How Does Life Insurance Work?

There are 41 million people in the U.S. who say they need life insurance but do not have it, according to the 2020 Insurance Barometer Report from industry groups LIMRA and Life Happens. This can partially be explained by the tendency of people to overestimate its cost.

Perceptions about affordability and value can deter people from buying the life insurance they need. More than half of respondents in the Insurance Barometer Report said a $250,000 term life insurance policy for a healthy 30-year old would cost $500 a year or more. But the average cost is closer to $160 a year. That’s a pretty big discrepancy in perceived cost versus actual cost.

Here’s a breakdown of what you need to know about getting the best life insurance so you can make an educated decision.

What Is Life Insurance?

Life insurance is a contract between you and an insurance company. Essentially, in exchange for your premium payments, the insurance company will pay a lump sum known as a death benefit to your beneficiaries after your death.

Your beneficiaries can use the money for whatever purpose they choose. Often this includes paying everyday bills, paying a mortgage or putting a child through college. Having the safety net of life insurance can ensure that your family can stay in their home and pay for the things that you planned for.

There are two primary types of life insurance: term and permanent life. Permanent life insurance such as whole life insurance or universal life insurance can provide lifetime coverage, while term life insurance provides protection for a certain period.

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