No one ever really wants to think about life insurance. But it pays to plan ahead, particularly if you’re a breadwinner. Having a life insurance policy can make paying for essentials easier for your loved ones after you’re gone. Not sure where to begin? Here are a few basic facts about life insurance—and how it works—to get you started on the right path.
What is life insurance?
Life insurance is a policy that helps you provide for your family after your death. Without your income, your loved ones may not have enough money to keep up with the rent or mortgage, pay other household bills, buy groceries, or even cover your funeral expenses. In your absence, life insurance pays your designated recipients a “death benefit,” or a set amount of money specified by your policy, when you’re gone.
What types of life insurance policies are available?
There are three main kinds of life insurance: term, whole, and universal.
Term life insurance is a cost-effective option when you have more to protect. It offers affordable coverage for a set period of time with level premiums. The benefits can be used to help cover the living expenses of those you care about most in your absence.
Whole life insurance provides simple, lifelong coverage with guaranteed benefits and premiums. The coverage can be there for your family when it’s time to take care of your final expenses.
Universal life insurance provides permanent coverage that can help meet your changing needs. You can use the flexible options with this type of policy to help grow cash value during your lifetime and then leave a legacy to your family or a gift to charity.
What are the common benefits of life insurance?
Depending on your life insurance policy, it provides money for your beneficiaries to help:
- pay your funeral and final expenses (such as medical expenses not covered by health insurance, burial costs, estate administration costs, and federal and state “death” taxes)
- replace your income
- cover outstanding debts
- provide an inheritance
- make charitable contributions
- build/accumulate cash value for yourself
How does life insurance work?
When you purchase life insurance, you begin paying a monthly or an annual premium. Your on-time payments keep your policy active. If you die while you have active coverage under a covered claim, your life insurance provider pays the policy’s death benefit to your beneficiaries. This benefit is often paid out in a lump sum. Your beneficiaries can choose to have the death benefit paid out in installments.
Learn more about how life insurance works.
How much life insurance do I need?
Get a general idea by answering only two questions, then use our life insurance checklist to get a detailed answer.