How Life Insurance Works & Why it is Important

How your life insurance works depends on your policy and insurer. You’ll want to read the details of your individual policy so you know what to expect from your insurance company and payouts. Consider what you want your life insurance to do for you. Let’s look at two examples: 

  • A permanent life insurance policy lasts for the duration of your life. However, if you only want a whole life insurance policy for its cash accumulation feature, you may want to put your money into an investment vehicle instead. This will help you avoid the extra fees you’ll pay to an insurance company.
  • When you die, any cash value usually goes back to the life insurance company. Your beneficiaries get the policy’s death benefit, not the death benefit plus cash value. 

Again, understand what your beneficiaries will get out of the policy before you choose one type of life insurance policy over another. The only way you can do that is to read the fine print of the policies you consider.

Why Get Life Insurance?

Why do people get life insurance, anyway? Let’s take a look at the reasons you may want to get life insurance: 

  • You have debt. Someone still has to pay for your debts when you die. If you have a cosigner on a loan, a spouse in a community property state or a business partner who is a joint owner of a business, you’ll want to seriously consider getting life insurance to help pay your debts if you die unexpectedly.
  • Your family relies on your income. What would happen to your family if you weren’t around to pay for the everyday living expenses that crop up? Consider how much your family relies on your income and make a life insurance purchase accordingly. Consider long-term consequences of your income, such as paying out-of-pocket for college and more. 
  • Your heirs will have to pay estate taxes. In 2021, the federal estate tax will go to your loved ones if you leave behind assets totaling more than $11.7 million.
  • Your family will need help paying for your funeral expenses. Your family could easily spend $10,000 on a funeral. If your family will need help paying for the arrangements, you may want to get life insurance.  

Not everyone needs to get life insurance. You may wonder whether you need life insurance at all if you have significant financial assets through stocks, real estate or other investments. If that’s the case, you may not need the coverage. In addition, if you don’t have children and your spouse can handle everyday expenses, you may not need it.