Working toward financial security looks different for everyone. Some stash money away while others invest in stocks and real estate. Life insurance comes into play when you want to secure your family’s financial wellbeing in the long term.
75% of American adults rely on some form of life insurance to financially safeguard their family. With so many households depending on life insurance for protection, it makes sense to wonder, “how does life insurance work?”
What is Life Insurance?
Life insurance is a method to provide funds (death benefit) to loved ones after you die through a policyholder contract. It can be an important step in supporting your family’s future and creating financial security for years to come.
Permanent and term insurance are both variations of life insurance. The difference is in the timing and cost. Term life insurance is a method of coverage secured for a designated period of time. It typically costs less than whole or universal life policies due to the shorter duration of coverage.
Permanent life insurance, unlike term insurance, is a version of coverage that is kept for a lifetime. It offers a death benefit to beneficiaries no matter the age of passing. It can cost more than term life insurance due to its longer duration of coverage.
Why Get Life Insurance?
Life insurance is a way to provide financial security for your family after your death. Pairing life insurance with a few other financial strategies can create unwavering financial assurance.
According to the Insurance Information Institute, “68% of life insurance owners say they do feel financially secure. This feeling of financial security rises to 78% when a consumer has both employer-based and individual life insurance policies.” Knowing your family is protected, even during difficult times, creates immeasurable peace of mind.
Life insurance can be used for a variety of purposes. According to the 2023 LIMRA Insurance Barometer Study, some of the most common reasons Americans buy life insurance include:
- 60% Burial/final expenses
- 38% Wealth transfer
- 28% Income replacement
- 25% Pay off mortgage
- 24% Supplement retirement income
When Do I Need Life Insurance?
It is typically suggested to consider life insurance once you have dependents relying on your income. Many Americans start to think about and consider a life insurance policy once they have their first child.
According to a LIMRA poll, 40% of insured individuals wished they had purchased their life insurance policies at a younger age. Securing a policy at a young age can result in lower overall costs.
A common myth associated with life insurance is that those without an income do not need life insurance. According to a recent study, stay-at-home parents add more than $200,000 of added value contributions that would need to be replaced in the event of their death. Life insurance could help provide services and support to keep your family running smoothly.
How Much Do I Need?
The required amount of life insurance varies based on individual circumstances, although some financial experts suggest starting with 10 to 15 times your annual income.
It is also important to consider the intent for the policy. Are you looking for an income replacement, burial cost coverage, or funds to pay off a home? A clear vision for these funds could help determine the amount of insurance you require.
Now that we’ve explored the question, “how does life insurance work?”, get even more details on the workings of life insurance with our article: Life Insurance Facts and Figures Worth Noting.
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Bankers Life is here to help customers with their financial and insurance needs so please visit us at BankersLife.com to learn more.
