How Life Insurance Works

Ethos breaks down the process into three key sections: buying, coverage, and filing a claim. Once you understand those three concepts, you'll be ready to purchase a policy. 

What is a life insurance policy?

A life insurance policy is a contractual agreement between you and a life insurance company. You pay a premium in exchange for a death benefit that's passed on to your chosen beneficiary if you pass away while the policy is active. To claim the benefit, your beneficiary must file a claim. Death benefits aren't taxed as income or included in the policyholder's estate, so it's a convenient way to pass money on to your heirs. 

Buying life insurance

Applying for life insurance isn't difficult, but it's wise to keep a few tips in mind. First, it's important to understand that your quote for a policy depends on a few different factors, including:

• Your health background
• Your age
• The size of your policy's death benefit
• The length of coverage

Some life insurance companies require a medical exam before approving a policy to confirm your health level. You get to skip this step with Ethos—just fill out a health questionnaire.

It's important to compare different policy options to find the one that fits your coverage needs and your budget.

How do beneficiaries work?

A life insurance beneficiary is an individual you name on your policy to receive the death benefit after you pass away. This could be a spouse, a child, or a close friend. You'll name two beneficiaries in most cases: a primary and a contingent beneficiary. 

A primary beneficiary is a person you intend to receive the death benefit. A contingent beneficiary is like a backup; if something happens to the primary beneficiary and you haven't updated your policy, the contingent beneficiary receives the funds instead. 

Note that your life insurance beneficiary is entirely separate from any beneficiaries listed in your will. You must designate a beneficiary specifically with your life insurance company. 

What does coverage entail?

Several types of life insurance impact the coverage you receive. 

Term life insurance

Term life insurance provides coverage over a set number of years, often ranging between 10 and 30 years. The longer the term, the higher the premium will be. It's often the most affordable option, and it can provide a financial safety net when you're younger. 

If the term expires and you haven't passed away, the policy expires. You don't get any refund on the premiums you paid over the years. But the major benefit is that you can get an affordable policy when you're younger and less likely to pass away, compared to getting a similar policy when you're closer to your twilight years. 

Whole life insurance

Unlike term life insurance, whole life insurance is a permanent life insurance policy that remains in effect for your entire life. No matter when you die, your beneficiary will receive your death benefit. Because this coverage is more comprehensive than term life, the policies are more expensive. You'll also see lower coverage limits. At Ethos, for instance, whole life policies are available with policy limits from $1,000 to $30,000. 

Other types of life insurance

Another type of permanent life insurance is called universal life. You'll pay a premium, but part of that money goes towards savings with a cash value. It can go into an interest-bearing account, or it can be invested.

As you get older, you can tap into that cash value component, either by making a withdrawal or borrowing against it. 

You could also use the cash value towards your premium payments to help lower your expenses at specific points in your life. 

How to file a claim

To receive a death benefit when the policyholder passes away, a beneficiary must file a claim with the insurance company. They'll need copies of the individual's death certificate and any forms required by the company. 

The process is usually fast and the beneficiary quickly receives the funds; in fact, it's usually much faster than waiting on assets that must go through probate.

Bottom line

Now that you understand how life insurance works, it's time to get a free quote estimate. It's quick and easy to see exactly how much coverage you could get at different premium levels.