How Does Life Insurance Work and What Does It Cover?

Life insurance can help financially protect your beneficiaries upon your death. If you suddenly pass away, they'll receive a death benefit as long as you’ve kept up on premium payments, abide by the policy terms and your policy is still active. The life insurance death benefit can be used to cover expenses such as end-of-life costs and outstanding debts. Let’s dive deeper into how life insurance works and what it covers.

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Table of Contents

Key Takeaways

Life insurance provides financial protection for beneficiaries by offering a death benefit when the policyholder passes away, as long as premiums are paid and policy terms are met.
Two common types of life insurance are term life insurance, which lasts for a set period, and permanent life insurance, which offers lifelong coverage and may include a cash value component. Aflac offers term, whole, and final expense life insurance.
The death benefit payout can be used to cover various expenses, such as funeral costs and outstanding debts.
Choosing the right life insurance plan depends on your individual needs, budget, and coverage goals.

How life insurance works

Life insurance is a contract between you, the policyholder, and a life insurance company. You make regular premium payments and follow the terms within the plan, and the company provides your beneficiaries with a death benefit or payout when you pass away. While term life insurance applies for a certain time period, like 10, 20, or 30 years, permanent life insurance typically offers indefinite coverage as well as a cash value component.¹

What does life insurance cover?

Life insurance policies offer these common features:²

Death benefit payout

A life insurance death benefit payout is usually a lump sum of money your beneficiaries receive after you pass away. They typically can use these funds in any way they’d like.

Cash value

Cash value comes with permanent life insurance policies such as whole and universal life insurance. This life insurance feature is essentially a tax-deferred savings account that grows over time.

Riders

Life insurance riders can allow you to access your death benefit while you’re still living in certain situations. You may use them to help cover expenses related to a terminal illness, hospice or nursing home care, or anything else. Aflac offers several riders that can be added to many life insurance policies, such as the accelerated-death benefit rider* and waiver of premium rider.

Types of life insurance

The four main kinds of life insurance are term, whole, final expense, and universal. Aflac offers all these life insurance types besides universal life insurance:

Term life insurance

Term life insurance is a temporary policy that lasts 10, 20, or 30 years. The policyholder chooses the term length upfront, and their beneficiary only receives the death benefit if they pass within the specified time frame.³

Whole life insurance

On the other hand, whole life insurance allows the beneficiary to receive the death benefit regardless of when the policyholder passes. It also has a cash value portion that allows part of the premium payments to grow in a separate tax-deferred account. The policyholder may be able to access these funds in an emergency.⁴

Final expense life insurance

Final expense life insurance is a type of whole life insurance with benefits designed to help cover end-of-life costs. These plans typically help cover funeral, medical, accounting, and long-term care costs.⁵

Universal Life Insurance

Universal life insurance is a permanent life insurance plan that handles the cash value differently. Typically, the cash value can grow based on a market index rate or a money market rate. This is a riskier decision, as it can cause the cash value to grow or decline more quickly.⁶

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What deaths does life insurance cover?

Life insurance usually provides coverage for deaths that result from:⁷

Natural causes: Natural causes may be old age, a heart attack, stroke, or kidney failure.
Accidental death: Examples of covered accidental deaths include car accidents and drowning.
Suicide after two years: Suicide is typically covered as long as it occurred at least two years after the policy has been obtained.
Murder: Murder is typically covered as long as it had nothing to do with your beneficiaries, and your death is considered homicide or manslaughter.

Expenses beneficiaries can help cover using the life insurance death benefits

Your beneficiaries can use the death benefit they receive from your life insurance policy to help cover the following:⁷

End-of-life costs: End-of-life costs may be funeral or burial expenses, medical bills, and any other final expenses beneficiaries need to cover upon a policyholder’s death.
Debt: If you leave behind debt, like a mortgage or car loan, the death benefit payout may come in handy.
Charitable contributions:  You can name your favorite charity as a beneficiary and leave a legacy.

Reasons life insurance won’t pay out

Life insurance doesn’t typically pay out in these circumstances:⁸

Murder: If your beneficiaries murder you or are closely tied to your murder, they won’t receive the death benefit, per the slayer rule.
Suicide: A payout won’t apply if you commit suicide within the first two years of purchasing your policy.
Acts of war and terrorism: Deaths that result from war or terrorism aren’t usually covered.

Which life insurance plan is right for me?

The right life insurance plan for you depends on factors such as:

Coverage needs
Dependents
Budget

For instance, you may consider a term life insurance policy if you want coverage until your children become adults. Or, if you want lifelong coverage and can afford to pay higher premiums, whole life insurance may be right for you. Compare quotes and policy types to figure out which option is best.

Learn more about life insurance

Life insurance can make your loved ones' lives easier after you pass away by helping them cover expenses and pay off debts. Having a policy can help give you peace of mind knowing that they have added financial protection. If you’re interested in getting life insurance, Aflac offers a variety of life insurance policies that are worth exploring. Use Aflac’s life insurance calculator to help you determine how much coverage would be sufficient for you and your loved ones, or chat with an agent today to explore your life insurance options and get a quote today.

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