How does Life Insurance Work


How does life insurance work? The most important questions you must ask, and how to buy life insurance cost-effectively.

How much Life Insurance

There are generally two approaches for you to decide how much life insurance would be necessary.

Obligations Approach

To determine how much life insurance to get with the obligations approach, estimate your household’s fixed and variable expenses, then subtracting your household’s remaining income potential.

Income Replacement Approach

For this approach, you should measure how much income you would have produced if you were still alive, and adjust it for inflation.

The rule of thumb would be to simply multiply your annual income by ten – that should be the minimum amount for which you should insure yourself.

Group Life Insurance

Offered through professional organizations or various employers, group life insurance policies would usually offer lower rates. Insurance companies would insure as a group – you thus do not have to qualify for insurance individually. The high-risk individuals in the group are balanced with the low-risk ones; there is even no physical exam necessary. Group life insurance policies are thus especially advantageous for high-risk individuals.

Long-Term Care Insurance

Long term care insurance policies are designed to insure against to risk of frailty in old age. This covers costs of staying in nursing homes and other forms of extended care.

Long-term care insurance policies are generally recommended if your asset base is mid-range. If you have less than $100,000 in assets, you would usually be able to qualify for state aid programs such as Medicaid. If you are significantly more assets, perhaps in the range above one million, you would most likely be able to insure health care costs on your own.

How does Life Insurance Work

For even more on how life insurance works, return to the content page article on what is whole life insurance.


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