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The Basics

How does life insurance work?
Each year, you pay the insurance company for your insurance policy, this money is called a "premium." You also tell the insurance company who should get the insurance money if you die (a process called "naming your beneficiaries"). Then, if you die while your policy is active, the insurance company will pay your beneficiaries the insurance money. Insurance companies can afford to do this because only a small number of people die each year, while many more people pay them premiums.

Why should I buy life insurance?
Life insurance protects your family in case something happens to you. Most people buy life insurance to make sure that their family still has enough money to take care of things after they die (like paying the mortgage and the cost of the funeral). If you buy "permanent" life insurance you can also save money for the future. Get more information on permanent vs. term life insurance.

How much insurance should I buy?
Most experts recommend you buy a life insurance policy worth about seven times what you make in a year. So if you make $25,000, they would recommend about $175,000 in insurance ($25,000 x 7 = $175,000). If you make $40,000, they would recommend $280,000 ($40,000 x 7= $280,000).
But if you want a more precise number, you should talk to an insurance agent about what's right based on your situation. Get tips on choosing an agent.
You can also use Insure.com’s online tool to figure out how much life insurance you need

If I buy $200,000 in insurance, does that mean I have to pay $200,000 a year?
No. The $200,000 is how much your family will get if you die. How much you pay the insurance company each year in premiums will depend on the company, your age and health, and what kind of life insurance you buy. For example, it would cost you a few hundred dollars a year for $200,000 in term life insurance and some $1,000 to $2,000 for the same amount of coverage in permanent life insurance.

Can the insurance company decide to cancel my policy?
After you buy insurance, the company usually has two years to cancel your policy if they find out that you lied about something like your health, age or whether you smoke. After that, the policy can only be cancelled if you don't pay the premiums on time (although if you lied about your age or smoking, that can still effect the amount of money the insurance company will pay out in death benefits or cash value).

Is there any reason an insurance company wouldn't pay my family the insurance money if I died?
Yes. There are three possible reasons for the insurance company not paying your beneficiary:

  • If you don't tell the truth when you are filling out your insurance forms (For example, if you didn't tell the insurance company that you had a heart attack a few years ago and you die from a heart attack within two years of getting your policy.)
  • If you commit suicide
  • If your beneficiary kills you (In this case, the insurance company won't pay them but, they will pay your "secondary" beneficiaries.)

What happens if I'm still alive when my policy expires? Do I get my money back?
No. But if you bought permanent insurance, some of the money you paid in premiums will come back to you in cash value (the money that you can take out, either by canceling the policy or withdrawing the money early).

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