How Does Life Insurance Work?

How Does Life Insurance Work?

Answers to Common Life Insurance Questions

If you have questions about how life insurance works, we’re here to help, with some great insights from State Farm® Agents Denise Elliott (Durango, Colorado) and Ken Quach (Houston, Texas). They get a lot of questions not only about how life insurance works when you die, but how it works in the here and now too.  

The Basics

The main reason people buy life insurance is to protect their family. As Elliott puts it, “It’s like having someone who will take care of your family financially if you couldn’t due to an untimely death.” In simplest terms, you buy a life insurance policy and name a beneficiary to receive the death benefit. If the policy is active when you pass away, your beneficiary will receive that death benefit.

Term vs. Permanent

Term life insurance is pretty straightforward. Policies are purchased for a specific period of time, commonly for 10, 20, or 30 years. If the policy is in force at the time of death, your beneficiary receives the death benefit chosen when the policy was purchased. If you’re still alive at the end of the term, your policy ends. 

Permanent life insurance, which includes variations such as whole life and universal life, is lifelong coverage and, like term coverage, provides a death benefit to your beneficiary if you die. It also offers several living benefits, including accumulation of cash value at a guaranteed interest rate, taxes able to be deferred, and protection from creditors.

According to Elliott, “Years ago, we typically only recommended life insurance if you had family to protect. Now, the cash value buildup1 in permanent life insurance policies can be a helpful financial tool. 

“If I don’t use it for anyone else in my family, I can use it on myself. Where else can you go and buy one policy to take care of your debts if you die and still have the ability to borrow money to take care of your needs while you’re alive?”

Individuals vs. Businesses

While individuals typically purchase life insurance to provide money for their family or a charity when they pass away, life insurance can be an essential planning tool for business owners too. Quach has helped a lot of business owners protect their future with life insurance, and he talks about one example — partnerships.

“A lot of people who go into business have partners, and there are several ways we can help them. For example, there’s a plan where each partner in the business can ensure their share of the business will be passed on to the remaining partner(s) if they die. In addition, their beneficiary (typically their spouse/family) would still get proceeds from the life insurance policy.”

Learn More 

While we’ve scratched the surface on how life insurance works, we recommend sitting down with an agent to talk about your personal situation and the options that would make the most sense for you.

Unpaid loans and withdrawals will reduce the guaranteed death benefit and policy cash value. Loans also accrue interest.

disclosure

State Farm Life Insurance Company (Not licensed in MA, NY oro WI) State Farm Life and Accident Assurance Company (Licensed in NY andy WI) Bloomington, IL Each insurer is financially responsible for its own products. SILI-1000.0

Neither State Farm® nor its agents provide tax or legal advice.