How Does Life Insurance Work?

Quick Answer: Life Insurance pays your beneficiaries a tax-free lump sum of money when you die.

How Does Life Insurance Work?

Home insurance protects your house and car insurance protects your car. Life insurance protects… your beneficiaries.

A life insurance policy is a contract between you and the insurance company. In this contract, the insurance company promises to pay your listed beneficiary(s) a lump sum of money if you die while the policy is active. In exchange, you promise to pay the insurance company some money (called premiums) on a regular basis.

You can choose your beneficiaries and amounts that they would get.

Life insurance is just one part of an overall financial plan. You use it to make sure your family will still get the money you make, even if you’re not around to make it.

For example, Dan buys a $500,000 policy and names his wife Sally as the beneficiary. In exchange, Dan agrees to pay the insurance company $40 every month. If Dan has kept up with his payments and dies while the policy is active, the insurance company would pay Sally $500,000 tax-free for her to use as she pleases.

Sally could use this money to pay off the mortgage, contribute to the children’s college funds and build a financial cushion to help them cope and move forward in life.

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