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How Does Life Insurance Work?

From the outside looking in, it can be confusing to navigate life insurance options and which one is best for you. However, understanding how life insurance works and how each company functions can help you narrow down your choices. Let’s dive deeper into what life insurance covers and some types of plans at your disposal so you can decide which life insurance policy can best meet your needs.

How Life Insurance Works

Reviewing the life insurance basics is the first step in understanding how life insurance policies work. Simply put, a life insurance policy aims to support loved ones after the policyholder passes. Typically, you pay regular premiums in exchange for the life insurance company paying your beneficiary a sum of cash after you pass.1

There are a handful of life insurance types to choose from that we will review later on. First, let’s outline what life insurance covers.

What does life insurance cover?

Even though every policy is different, it’s not uncommon to wonder what life insurance typically covers. Almost every life insurance plan covers a death benefit. The death benefit is the sum of money given to the beneficiary after the policyholder passes. Depending on the life insurance plan you choose, and the benefits offered, you may be able to use the death benefit to help cover the following:

  • Co-signed debts with the policyholder
  • Higher education and college tuition
  • Everyday utilizes and monthly expenses
  • End-of-life, medical and funeral costs
  • Dependent or childcare2
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Types of Life Insurance

Depending on the type of life insurance policy, how it works is influenced by the rules and regulations of each plan. 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 plan 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

How much does life insurance cost?

In addition how types of life insurance plans differ, the cost can also vary based on how much life insurance you need. Typically, term life insurance is less expensive than whole life insurance. We recommend chatting with an agent to better understand what costs might look like based on your specific life insurance goals.

How to get life insurance

At Aflac, we make it easy to get life insurance with a few simple steps. If you have any questions, feel free to reach out to an agent to help you move through this process easily.

1. Figure out your coverage needs: Decide how much coverage you need, considering factors like your dependents, income, and any long-term debts you may have.

2. Choose a policy type and insurer: There are many types of life insurance policies out there. Decide whether you want a temporary or permanent plan and which type is right for you. Then, compare quotes across multiple life insurance companies to find one that works best for your coverage needs and budget.

3. Submit your application: Once you’ve decided on a policy, fill out and submit your application. The application will require personal information such as your address, date of birth, Social Security number, and occupation.

4. Take a medical exam: After you submit your life insurance application, you may need to take a medical exam, depending on which type of policy you applied for.

5. Get approved" Once you’ve been approved, you can receive the coverage you need and start paying premiums. Your policy may last several years or your lifetime, depending on which type you have, as long as you continue making premium payments.

Which life insurance plan is right for me?

The right life insurance plan for you depends on factors like your coverage needs, dependents and 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.

How much life insurance do I need?

There are many ways to determine how much life insurance coverage you need. Some financial experts recommend multiplying your income by ten times or more to determine how much coverage to get. Another method is using the DIME formula, which takes your debt, income, mortgage, and education into account. Considering these aspects of your personal finances in detail can help you figure out your life insurance needs.7 Additionally, Aflac offers a life insurance calculator that can help you determine how much coverage would be sufficient for you and your loved ones.

Get life insurance quotes from Aflac

At this point, we hope you’ve gained more clarity on how life insurance works and what it covers. Aflac offers helpful and affordable term and whole life insurance plans that can help you and your family meet your financial goals. We also have final expense whole life insurance to help loved ones prepare for end-of-life costs.

Life insurance is worth it if your loved ones depend on you financially and may benefit from additional financial support later on. Chat with an agent today to explore your life insurance options and get a quote.

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