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What you’re too afraid to ask: How does life insurance really work?

We know that life insurance is not an easy topic to discuss. And if you’re reading this while trying to navigate life insurance for a loved one who has passed away, you have our deepest sympathy.

To make it easier, we spoke to our staff from our Car Owners Life Insurance Company to answer your common questions about how life insurance works. We hope that makes it a little easier for you.

  1. How does life insurance work?
  2. How does life insurance work in case of death?
  3. Does life insurance really pay off?
  4. How long do you pay life insurance before it pays out?
  5. Can I cash in my life insurance policy before I die?

How does life insurance work?

Essentially, you pay for one life insurance policy, and when you die, that policy will pay the nominated individuals or organizations (beneficiary) the specified dollar amount (the death compensation) within the provisions of your policy.

The death benefit, for a personal insurance policy, is often used by surviving family members to cover funeral expenses, pay off debts and help replace lost income. Depending on how the policy was set up, the funds can also help pay for a relative̵

7;s education and other elder planning priorities set out in their trust.

Some important variables to consider when choosing a life insurance policy include:

  • How long do you need to be insured?
  • The size of the death benefit
  • Whether the policy builds cash value or not
  • How long do you have to pay for the insurance?

Depending on your stage of life, certain types of coverage may be more appealing to you. So explore the options out there, which include three types of coverage:

Read more: Whole life insurance vs. term: What you need to know

How does life insurance work in case of death?

After the person insured under the life insurance has died, a family member, or designated administrator, must contact the insurance agent or the insurance company. They will likely need a copy of the death certificate and life insurance number.

Once the claim has been submitted, the designated persons or entities can generally expect to hear back from the insurance company within a few days with further instructions. Once the funds are distributed, they can use the money to cover funeral expenses, pay off debts, help with income replacement and other needs they may have.

If the deceased person wanted certain funds set aside for specific needs, they may have designated their trust as the beneficiary of their policy. In this situation, their trust will provide instructions on how to use the funds and you will need to refer to these documents to distribute the funds according to specification.

Does life insurance really pay off?

Yes! Our life insurance partners are passionate about helping families during difficult times.

Of course, there are situations when a life insurance policy may not pay the beneficiaries, which may include, but are not limited to:

  • Death by suicide, if within combat period
  • Material misrepresentations about the application of the policy affecting eligibility or pricing
    (For example, if you say you don’t have a chronic lung condition on the application but you actually take medication for asthma.)
  • Required premiums were not paid to keep the policy in force
  • The insurance was through an employer’s group plan and the person insured under the life insurance policy is not employed by that company at the time of their death
  • The life insured died while participating in illegal activities

Please read the policy carefully for full payout restrictions and terms.

Read more: How much life insurance do I need? [Free Calculator]

How long do you pay life insurance before it pays out?

Short answer: it depends on your policy.

Some life insurance policies allow you to choose how long you “pay into” your policy. For our whole life policies, we offer ten pay and lump sum payments, which allow you to pay a certain number of payments to pay off the entire policy, faster.

So let’s look at an example.

life insurance ten-pay-option-exampleJack has just turned 50 and decided he needs life insurance. He buys an Auto-Owners $100,000 Ten Pay whole life policy at preferred rates and has a monthly premium of about $367.22. *

Since he chose a ten payer policy, he will pay his monthly premium ($367.22) for 10 years. This corresponds to 120 payments (12 monthly payments x 10 years = 120 payments).

After he has made his monthly payments for 10 years, he is done and his policy is considered “paid up.” This means he will have the $100,000 death benefit available to his beneficiaries upon his death (up to age 110) and will no longer be billed for it.

Life insurance policies are similar in that you pay for the period that your policy gives you coverage, which is usually 10, 20 or 30 years. These payments tend to be less than the Ten Pay and Single Pay options, as you get coverage for a shorter stated period of time and make payments on the policy throughout the term. Please note: If the person covered by the life insurance policy lives beyond the coverage period, the policy will not pay the death benefit as it has passed the term.

Can I cash in my life insurance policy before I die?

Some life insurance policies build a cash value. Permanent life policies, such as our term life policies and universal life policies, offer this, but term life policies do not. When you make payments for whole life or universal life insurance, a portion of your payment goes towards building your cash value. For whole life policies, your cash value is built into a guaranteed interest rate that is assigned when you purchase your policy.

life insurance cash value statement
You can withdraw the cash value or take out a loan against your policy’s cash value to pay for college, a house, etc., while the policy is still in force. Both of these options will reduce the lump sum your beneficiary receives. With the loan option, you will be charged interest on the loan. Other fees may also apply when withdrawing insurance cash value.

The cash value is really meant to work like a legacy planning account, not a personal loan, but it can be used that way if needed.

Read more: Is life insurance taxable? Here’s what you need to know

Auto-owners Whole Life policies and our Universal Life policies offer the opportunity to build cash value. In addition, our universal life products, Perma Term® 2 and Perma Term® 3, offer you the option of structuring the insurance as a permanent cover or as a term!

Each of these products has its own eligibility requirements, coverages and prices, so talk to your agent about what might work best for you.

We are passionate about helping you provide for your family’s future. We know it’s not an easy topic to discuss, which is why we’re here to help you navigate it. If you have questions about an existing life insurance policy or are interested in finding a policy, contact your local Bolder Insurance Advisor.

This article is provided by Auto-Owners Insurance, a Bolder Insurance Partner

*Products referred may not be approved/available in all states. Restrictions and conditions may apply. The premium will be based on selected benefits and available policy rates at the time of application.

Disclaimer: This article is not expert advice. The analysis of coverage is in general terms and is superseded in all respects by the insurance agreements, endorsements, exclusions, terms and conditions of the policy. Some of the coverage mentioned in this material may not be applicable in all states or may need to be modified to conform to applicable state law. Some covers may have been removed or modified since the publication of this material. Discounts may not be available in all states. Restrictions and conditions may apply. Premiums will be based on selected benefits. Please contact your local Independent Auto-Owners Insurance Agent for details.”

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