What is Life Insurance and How Does It Work?

Life insurance features

Life insurance contracts contain several features:

Policyholder

The policyholder is the individual who buys the life insurance plan and is responsible for paying premiums. If the policyholder dies, the death benefit can be paid to their beneficiaries.

Beneficiary

The beneficiaries are the parties the policyholder designates to receive the death benefit when the policyholder passes away. Beneficiaries can be individuals, qualifying charitable organizations, and certain life insurance trusts.

Death benefit

The death benefit, also called the face amount, is the amount the insurer pays to beneficiaries if the policyholder passes during the policy term. Beneficiaries should file a claim with the life insurance company after the policyholder passes away to claim the death benefit.

Premium

Premiums are the amounts the policyholder pays to maintain their coverage. Without paying premiums, the policy can lapse, causing the policyholder to lose coverage. Most insurers allow policyholders to pay premiums annually, semi-annually, quarterly, or monthly.²

Coverage length

Coverage length, or term length, is the time the life insurance policy is active. Some policies, such as term life insurance, only last for a fixed period. On the other hand, permanent plans last for life.

Cash value

Cash value is a growth component of permanent life insurance that allows you to build wealth through your life insurance policy. The insurer puts part of each premium payment into the cash value, growing tax-deferred at a rate that varies by policy type. As this component grows, you can borrow or withdraw from it. If you surrender your policy, you get your cash value back minus surrender charges.

Types of life insurance policies

Consider these life insurance policy types:¹

Term life insurance

A term life plan covers you for a period, typically from 10 to 30 years.³ If you pass away while the plan is active, your beneficiaries can file a claim to get the death benefit. However, your policy will expire if you live through the policy term. You must renew your term policy or apply for a new one to keep your coverage. Term life insurance premiums are typically lower when compared to the sizable death benefit. Aflac can help you get a term life insurance policy if you need coverage that fits your budget.

Whole life insurance

Whole life insurance is permanent, so it lasts for a lifetime and comes with cash value. The cash value accumulates at a fixed, guaranteed rate that depends on prevailing interest rates. This means the cash value grows more slowly, but you typically don’t have to worry about losses. If you’re looking for lifelong coverage and guaranteed cash value growth, Aflac can help you get a whole life insurance policy.

Final expense insurance

Final expense insurance is a smaller whole life plan that helps cover funeral costs, medical bills, and other end-of-life expenses. The death benefit is small, but premiums are typically lower, and there is typically no medical exam. These policies also cover you for life and offer cash value. Aflac final expense insurance comes with competitive premiums and lifelong coverage.

Universal life insurance

A universal life insurance plan is a form of permanent life insurance that lets you adjust your premiums and death benefit within limits. Raising your death benefit increases premiums, while lowering your premiums reduces your death benefit. Additionally, universal life insurance tends to cost less than whole life insurance.⁴ Universal life insurance may also let you pay premiums with cash value when it grows large enough. However, if the policy shrinks too much, coverage can lapse. Aflac does not offer universal life insurance.

Variable life insurance

Variable life insurance coverage operates the same way as universal life insurance. However, you can invest your cash value into individual securities, such as stocks, bonds, and mutual funds. As a result, you can potentially enjoy faster growth. However, you also risk incurring losses. It’s smart to work with a financial advisor to select investments for your variable life insurance cash value. Aflac does not offer variable life insurance.

How to get a life insurance policy

Here’s how to get a life insurance policy:

• 1. Decide which policy type fits your needs: Consider how long you need coverage and if you want additional wealth-building opportunities.
• 2. Determine how much coverage you need: Consider aiming for at least 10 times your annual salary.⁵ However, this can vary by family size, living expenses, financial goals, and more.
• 3. Shop around and compare quotes: This helps you find the lowest rates and best terms on the coverage you need.
• 4. Apply for the policy: Fill out the application online or in person. You may also need to schedule and take a medical exam.
• 5. Wait for underwriting: This can take several weeks. But keep in mind it may take only a few days if you apply for a no-exam policy. Regardless, you must wait until the insurer contacts you.
• 6. Sign the documents and pay your first premium: If you like the terms the insurer offers, sign the documents and pay your first premium.

Who should get life insurance?

Here’s who may want to consider getting life insurance:

Parents

Life insurance can help parents protect their partners and children. If the policyholder passes away, the surviving partner can use the payout to help with loss of income, help pay debts, and save for their children’s college.

Both parents should consider life insurance, even if one is a stay-at-home parent. If the stay-at-home parent passes away, the working parent can use the death benefit to help with childcare and household services.

Couples

Couples can benefit from life insurance even if they have no children. If one partner passes away, the other can rely on the death benefit for added financial security — especially if they live together.

Furthermore, couples could use the cash value to help build wealth early in life. If they decide to have children, that cash value may be large enough to help fund relevant goals like purchasing a larger home or paying for college.

Those with debts

If you pass away with debt, your estate may be used to pay those debts off. This can leave heirs with significantly fewer assets than you want them to have, especially if you pass away with large loans like mortgages and auto loans.

A life insurance policy helps alleviate these concerns. Loved ones can use the proceeds to help pay most or all of your outstanding debts. Your heirs, therefore, get to keep more of your estate and potentially any remaining death benefit.

Retirees

Retirees can use life insurance for legacy planning purposes. Life insurance death benefits can be subject to fewer or no taxes when structured correctly in an estate plan. As a result, retirees can leave a larger legacy to their heirs or favorite charitable causes when they pass away. Furthermore, the cash value can help them to assist their children and grandchildren financially. For example, it can help pay for college tuition and other expenses.

Young adults

Young, single adults may think they don’t need life insurance, but there are plenty of reasons to consider it. For example, life insurance can help ensure your parents are cared for as they age. If you pass away early, the death benefit can help your parents cover medical expenses, long-term care, and similar costs. Life insurance can also help young adults with complex financial needs and open additional avenues to build wealth through cash value.

One advantage young adults have is that they may qualify for the lowest life insurance rates, since age is a significant factor in calculating premiums. Once you purchase a policy, you typically lock in your premiums for the duration of the policy term.

Which life insurance policy is right for me?

The right type of life insurance policy for you depends on your coverage needs and budget. For instance, if you’re starting a family and want to be covered until your children become adults, you may consider a term life policy. Or, if you’re older and can afford enough coverage for your loved ones to cover your end-of-life expenses, final expense insurance may be right for you. It's advisable to consult with a financial advisor or insurance agent who can assess your individual situation and recommend the most suitable policy for your needs.

Get a quote for Aflac life insurance

Life insurance can be a key component of your overall financial plan. It can help protect your loved ones, help you build wealth, and gain added peace of mind. There are many types available, helping you choose your coverage to your circumstances.

Aflac offers several insurance policy choices, including final expense, term, and whole life insurance. Chat with an agent today to explore your options and find the best life insurance policy for your needs.