What is life insurance and why do you need it?

Life insurance can be confusing because most articles use industry terms and jargon that can be hard to understand. We try to keep things easy to understand, so we’re here to break down life insurance. What is it? Why might you want to consider opting into a life insurance policy? If the policyholder passes away, life insurance can cover different needs for many years, from mortgage payments to college tuition. Though 70% of Americans consider life insurance a necessity, 41% have no life insurance at all. If you’re part of the 41%, you might want to consider your options for life insurance.

WHAT IS LIFE INSURANCE?

Life insurance financially provides for family or anyone who relies on your income if you pass away. When you take out a life insurance policy, you name these people—called dependents—in your policy. This can totally or partially replace a sudden loss of income for them. Experts recommend having a life insurance policy if you have children or a spouse who are financially dependent on you. If you financially support your parents, you may want a life insurance policy that will continue supporting them should the worst happen. This can help families with things like funeral costs and day-to-day expenses. 


HOW DOES IT WORK?

Just like medical and auto insurance, you pay a monthly premium to the life insurance company. If a tragedy occurred and you were to pass, the beneficiaries (usually dependents) listed on your policy would receive the payoff of your coverage amount. So, for example, if you purchased $100,000 in coverage, your family would receive that amount if you passed. There are many different types of policies, but the most popular are permanent life insurance and term life insurance. Here’s what those mean.

TERM LIFE INSURANCE

Term life insurance, which is temporary coverage, only protects you for a certain “term” period. This type of policy is available for different periods like 5 and 10 years, up to 30-year terms. If you purchase a 5-year term policy, your rate will lock in for those five years and won’t fluctuate. If you die within the five years, your dependents will then receive the money. However if the term expires and you do not renew coverage, you will not be protected should you pass away.

Let’s say you buy a $100,000 5-year term life insurance policy that expires when you’re 50. If you die at 49, your beneficiaries will receive the death benefit. However, if do not renew your policy and die at 51, your beneficiaries will receive nothing. 

PERMANENT LIFE INSURANCE

Permanent life insurance is exactly what it sounds like—a policy that does not expire after a number of years. A permanent life insurance policy provides life insurance protection for your entire lifetime. Most permanent life insurance policies come with a savings aspect. This means that as you make payments, the policy earns cash value. The policyholder can then borrow money or withdraw funds to cover expenses. Because of this, these policies typically have higher premiums.

HOW DO I KNOW WHEN I NEED LIFE INSURANCE?

Only you can decide if buying a life insurance policy is right for you. When it comes to life insurance, it’s important to ask yourself “If I die today, who relies on my income? What income would need to be replaced?” Whether it’s your parents, kids, or spouse, you’ll want to keep them protected. 

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