How does Life Insurance Work

How Does Life Insurance Work

Updated May 2, 2017 . AmFam Team

Here’s a high-level explanation of how life insurance works, and how it can protect those you love.

Life insurance is all about caring for those who depend on you, and having peace of mind knowing that your loved ones will have some financial protection if you were to pass away.

If you’re wondering how life insurance actually works, you’re not alone. Here’s an overview of what you need to know.

Life Insurance Basics

For starters, life insurance protects the special people in your life by providing them a financial safety net in the event that you pass away. It can help replace your lost income and other ways you financially provide for their needs — everything from day-to-day necessities like groceries and electric bills, to bigger ongoing expenses like mortgages or tuition payments. Read more to learn how to calculate your life insurance needs.

Life insurance pricing is determined based on the amount, type and length of coverage you select, as well as things like your age, sex, health, medical history and other factors.

Once you’ve purchased a policy, you pay premiums on a regular basis. And if you pass away while the policy is in effect, the insurance company will pay your beneficiaries the amount of money you specified in your policy. Learn more about choosing a beneficiary.

Types of Life Insurance Coverage

When you’re shopping for life insurance, you’ll want to explore the two main types: temporary and permanent. Temporary life insurance provides coverage at a lower initial cost. This includes term life insurance, like American Family Life Insurance Company's DreamSecure Simplified Term Life Insurance and DreamSecure Term Life Insurance, which remains in effect for a specific term or length of time at a set premium. Term life is popular among those who want temporary coverage at a lower cost for larger amounts to help pay off mortgages, loans or other debts, replace income, pay for education costs, and more.

Permanent life insurance provides protection for the length of your entire life, not just part of it. This includes DreamSecure Whole Life Insurance, with coverage for your whole life and premium payments that remain the same regardless of changes in your health or age. Similarly, universal life insurance offers long-term protection, but has flexible premiums that you can adjust as your circumstances change, such as our DreamSecure Flexible Life Insurance.

Both Whole life and universal life policies can build cash value that you can access during your lifetime. These policies are popular among those who want longer-term protection, and the ability to build the cash value of the policy over time. (Note: loans or cash value withdrawals may affect the policy’s death benefit and could require the need for additional premium payments to keep the policy in force.)

Life Insurance for Final Expenses

Life insurance can help your loved ones cover the costs for expenses they’ll face after your death. It can help relieve the financial burden for final expenses, such as funeral home costs, service and burial — among other things. Learn more about life insurance and final expenses.

Is the death benefit from life insurance taxable?

The short answer is no, most of the time. The beneficiaries will usually receive the death benefit tax-free.

How is a death benefit paid out?

Your life insurance benefit will be paid when you — or whomever the insured is — pass away and the beneficiary files a death claim. The beneficiary will need to submit proof of death, usually a death certificate, and the insurance company will review the claim.

Beneficiaries are usually paid with a lump sum, meaning they’ll receive the entire death benefit in one payment, or they have the option to be paid in installments that can be set up a variety of ways.

Getting life insurance is one of the best decisions you’ll ever make. It’s a smart way to help make sure those you love have the financial protection they need. Your American Family Life Insurance agent can help answer any questions you have regarding your life insurance coverage — connect with them to ensure you’re protecting what matters most.

Policy Forms: ICC18-33 (10), ICC18-33 (15), ICC18-34 (20), ICC18-35 (30), L-33 (10)(ND), L-33 (15)(ND), L-34 (20)(ND), L-35 (30)(ND), L-33 (10)(SD), L-33 (15)(SD), L-34 (20)(SD), L-35 (30)(SD), ICC18-36 (10), ICC18-36 (15), ICC18-36 (20), ICC18-36 (30), L-36 (10)(ND), L-36 (15)(ND), L-36 (20)(ND), L-36 (30)(ND), L-36 (10)(SD), L-36 (15)(SD), L-36 (20)(SD), L-36 (30)(SD), ICC21 L141 MS 01 22, L141 ND 02 22, L141 SD 02 22, ICC17-225 WL, L-225 (ND) WL, L-225 WL, ICC17-225 WL, L-225 (ND) WL, L-225 WL, ICC17-227 WL, L-227 (ND) WL, L-227 WL

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