How Exactly Does Life Insurance Work?

And why you should care.

We already answered some super basic questions about life insurance, but let’s talk about how it can be used and what it can do for you. Because while some of it is obvious, there are more benefits to life insurance than most people realize. For example:

  • It can protect a family from financial issues if/when a family member dies
  • It can protect a business 
  • It can be used to transfer wealth from one generation to the next 
  • It can provide life income, otherwise known as retirement income. 
  • It can serve as a source of financing 

Outset offers two basic policies: Term and Whole life (literally covering a fixed duration of time, or term, or your whole life). Whole life insurance is a permanent insurance policy. As long as the premiums are paid the policy is in place. It’s sort of like buying a house: As long as you pay the mortgage you can live in the house. If you pay the mortgage off in full you can stay in the house until you die. If the policy is paid in full while you’re alive it stays in effect until death. 

Pros of Term Life Insurance:

It is the least expensive form of life insurance, which means more money in your pocket while you’re alive. 

Cons of Term Life Insurance:

If you buy a term life policy it is important to have a plan of what you will replace the term policy with when it expires. Simplest Term life policy is like rent—as long as you pay, you are covered by the policy. It does not work as an investment or savings vehicle. All the payments you make go in total to the insurance company. It pays out upon death as long as you have paid the premiums. If you do not die during the term, or the length of the insurance contract, then the money you paid is gone and you are no longer covered. If you do not die during the term, there’s obviously no death benefit, or money paid to a beneficiary. 

Here’s the thing: as you get older insurance costs more and is harder to get. When the policy ends, you’re no longer eligible for the price you paid for the policy when you were five years younger, yet you still need to figure out a way to secure your family, business, friends and/or pets.  

Pros of Whole Life Insurance: 

The policy doesn’t expire after a certain term or period, which means you don’t have to shop around for policies ever again. It’s one and done essentially. Cash value grows tax deferred, or tax free. So the money in your policy will get larger and larger and it won’t be taxed. This allows it to grow faster. There are options if you can no longer pay the payments so the policy is never a loss.

Cons of Whole Life Insurance:

The policy covers your whole life and is more expensive even when you are younger than term life. The payment amount is not flexible.