Life insurance is considered by many to be an important part of personal finance. In fact, 63% of Americans consider life insurance a necessity, according to Life Happens*, a nonprofit industry group. Yet there remains a great deal of confusion, and even skepticism, about life insurance. That’s because many people approach life insurance with predisposed notions.
A life insurance policy is a contract with a life insurance company. In exchange for premium payments, the insurance company agrees to provide a lump-sum payment, known as a death benefit, to the beneficiaries of the policyowner upon death.
There are two basic types of life insurance: term and permanent. Term life is the simplest, least expensive and the most widely applicable to most situations. With term life, a life insurance company pays the death benefit to the beneficiaries if the insured dies within a stated term—typically 10, 20 or 30 years. The premiums are fixed or level for the length of the term. That means that you may very well pay premiums for decades and “get nothing out of it.” But that’s good news, because it means you’re still alive.
Life insurance isn’t simply about placing a monetary value to someone’s life. It helps compensate for the inevitable financial consequences that accompany the loss of life. Ultimately, it helps those left behind cover the costs of final expenses, daily expenses, outstanding debts and mortgages, educational expenses – that would have been paid with the lost income. More importantly, in the aftermath of an unexpected death, life insurance provides a death benefit that can help lessen financial burdens at a time when surviving family members are dealing with the loss of a loved one.
* LIMRA, US Consumer Today: The Generations 2014