How Does Life Insurance Work?

We understand that if you're just getting started, life insurance can seem like an extraordinarily complex product. "How does life insurance work?" is a question we hear a lot. Though it may feel like you're facing a steep learning curve, the good news is that understanding how life insurance works might be simpler than you imagine.

Because there are many different types of life insurance, we'll keep this simple by focusing on a commonly chosen policy type: term life insurance.

Applying for Life Insurance

Securing a life insurance policy begins by requesting a quote. A quote is an estimate (from an insurer) of the amount money you'll be charged in monthly premiums for the amount of coverage you seek. It is important to note that a quote is not a formal-contractual offer, but an estimate. The actual amount you pay for coverage could be more or less than your quoted premium rate. This is because the way term life insurance works, it's not until your application goes through underwriting that you get your final offer. The more forthcoming you are in answering questions while requesting a quote, the more accurate the quote you receive is likely to be. Once you've requested your quote, whether online or by speaking to a licensed insurance agent, you'll be asked a series of personal questions to begin the application process. The questions may feel a bit intrusive, but they aren't intended to invade your privacy. Rather, each question you may be asked relates directly to the amount of premium you'll pay.

Things You May Be Asked During Your Application Process Include:

• How much money you and your spouse make annually
• Your personal medical history
• Information about family medical history
• Questions about financial assets like retirement accounts, homes, and cars
• If you have any hobbies that involve high levels of personal risk
• Whether or not you have any upcoming travel plans that include visiting high-risk locations
• History of any mental health conditions requiring medical attention
• Your driving record
• Personal identifying information (or PII)

Learn more about what questions life insurance companies ask and how to prepare: https://www.aigdirect.com/about-life/questions-life-insurance-application

Depending upon your situation, and the coverage you seek, a medical exam may also be required when you apply for life insurance. This is typically necessary to determine if you have any medical conditions that may affect the amount you pay for coverage. Your medical exam should not take more than 30 minutes of your time, and may help to secure the lowest rate available to you.

Read more about preparing for you medical exam: https://www.aigdirect.com/life-insurance-basics/medical-exam-preparations

How is Life Insurance Priced?

Once your application is complete, all of your provided information is factored into actuarial tables used by insurers to calculate risk and insurability. This process of reviewing your application is called "underwriting". After all of your information has been reviewed and assessed by an insurer during the underwriting process, you will be placed into something insurers call a "rate class"

Rate classes are a system used by insurers to determine how much you'll pay for life insurance. Individuals are placed into figurative groups or "classes" based on their projected mortality risk. Because of this, it is best to provide the most accurate medical information possible during your application process.

These can vary slightly in name by insurance company. But for example, at AIG Direct, our rate classes look like this for American General Life policies:

• Preferred Plus (the least costly rates)
• Preferred
• Standard Plus
• Standard

How the purchase works

Once you've completed your application for life insurance, you'll receive a final offer from the insurer(s) with whom you've applied for coverage.

At this point, a first payment of premium is typically needed to initiate a policy. Your first payment can be made by a variety of methods. These include: direct draft from your checking or savings account, electronic funds transfer (EFT), or credit card.

Your next step after making your initial premium payment is to determine how you'd like to continue to make payments throughout the life of your policy. Premiums are typically paid on a monthly, quarterly, or annual basis. These payments can be made by bank draft or EFT on a recurring basis. If you miss payments, your policy may be deemed (by your insurer) as a "lapsed" policy.

Now that you understand the basics of how life insurance works, you can move on to the next step of securing coverage and helping to provide peace of mind to your loved ones.

Request a quote today to get started: https://www.aigdirect.com/term-life-insurance-quotes-now