Many Americans Are Confused About Life Insurance. Here’s What You Need To Know
September is Life Insurance Awareness Month, which might sound strange to some. Awareness campaigns make sense for diseases and the issues concerning minority groups, but an insurance product?
Well, as it turns out, an awareness month may be just what the doctor ordered — because life insurance remains one of the most mysterious financial products on the U.S. market. In fact, according to a June 2024 survey from Corebridge Financial, nearly one in 10 Americans aren’t even sure if they have coverage or not, while about nine in 10 were unable to correctly estimate the monthly cost of an average plan. (Nearly a third of survey respondents overestimated the price by double or more.)
Which is to say, September presents the perfect opportunity to gain some clarity about what life insurance is, how much it costs and who needs it.
So we’ve gathered some of the basics here for you to review at a glance — and use to make the best decisions for you and your family this month (and beyond).
First things first: What is life insurance?
Life insurance is an insurance policy that pays an amount of money known as a death benefit at the time the policyholder passes away. This money can be used by surviving loved ones to cover funeral costs, replace the decedent's income, create an inheritance and more.
As is true with other types of insurance coverage (like homeowners insurance, auto insurance and health insurance), each life insurance policy is different — so it’s important to read your paperwork in full to understand what you’re getting.
Life insurance for beginners
Now that we’ve got the most elemental definition under our belts, let’s take a closer look at how life insurance works — and debunk some common misconceptions.
1. There are different types of life insurance
Although it might all be called "life insurance," there are different types of policies on the market — and they have very different benefits. The two main categories of life insurance are permanent life insurance and term life insurance.
- Term life insurance is the simplest kind of coverage, and the type most often offered as part of a workplace benefits package. Term life insurance, as its name suggests, offers coverage for a certain term or amount of time: one, five, 10 or even 30 years. However, a death benefit is only paid if the policyholder passes away within that specified term. If you outlive the policy, you’ll need to renew your coverage and prices may be higher by then.
- Permanent life insurance, also sometimes known as whole life insurance or cash value life insurance, offers you coverage for your entire life, so long as you keep making your monthly payments. Permanent life insurance may also come with a cash value savings account, which you or your heirs may be able to access during your lifetime under certain circumstances. (Another subtype of permanent life insurance is universal life insurance, which offers more flexibility since it doesn’t have set premiums.)
Permanent life insurance policies are often pricier than term life insurance policies — but as you can see, they also offer more robust benefits. Which is right for you depends on your personal needs and family circumstances, and a qualified broker can help.
2. The younger and healthier you buy in, the lower your costs
No matter which type of life insurance you purchase, if you’re younger and healthier, your costs are likely to be lower. That’s why the best time to think seriously about whether or not you need life insurance coverage is right now.
Bear in mind, too, that unlike marketplace health insurance policies under the Affordable Care Act (ACA), life insurance companies can deny coverage to those with preexisting conditions. If you do have a chronic or terminal illness, term life insurance may be more accessible than permanent life insurance — but if you’ve yet to develop one of these conditions, your odds of qualifying (and scoring a lower price) are even better.
3. Depending on your insurance needs, your workplace plan might not be enough
While it’s not as common as health insurance or retirement coverage, many workplaces do offer life insurance as part of their benefits package. According to recent BLS data, about 62% of civilian workers have access to life insurance coverage through their employer.
However, workplace life insurance plans are almost always term life insurance — and even if the term is a longer period, it is likely to expire as soon as you stop working with that company for any reason. You may be able to port the policy over to another provider, but doing so will take effort and must be done on a short timeline after your employment ends.
That’s why, for those who want to ensure their family is protected no matter what happens with their job, purchasing a separate plan may be a safer call — and one that may come with additional benefits that term life insurance doesn’t offer.
4. Life insurance can also function as investment tool
While many people know that life insurance can be used to help ease your family’s financial burden at the time of your death, fewer know that cash value life insurance policies can function as a savings tool.
Whole life cash value life insurance policies offer the policyholder access to an investment account that you could, if you decided to surrender your coverage, access during your lifetime. Your cash value account grows tax-deferred and can be used as collateral for a loan.
While accessing your policy’s cash value means foregoing your future death benefit, under certain circumstances, it’s a financial move that could make more sense for both you and your loved ones.
5. With the right policy, you could use it to pay for your elder care
Many people think that life insurance policies are only for people with children. But no matter who you are, you’re likely going to need care during your advanced years — and if you set up your life insurance policy the right way, it could help pay for it.
For example, some permanent life insurance policies offer a living benefit option, which allows the policyholder to access a certain amount of their death benefit while they’re still alive. You could use that benefit to pay for care, be it professional or the efforts of a loving family member. You could also do this by surrendering your life insurance policy for its cash value, as described above.
As you can see, there are more benefits to life insurance coverage than initially meet the eye. Just as every life insurance policy is different, so is every potential policyholder’s life circumstances — so this month, take a moment to review you and your family’s needs and consider how life insurance might help meet them.
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.