How does life insurance work & how does it protect you?

How Does Life Insurance Work?

Life insurance is an essential tool for financial protection, offering peace of mind to individuals and their loved ones.

At its core, life insurance provides a financial safety net by delivering a lump-sum payment, known as a death benefit, to beneficiaries upon the insured person’s passing. This payment can alleviate the financial strain caused by loss, helping to cover expenses like mortgages, education, or daily living costs.

Whether you’re securing your family’s future or planning for end-of-life expenses, understanding how life insurance works is the first step in building a stable and secure financial plan.

SBLI has shared a comprehensive guide discussing all you need to know about life insurance. Keep reading to learn more.

How life insurance works

Life insurance operates as a contract between the policyholder and an insurance company. You, the policyholder, agree to pay premiums — regular payments made monthly, quarterly, or annually — in exchange for financial protection for your designated beneficiaries.

So how does life insurance work when you die? When you pass away, the insurance company provides a death benefit, a predetermined amount of money, to your beneficiaries. This benefit offers financial support that can be used for any purpose, from paying off debts to securing future financial stability.

Life insurance can be tailored to your needs through the addition of riders. Riders are optional features you can purchase to enhance or customize your policy. For example, at SBLI, you can explore a range of riders designed to address specific needs, such disability income or accelerated death benefits.

This flexibility ensures your policy aligns with your financial goals, providing not just protection but also peace of mind.

What is covered in life insurance?

Life insurance provides financial protection by paying a death benefit to the policyholder’s beneficiaries upon their passing. So what does life insurance cover for your loved ones? This death benefit can be used in numerous ways to ease financial burdens. For families, it often serves as a vital resource for covering day-to-day living expenses, including rent or mortgage payments, utility bills, groceries, and childcare costs. It can also help ensure a secure future by funding college tuition or other educational expenses for dependents.

Financial obligations

Beyond immediate needs, life insurance can cover significant financial obligations such as outstanding debts, medical bills, or credit card balances. For families facing end-of-life costs, life insurance often helps pay for funeral, burial, or cremation expenses, which can otherwise place a heavy financial burden on loved ones.

Long-term financial goals and estate planning

Some policies are designed to support long-term financial goals. For example, permanent life insurance policies like whole or universal life insurance comes with a cash value component, which grows over time. Beneficiaries can use the funds not only for immediate needs but also for estate planning or leaving a legacy to future generations.

Life insurance typically provides coverage regardless of the policyholder’s cause of death, whether due to an accident, illness, or natural causes, so long as the policy remains active. However, certain exclusions may apply, and it’s essential to understand these when selecting your policy.

Financial cushion

Additionally, some whole life insurance policies allow for borrowing against the cash value while the insured is still alive, offering a financial cushion in times of need.1 At SBLI, we design policies to provide peace of mind, knowing your loved ones will have the financial resources they need to move forward, no matter the circumstances.

What does life insurance not cover?

Although life insurance is comprehensive, there are specific circumstances under which it may not provide coverage. For instance, if the policyholder engages in fraudulent activity or intentionally misrepresents information during the application process, the death benefit can be denied. Similarly, most policies exclude coverage for deaths related to suicide if they occur within the first two years of the policy.

Another limitation involves the “revocation-upon-divorce” rule. In some states, a life insurance policy’s ex-spouse beneficiary designation is automatically revoked after a divorce, unless otherwise stipulated. This means the ex-spouse may not receive the death benefit, even if initially named.

It’s also worth noting that death caused by participation in high-risk activities, such as certain extreme sports or illegal activities, may not be covered unless explicitly stated in the policy. Understanding these exclusions ensures you and your beneficiaries are fully informed about the scope of your coverage.

Have questions about what’s not covered? Our trusted life insurance professionals can provide clarity and guidance.

Does life insurance pay for funeral expenses?

Yes, life insurance can cover funeral expenses, providing families with essential financial support during a challenging time. Beneficiaries can use the death benefit to pay for funeral services, burial or cremation costs, and related expenses such as transportation, flowers, or a memorial service.

Mary’s story

When Mary lost her husband unexpectedly, she faced significant funeral costs, including a $10,000 burial fee and additional expenses for a memorial service. Thankfully, her husband’s life insurance policy provided a $25,000 death benefit, allowing her to cover all end-of-life costs without dipping into savings. The remaining funds helped her manage living expenses, offering financial security during a difficult time. Life insurance ensured Mary wasn’t burdened by financial stress.

Understanding the two main life insurance options

When choosing life insurance, understanding the two primary options, term life insurance and permanent life insurance, is essential. Each type caters to specific needs and financial goals, offering unique features and benefits.

How does term life insurance work?

Term life insurance provides coverage for a specific period, or “term,” typically ranging from 10 to 30 years. If the insured person dies while the policy is active, their designated beneficiaries receive the death benefit. This payout can help cover expenses such as mortgages, education costs, or daily living expenses. However, if the policyholder outlives the term, the coverage ends, and no benefits are paid unless the policy is renewed or converted.

Renewing a term life policy often results in higher premiums due to age and potential health changes. Some policyholders opt to convert their term policies into permanent ones, such as whole or universal life insurance, to extend coverage.

At SBLI, we offer two affordable term life options:

How does whole life insurance work? 

Permanent life insurance offers lifelong coverage, provided premiums are paid.2 This category includes whole life insurance and universal life insurance, which differ primarily in their savings components.

  • Whole Life Insurance: Features a fixed premium and a guaranteed cash value that grows at a steady rate. Policyholders can borrow against this savings component or use it to cover future premiums.3
  • Universal Life Insurance: Offers flexibility in premiums and death benefits. The cash value grows based on market performance, making it more dynamic than whole life insurance.

Choosing the right option

Understanding your financial needs and goals is key to selecting the right life insurance. While term life offers affordability and simplicity, permanent life insurance provides lifelong protection with added financial benefits. Evaluate your circumstances carefully or talk with one of our insurance professionals to make the best choice.

How much life insurance should I get?

The amount of life insurance you need depends on your personal and financial circumstances, as well as the needs of those who depend on you. When calculating this amount, it’s helpful to consider your current income, debts, savings, and future expenses, such as college tuition or retirement funds for a spouse.

Factors to consider

Start by evaluating who depends on you financially. For parents, this might include ensuring that their children’s day-to-day expenses, educational needs, and living costs are covered in the event of their passing. Young professionals may want coverage to pay off student loans or leave a financial gift for loved ones.

It’s also important to consider your debts. If you have mortgages, auto loans, or credit card balances, your life insurance should be sufficient to pay these off, so your family isn’t burdened financially.

Not sure how much coverage you need? Our calculator makes it easy—get a quick, personalized estimate to protect your future.

Blending policies for comprehensive coverage

Some individuals find a combination of term life insurance and whole life insurance works best. For instance:

  • Term life insurance can provide higher coverage during peak financial responsibility years, such as when raising children or paying off a mortgage.
  • Whole life insurance can offer lifelong coverage with a savings component that builds value over time, creating financial security for long-term needs or legacy planning.

This blended approach, also known as laddering, ensures both affordability and comprehensive coverage, addressing immediate and future needs.

Explore the benefits of laddering your policies.

Life insurance for children

While many focus on life insurance for adults, insuring children can also be a wise decision. Policies for children typically have lower premiums and can serve as a foundation for their future financial security. Options include the following.

  • Whole life insurance for children: Provides lifetime coverage with a cash value component that grows over time.
  • Term riders on adult policies: A cost-effective way to include children under your policy for a specified term.

These policies can provide financial benefits if used later for education, emergencies, or other needs.

Using tools for calculation

Determining the right amount of life insurance may feel overwhelming, but tools and resources, like SBLI’s life insurance coverage calculator or Term Life Affordability Calculator, can help simplify the process. These tools consider your income, debts, and financial goals, helping you find the most suitable coverage.

Tax considerations

It’s worth noting that life insurance proceeds are generally not considered taxable income, meaning beneficiaries receive the full payout amount. This tax-free benefit can provide additional financial relief for your loved ones during a difficult time.4

Tailoring the right amount of life insurance ensures your family’s financial well-being and peace of mind, allowing you to prepare for life’s uncertainties.

Can you have multiple life insurance policies?

Yes, you can have multiple life insurance policies, and for many individuals, it makes financial sense to do so. While you may already have group life insurance through your employer, having additional policies can provide a stronger safety net for your loved ones, particularly if your group policy offers limited coverage or isn’t portable when you leave your job.

Having multiple policies allows you to tailor coverage to meet your changing needs. For example:

  • Term life insurance policies: Purchasing several term policies with varying durations (a strategy known as laddering) ensures maximum coverage when your financial responsibilities are highest, such as raising children or paying off a mortgage. As these responsibilities decrease, so do your coverage needs, allowing shorter-term policies to lapse.
  • Supplemental policies: Adding a whole life insurance policy to your term coverage can provide permanent protection and a savings component for long-term goals like estate planning or leaving a legacy.

Combining policies also lets you balance affordability and coverage. For example, you might opt for an inexpensive term policy for high coverage in your early years and layer it with a smaller whole life policy for lifelong security.

How to learn more about life insurance options

Life insurance can feel overwhelming but learning more is simple with the right resources. Start by using online life insurance calculators to estimate your needs and explore coverage options. If you’re unsure, consult with a trusted professional who can guide you through the complexities of policies, premiums, and benefits.

Many insurance companies now offer no-medical-exam policies up to $750,000, making the process easier and faster. While cost matters, prioritize companies known for excellent customer service and reliability. Shopping around is key, but don’t compromise on quality — choosing the right insurer ensures your loved ones are protected when they need it most.

SBLI has shared resources you can reference to start your insurance research.

No matter your needs, SBLI makes life insurance simple. Get a quick quote for term life, apply online for Simple coverage, or speak with an agent about whole life. Find the right protection for you and your loved ones—on your terms.

Explore your life insurance options

1Withdrawals are subject to ordinary income tax and, if taken prior to age 59½, a 10% federal penalty.
2Guarantees are backed by the financial strength and claims-paying ability of SBLI.
3Loans will reduce your net cash value and net death benefit and may be subject to interest charges. Unpaid loans are subject to ordinary income tax and, if taken prior to age 59½, a 10% federal tax penalty.
4This is designed for general informational purposes on the subjects covered and is not intended to be legal, tax, or investment advice. Information regarding the subjects covered may not constitute the most up-to-date available and no representations are made that the content is error-free. Further, pursuant to IRS Circular 230, it cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You should consult your own legal, tax, or investment advisor regarding your personal situation.

SBLI Simple Term Life Insurance policy form series 20-P-SIT
SBLI Term Life Insurance policy form series B-56.
SBLI Universal Life policy form series B-49.
SBLI Whole Life policy form series: 21-P-PWL & 21-P-PSPWL.
Not all riders are available for all products. An Accelerated Death Benefit rider is automatic and free. Other riders are available at an additional cost. Rider form series BC-40.1, 18-R-AXRDB, 18-R-AXDDB, BN-9, BN-50, BN-56, and 14-WOPR.
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