What Is Life Insurance?
You buy insurance for your car, your house, your cell phone, your pets and maybe even your upcoming vacation—but do you have insurance on your life?
Life insurance is a very important aspect of personal finance, yet according to the 2019 Insurance Barometer Study by LIMRA and Life Happens, 43% of Americans don’t have any form of life insurance.1
Why aren’t Americans buying life insurance? Well, there are many reasons, but lack of knowledge about life insurance may be a big factor. According to the same study by LIMRA and Life Happens, less than half of Americans say they are knowledgeable about life insurance.2
If you’re wondering if life insurance is a good choice for you—but you feel less-than-knowledgeable about your options—keep reading for our easy-to-understand information!
What is life insurance?
Life insurance is a contract between you and an insurance company. In exchange for your premium payments (what you pay each month/quarter/year to keep your policy active), the insurance company pays a cash benefit (also known as a death benefit) to your beneficiary (the person, people or institution(s) that receive money if the policyholder dies) if you pass away while the policy is in force.
What is life insurance used for?
You may be wondering, “What is the purpose of life insurance?” Insuring your life may seem like a strange thing to do, but here’s an important way to look at it: Buying life insurance isn’t something you do for yourself; it’s something you do for your family.
When your life is insured, you can rest a little easier knowing that you’re protecting your family’s future if something happens to you. In the event you pass away, your beneficiary can use the cash benefits for any reason—to replace lost income, cover living expenses, pay off debts, fund college, save for retirement and so much more.
Families that don’t have life insurance oftentimes struggle financially when a loved one passes away. That person’s income stops, but the bills continue—from funeral and burial costs to medical expenses, household bills, and mortgage payments.
How do I purchase it?
Purchasing life insurance is very simple! You meet with your trusted insurance agent or financial advisor, discuss your needs and select the appropriate policy. The next step is to complete an application. The insurance company’s underwriters will then review your medical history to determine if your application is acceptable, and to identify your risk classification. You may need a medical exam. Usually, the younger and healthier you are, the less the cost.
Once your policy is in force, you then pay regular premiums on a monthly, quarterly or yearly basis to keep your policy active. Your premium rates may be determined by several factors. The type of policy you select, your age, your gender and your health history when you apply will all affect your premiums.
What are the different types of life insurance?
Now that you recognize the importance of life insurance, take a moment to understand the common types available.
Although we have several options, keep in mind that they have one sure thing in common: They each pay a death benefit when the covered person passes away. However, they can differ in terms of coverage length, premium flexibility, cash value accumulation and distribution, and other factors. Here explanations of the different types:
Term life insurance offers temporary coverage for a set number of years. A term policy’s specified period may be five, 10 or 20 years. Premiums are affordable and level, which means they remain the same for the entire period you choose. At the end of the policy’s specified period, your coverage will end. However, you may have the option to convert your policy to a permanent life policy if you want to continue your coverage. This is a great option if you need coverage for a certain time-frame, such as for the length of your mortgage or until you reach retirement.
Whole life insurance offers lifetime protection that builds cash value at a guaranteed interest rate. It features level premium payments, which means they won’t ever increase. You can use your cash value for any reason, including supplementing your retirement income or paying medical bills. It is a great option if you want coverage for long-term needs and through your retirement.
Similar to whole life, universal life insurance also offers lifelong protection and cash value that accumulates tax deferred. What makes it unique is the flexibility to adjust your coverage and premium amounts. You can choose to increase or decrease your premium payments based on how fast you want your cash value to grow, subject to minimums and maximums. This type of policy also features the unique ability to increase or decrease the death benefit. If you need less life insurance in the future, simply reduce your coverage amount. If you need more, you can request a coverage increase (with evidence your health hasn’t changed). It is a great option if you want flexible coverage for long-term needs and through your retirement. Read more about it here.
Juvenile whole life
Juvenile whole life insurance offers permanent protection by insuring the life of a minor or young adult to help build a strong financial foundation. This type of insurance helps guarantee that your child will have protection in place regardless of his or her future health. Another benefit is the ability to lock in childhood premiums for life, which can help make premiums affordable in the future. It builds cash value over the life of the policy, which can be borrowed against tax free for any purpose. This type of policy is great if you want to provide an everlasting gift to mark a special milestone in the life of a beloved child or grandchild. Read more about it in this recent blog post.
Still have questions?
We hope this simple guide has increased your understanding of why life insurance is a crucial part of personal finance. If you still have questions, contact us here.
1Life Happens and LIMRA, 2019 Insurance Barometer Study, 2019.
Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.
For information and educational purposes only. Does not constitute investment advice or a recommendation