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How does life insurance work?-Life Insurance

Understanding how life insurance works can help you plan for the future of your loved ones or protect your business.

If you have questions about how life insurance works, we're here to help, with some great insights from State Farm®. We 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.

Life insurance basics

The main reason people buy life insurance is to protect their family. 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 life insurance

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, or it can renew annually, albeit at a much higher rate.

Permanent life insurance, which includes variations such as whole life and universal life, can provide lifelong coverage. Over time, permanent insurance builds cash value, which grows tax-deferred, and offers optional riders to help tailor the policy to fit your needs.

Life insurance for 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. Many business owners protect their future interests with life insurance. For example, business partners may insure that life insurance proceeds are there to purchase the deceased partners share from the remaining family members. This is commonly known as a Buy-Sell agreement, and can be an affordable alternative for the remaining partners to purchase the outstanding shares of the deceased partner. Businesses could also use the policy's cash value in times of financial opportunity.