How Does Life Insurance Work?

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Answers to Common Life Insurance Questions

If you have questions about how life insurance works, we’re here to help, with some great insights from State Farm^® Agents Denise Elliott (Durango, Colorado) and Ken Quach (Houston, Texas). They 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.

The Basics

The main reason people buy life insurance is to protect their family. As Elliott puts it, “It’s like having someone who will take care of your family financially if you couldn’t due to an untimely death.” 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

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.
Permanent life insurance, which includes variations such as whole life and universal life, is lifelong coverage and, like term coverage, provides a death benefit to your beneficiary if you die. It also offers several living benefits, including accumulation of cash value at a guaranteed interest rate, taxes able to be deferred, and protection from creditors.
According to Elliott, “Years ago, we typically only recommended life insurance if you had a family to protect. Now, the cash value buildup¹ in permanent life insurance policies can be a helpful financial tool.
“If I don’t use it for anyone else in my family, I can use it on myself. Where else can you go and buy one policy to take care of your debts if you die and still have the ability to borrow money to take care of your needs while you’re alive?”

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. Quach has helped a lot of business owners protect their future with life insurance, and he talks about one example — partnerships.
“A lot of people who go into business have partners, and there are several ways we can help them. For example, there’s a plan where each partner in the business can ensure their share of the business will be passed on to the remaining partner(s) if they die. In addition, their beneficiary (typically their spouse/family) would still get proceeds from the life insurance policy.”

Learn More

While we’ve scratched the surface on how life insurance works, we recommend sitting down with an agent to talk about your personal situation and the options that would make the most sense for you.

¹ Unpaid loans and withdrawals will reduce the guaranteed death benefit and policy cash value. Loans also accrue interest.

disclosure

State Farm Life Insurance Company (Not licensed in MA, NY or WI) State Farm Life and Accident Assurance Company (Licensed in NY and WI) Bloomington, IL Each insurer is financially responsible for its own products. SILI-1000.0
Neither State Farm® nor its agents provide tax or legal advice.

Here’s how you should be saving money during your lifetime

Here’s how you should be saving money during your lifetime

By assessing your life at various stages can enable you not only to plan ahead, while also target certain financial achievements to ensure your well-being.

This is according to Errol Meyer, the legal specialist from Standard Bank Financial Consultancy, who says that personal financial planning becomes easier and adjustments can be made as you go along.

Below, Meyer sets out how you should be saving during your lifetime.

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Starting out and becoming established (ages 18 to early 30s):

At this stage, education and getting a car, rather than thinking about retirement are usually priorities. But, this is the time to begin thinking that far ahead.

At this stage of life, you should concentrate on developing lifetime habits such as:

• Making sure that you pay yourself first. Decide what you want to save and put this aside before spending any money. You can build future financial independence earlier than you think if you decide, for example, to put away 33% of your earnings for the future.

• Learning not to compromise. Committing money to investments that stop you from drawing it out takes away temptation. A 12-month fixed investment is ideal. The money grows and you can’t get it.

• Putting together a budget. Deduct your compulsory savings and then set aside money for living and money for short-term goals.

• Consider starting a long-term fund. Investment portfolio’s that are aligned with lifestyle goals, such as education and buying a house are good ways to go. The earlier you invest the less the investment will cost and the more you will benefit.

• Wisely invest some of your budget. For example, cars just don’t hold their value. Buy a pre-owned car or downsize and you will have money available when you need it.

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Moving on and beginning to accumulate assets (mid-30s to 50)

With your education complete and career path decided, you are now focusing on family and other responsibilities such as focusing on home loans, saving for the future of your children and other needs.

Typically, this is the time of your life when you get established and your income increases accordingly. You should be looking at:

• Increasing your contributions to medium and long-term savings mechanisms and taking out life insurance.

• Diversifying savings and moving into shares, unit trusts and other products.

• Reassessing your retirement savings and adjusting them if necessary.

• Making sure that you have a will.

Review your investment plans regularly and get a professional financial planner to assess what you need for the next stage of your life. As you approach 50, it pays to be realistic about your health and plan for contingencies that could result if your health doesn’t stay good.

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Independent family and the road to retirement (age 50-65)

Ironically, life gets cheaper and earnings greater at this stage of your life. Children leave home and even begin their own families. Simultaneously, your earning power peaks. Retirement beckons.

The important things to consider now are:

• Making sure you have no debt as you approach retirement. After retirement, you have to live on investments and pensions. Major debts can be financially damaging.

• Consolidating your investments so that they are low-risk investments that offer steady, inflation-linked returns.

• Adjusting your long-term retirement strategy and thinking about increasing your contributions to a retirement annuity.

• Planning your estate and taking steps to ensure that your family rather than the taxman- benefits when you die.

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