  • Whole Life Insurance: Guarantees a death benefit and accumulates cash value over time. Premiums for whole life insurance tend to be higher than term insurance but remain fixed throughout the policy's life.
  • Universal Life Insurance: Provides more flexibility than whole life insurance. It allows you to adjust the death benefit and premium payments to better suit your evolving needs. This type of permanent life insurance also accrues cash value, which can be used to cover premiums or increase the death benefit.

The primary purpose of life insurance is to provide financial support to your beneficiaries upon your passing. It can help cover various expenses, such as funeral costs, outstanding debts, mortgage payments, and ongoing living expenses. This way, your loved ones can focus on processing their emotions regarding your death instead of worrying about financial obligations.

Additionally, life insurance policies often offer additional coverage options called riders. These riders allow you to customize your policy to meet specific needs. Some common riders include:

  • Accelerated Death Benefit Rider: This rider allows you to access a portion of the death benefit if you are diagnosed with a terminal illness, providing financial assistance during your lifetime. You can use the money to pay for your treatments and avoid spending your savings.
  • Waiver of Premium Rider: In the event of a disability or inability to work due to illness or injury, this rider waives future premium payments, ensuring your policy remains active.

Choosing the right life insurance plan requires careful consideration of your circumstances and goals. By understanding these, you can determine the amount and type of coverage you need to ensure your loved ones are financially secure when the unexpected happens.

Start by assessing your financial obligations, such as outstanding debts, mortgage, and the needs of your dependents. You should also consider your long-term goals, such as providing for your children's education or leaving a legacy for your family.

If you’re still in the process of paying your mortgage or have young children who are still in school, you might need to get a life insurance policy with a higher benefit. Doing so will provide you with peace of mind knowing that your family can continue paying for these things in the event of your passing.

You should also research and compare different insurance providers, policies, and their respective terms and conditions. Seek guidance from reputable insurance agents or financial advisors who can help you navigate the complexities of life insurance and find a plan that aligns with your needs and budget.

Lastly, remember that the longer you wait to get life insurance, the more expensive it can get. So, don’t put things off, and start finding a plan that works for you while you’re young. You can always get another plan or tweak your existing one should your needs change in the future.

Let Allianz PNB Life help you build a better tomorrow for yourself and your loved ones through our insurance solutions. If you want to learn more about life insurance and our products, talk to our Life Changers™ today.