Life insurance is considered one of the most important personal financial decisions you can make, but many Americans still don’t have it. The rate has been declining slowly since 2011, when 63% of US adults had life insurance. Now it’s just 57%. This is driven by many different factors, but one of the most significant drivers of this decline is that many people find life insurance confusing and think it’s probably going to be too expensive. They’re right about it being confusing but in general overestimate the costs. If you don’t have life insurance, here’s a little bit of information to clarify any confusion around the subject.
Why would I need life insurance?
There are several reasons why you might need life insurance, but all have one thing in common. They involve somebody who needs to rely on you for their financial wellbeing. These people are called dependents and can be children, spouses, parents or even business partners. If nobody would suffer financially from you not being around anymore, then you don’t need life insurance.
Life insurance is compensation not investment
Life insurance is like many insurance schemes, but it can be confusing due to the longevity of the insurance payments. It might feel like you are putting money into a fund for your family to access at the end of your life, but this is different to what you’re actually doing. Life insurance is a strategic tool to lessen the financial stress when your surviving family or other dependents are grieving. It doesn’t increase in value over your life like an investment would and is a guaranteed payment unlike an investment. People prioritize life insurance over investments as investments carry some risk, and many feel like there is no room for any risk when the happiness of their dependents is at stake.
The process
This insurance is a contractual policy between the company and somebody who wants to take care of their dependents. The insurance company is paid regular installments in exchange for what’s known as a death benefit. The company makes profit from the difference between the combined premiums and the claim paid out. According to Insurance Geek, there are two varieties of life insurance; these are term life vs. whole life insurance. Term life insurance is simply a policy that’s based on the chance that somebody will require a death benefit in a set term, typically a number of decades. Whole life insurance is similar but is designed to allow the policy to exist indefinitely. This works as there is some form of savings that the insurance company does (maybe through some low-risk bonds) to help them compensate for the risk that they assume, as the individual making the payments gets older and more likely to die. This means that if whole life insurance is bought at a very young age (18 being ideal) the owner will pay a very low policy for the entire time they maintain the contract.
Life insurance is a difficult thing to wrap your head around (and quite hard to think about). I hope this article has run you through the basics. There’s a lot of information online that could help you out if you want a more detailed explanation.
