What Is Life Insurance and How Does It Work?

By: Updated: December 8, 2021


In this day and age, life insurance is a must. The reality of death has struck many close to home. Death is a very traumatizing experience for your loved ones.

Even when families are coping with the loss of a loved one, they are often forced into a difficult position financially. Life insurance offers a proactive way for individuals to protect their loved ones from financial ruin. Life insurance provides families with the necessary security to avoid the financial predicament that ensues after the passing of a loved one.

Life insurance is a legal agreement that ensures a sum of money to be paid out to your listed beneficiaries. This lump sum will be able to help your family absolve outstanding debts and reach financial stability.  


What Is Life Insurance?

Life insurance is a legally binding contract between an insurance policy holder and an insurer or assurer. This contract ensures that the insurer promises to pay a designated beneficiary a sum of money upon the death of an insured person.

This lump sum of money is designed to help the beneficiaries. Depending on the contract, other events such as illness can also trigger payment.


How Does Life Insurance Work? 

After the passing of a loved one, you can file a claim with the life insurance company. Most insurance companies will ensure that you get your payout within 30 to 60 days of filing the claim. This fast turnaround allows families to pay off medical bills, funeral expenses and outstanding debt. 

Life insurance is not typically viewed as a "pay day", if someone had a sizable plan there will be a large payout. However, these funds are typically designed to pay off large expenses like a house's mortgage, college tuition, or help a family get a fresh start. Although nothing can make up for the loss of a loved one, life insurance allows beneficiaries to focus on healing without fear of financial ruin.  

Life insurance companies are designed to add additional financial security to your family. This goal can be obstructed if you opt to invest in an unreliable life insurance company. In order to be proactive, you should always make sure that you are putting your family's financial security in a trustworthy agency like us. 


What Does Life Insurance Cover?

When it comes to selecting a life insurance policy, you need to weigh the benefits offered and decide what works best for you. 

The two biggest categories in life insurance policies are term policies and whole life policies. Term life policies offer no additional benefits after the death benefit. Whole life policies can grow cash value and do not require a death to receive a payout.

Life insurance benefits can be used to manage a pre-determined inheritance. These funds are designed to pay off debts and manage final costs.

In contrast to saving money in your bank account, these benefits are usually income-tax-free to the beneficiary. In some cases, life insurance companies offer discounts or different products to potential clients. 

Based on your family's size and lifestyle you may need to opt for a different type of plan. If you are the primary breadwinner in the family, your life insurance should be for a larger payout. This forethought would allow your family to readjust their earning potentials without being bombarded by bills. 

When you are comparing the different plans and benefits offered by an insurance company you need to prioritize your needs. You can get the most cost-effective plan by being realistic but what kind of coverage you may need.


Consider the State of Your Health 

Your personal demographic and personal health plays a major role in the cost of your health insurance. Even someone in the best physical shape of their life is susceptible to an expiration date. 

When insurance companies assess the price of your plan they want to use a formula to determine the likelihood of you passing away prematurely. Typically younger policyholders pay lower premiums because they will generally be in better health. Young people will also be paying into the plan over a longer period of time.

Some insurance companies even require that you undergo a physical assessment to determine your health. If there is a history of extensive medical conditions and serious illnesses can affect your premiums. Life insurance gives you necessary financial security, but it still is a for-profit business. 


How Much Does Life Insurance Cost? 

The price of life insurance can range greatly based on the packages offered. If you are looking to buy life insurance you need to find an affordable plan that aligns with your desired benefits. 

The best-valued plan is not always the most inexpensive. When you are picking a life insurance policy you want to make sure that the plan's benefits align with your family's realistic needs

If you are purchasing your life insurance at a young age you can feel reaffirmed that you can always adjust your plan's value later on. This re-upping of a plan is really common amongst families that are growing. Parents see life increasing their life insurance as a way to ensure that their children are taken care of, even after they pass. 


Feel Secure When Choosing Life Insurance Companies

Life insurance policies act as a great way to pad your family's financial state. Once you have passed on, your policy will be able to help your loved ones and ensure that they are taken care of.

Although some may think that shopping around for life insurance is morbid, it's a way to take care of your family. Buying a life insurance policy should always be viewed as an investment for your family. 


Are you incorporated in Canada?

Small business owners and incorporated individuals in Canada can use a Health Spending Account (HSA) to save up to 40% of their medical expenses.  An HSA has no premiums and it is a cost effective alternative to traditional health insurance.  The plan covers a wide variety of health and dental expenses.  An HSA takes only a few minutes to set up.  Learn more by downloading one of our guides.


Learn more about a Health Spending Account by downloading a free guide:

Download the HSA Guide for Incorporated Individuals Download the HSA Guide for a Business with Staff

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