How Does Life Insurance Work

In our society we have developed certain phrases which we use to set imagery in our minds, i.e. what goes up must come down, he’s a day late and a dollar short, she’s as pretty as a picture, a nickel for your thought, you can lead a horse to water but you can’t make him drink, he puts his pants on one leg at a time, the rich get richer and the poor get children, penny wise but pound foolish, lit a fire under him, and you can’t take it with you when you die, just to name a few.

You can’t take it with you when you die

In the context of its use the phrase actually becomes a misnomer in the sense it creates a false impression of the impact of an unexpected or sudden death. It acknowledges the leaving behind the “acquired” items of our life, but it ignores the loss of values of future accumulation (future potential) and it does not recognize the value of emotional connections which are such an important part of our mortal existence.

Most people have a desire to leave this world without leaving a financial and/or an emotional burden on those left behind. This desire creates a real paradox in that we don’t want to acknowledge our vulnerability to an untimely death, so we justify the reluctance by stating it can happen to others but it won’t happen to me–while fighting the thought, “ya, but what if?” and we start looking for ways to prepare for that possibility.

One of the most ingenious tools society has created to deal with this paradox is the concept of life insurance. This tool creates a financial answer to dying too young or living too long. It also provides a bastion against some of the emotional trauma caused by death.

The concept works on the premise that many have the same desire and are willing to share in the financial burden of creating a pool of money for those who may be so unfortunate as to need access to it. Coupled with that concept is acknowledging death will occur to any participating–we just don’t know who. Consequently, we make our contribution to this pool of money through a premium deposit, hoping we may never have to be the one to draw upon that pool.

We also can make the deliberation on how much of that pool we would want to have access to if we were the one needing to draw on it. We do this by the amount of premium we are willing to pay: the more we deposit, the more we could potentially be returned.

How does life insurance fill the role of satisfying the needs of dying too young and also of living too long?

When an individual reaches the age when they are old enough to make a living, they begin to create an estate. This estate is composed of two parts: items acquired and potential income. It is a true statement that our future potential is much greater than those things we have acquired. It is also true to note that potential earnings are the source of the acquired portion of our estate. It is also true that our potential earnings are constantly diminishing due to the factor of time. We can illustrate this concept by a timeline from age 0 to age 100+.

  • Age 0 to age 25 we can label the learning years of our lives.
  • Age 25 to 65 we can label the earning years of our lives
  • Age 65 to 100+ the yearning years or the golden years of our lives, based on how well we financially prepared for it.

Since we share that timeline with loved ones, we can see that the amount of life insurance we purchase can immediately establish the size of the estate we wish to provide for our loved ones if we have sufficient time to do so. By the payment of a premium deposit, medically qualifying for it, and showing the financial need for it, we can create a million dollar estate or more immediately. It may not happen often, but there are examples of policies issued which, after one premium payment, pay the death benefit to the appropriate beneficiary.

All the way along the timeline, the life insurance face amount places a roof over the accumulation portion of our estate. If death occurs too soon, it replaces earning power so that dreams and aspirations can still be fulfilled; and then if one lives beyond the age of earning, it steps in and provides a source of earnings to assist other financial preparations made for the yearning years or golden years of our existence.

So recognizing the comment “we can’t take it with us” doesn’t tell the whole story of impact of unexpected or untimely death, we can say the greatest love letter your loved one will receive will be delivered by someone besides you or the post office, which creates imagery of a deep sense of joy in the midst of a sadly emotional moment in time. Some insurance agent is going to hand an envelope to your loved one which contains the fulfillment of a promise given to provide a home, food on the table, a warm bed, a proper education, access to medical care for your family, and will buy some time for your spouse to grieve properly before facing the other obstacles of life.

How does life insurance work?

It’s simple. You choose the amount of coverage you want, choose an agent and company you trust, fill out proper paperwork, pass underwriting requirements, prepare to make appropriate premium deposits, place the policy in a safe place along with other important papers, go about living while knowing your aspirations will be accomplished, and then periodically review making sure the policy is still meeting your aspirations. Pretty simple.

You don’t need to understand the actuarial computations or the statistics of mortality tables when considering life insurance coverage. In fact, some have become so engrossed in the how it works mathematically they never get around to putting the principle of life insurance into effect in their lives. Buying life insurance when you need it most is like ordering up a parachute when the airplane is already coming down. Now how’s that for imagery!!!

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