How Does Life Insurance Work?
Written by
Marty Agather is the Vice President of Client Experience for TrustedChoice.com. He started his insurance career by filling multiple roles over a 10-year span in a mid-sized independent agency in Chicago, Illinois. Marty also writes for various insurance magazines and blogs and co-hosts a weekly podcast at AgencyNation.com.
Q: How does life insurance work?
I don't understand how life insurance actually works. Where does the insurance company get the money to pay out claims?
A: Life insurance policies work in the same way that all insurance works: the premiums of many individuals are ‘pooled’ by the insurance company to create a fund large enough to pay the losses of the individuals in the group who suffer loss.
So for life insurance, an individual purchases a policy, and their money is pooled and invested by the insurance company. When the policyholder dies, the insurance company can pay the beneficiary the face amount of the policy.