Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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How does life insurance work?The question how does life insurance work is a complicated question but the very basic answer is this: you purchase a pre-determined amount of life insurance money to be paid out to those you choose as beneficiaries once you die.

In order to secure the policy, you must pay a monthly premium amount. It is important to note that life insurance policies vary greatly based on factors such as age, health conditions, amounts of coverage, the company you choose, and the type of policy.

Don’t let the complicated details of life insurance stop you from getting a policy. The following article provides further information about life insurance and how it works and then be sure to enter your information above for free life insurance rates!

What factors determine the amount of life insurance needed?

The amount of life insurance needed is vastly different from person to person. The basic way to determine the amount of life insurance needed is to calculate a few important things. First of all, consider how much you contribute to the family’s financial picture. Answer questions like: Am I the main breadwinner in the family?

Will the loss of my income gravely affect the family? What would my loved ones get from social security in the event of my death? Do I have a 401K that could be cashed in upon my death?

Non-working spouses should also carry life insurance if the duties the currently carry out would need to be paid for after death. This might include child care, elder care, yard maintenance, house cleaning, grocery shopping and numerous other tasks often taken care of by a stay at home parent or non-working spouse. Just because a person does not earn an income does not mean their death won’t cause a financial hardship.

Once this is determined, you should decide how many years of your income after your death you want to be covered by a life insurance policy. The idea here is that if you have a spouse and you are the main breadwinner, that spouse may need time to find a job, change careers, go back to school, finish raising children, etc. The ability to count on the same yearly income as before your death for a set number for years will ease the transition for your loved ones. With the loss of a non-working spouse funds will need to be available for the duties that person once performed as mentioned above.

After this, you will need to determine how much you owe on your home. Add the balance of your mortgage to the yearly income amount you want covered. Then you need to determine other life factors such as children’s education and additional debt that you may have. If income is replaced, the mortgage is paid for, debt is paid off, and education is covered, your loved ones will be able to move on with peace of mind. It is surprising how many people are not prepared for death and leave their loved ones in a position that causes them to lose everything.

Some insurance companies use the formula “liabilities minus assets” to determine an amount. This is a very basic calculation and does not take into consideration life circumstances, however it is a starting point. You simply add up your liabilities which amounts to your debt such as credit cards, mortgage, cars, and student loans. Once you have this number, you subtract your assets such as 401Ks, investments, a paid for home, a paid for vehicle, rental property, etc. The number left is the very lowest amount of life insurance you need. If the number is negative, everything will be covered and life insurance will just be extra left to loved ones.

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What factors determine the premium amount you will pay?

Having life insurance is an important aspect of financial security; however, many people go without it because they say they cannot afford it. There are many factors that affect the premium amount you will pay for a life insurance policy, and you have some control over those aspects. The best thing to do is to get a policy when you are young and at your best health wise. This is because the main factor that increases premium amounts is poor health. This does not just mean diseases or sickness.

Life insurance companies consider things like being overweight, smoking, and high stress levels as health risks. Being a smoker almost triples life insurance rates as the risk for many diseases including heart disease, cancer, and high blood pressure also increase. By being healthy and making healthy choices, your insurance premiums will be lower. Many life insurance companies will reduce your premium if you join a gym, do yoga, or participate in other stress reducing activities.

Life insurance is not cut and dry. There are many aspects, life circumstances, and other factors that affect how life insurance works. The best thing to do is to contact a life insurance company and get information concerning plans and rates. You can do this quickly and conveniently by using an online comparison tool. Try the life insurance comparison tool on this page today to find the life insurance company that works best for you. Start comparing insurance rates now!