What You Need to Know About Life Insurance

Life insurance can seem very complicated. What is it? What does life insurance cover and what is it used for? How do I get life insurance? All of these questions and many more can be overwhelming, making it easy to delay getting life insurance until later down the road. But it’s important to understand your coverage options and their different advantages before you decide on a policy. 

According to the 2023 Insurance Barometer Study, a record high number of people planned to buy life insurance within a year, including 50% of millennials and 44% of Gen Z adults. But only about half of all American adults report having life insurance. 

This guide to understanding life insurance has you covered. Here’s what you need to know about life insurance, including what it covers, how to get it, how to choose between options and why you should think about it now. Our simple life insurance calculator can also help you find out what options may be best for you.

In this guide:

• What Is Life Insurance?
• What Is Life Insurance Used For?
• Life Insurance Needs at Every Stage of Life
• Common Types of Life Insurance
• Converting Life Insurance
• How Much Life Insurance Do I Need?

What Is Life Insurance?

Life insurance protects your family’s financial future, even if the worst happens. Having a life insurance policy can help lower the financial risks your family faces in the event you can no longer provide for them.

When you purchase a life insurance policy, you pay premiums on a periodic basis. Then, upon the death of the insured, a lump sum is paid to the beneficiaries. There are many different types of coverage with multiple add-on options, so policies can be customized to match your personal needs and goals.

Before digging into the details of the different types of policies, it’s helpful to understand the benefits of having life insurance and how it can help protect your family long term.

What Is Life Insurance Used For?

Safety and Security for Your Loved Ones

Ensuring that loved ones can pay for necessary expenses and live in relative security is the primary reason many people purchase life insurance. Life insurance can provide a way to cover funeral costs, but it does more than that. Your policy can provide income to pay expenses, such as a mortgage, continuing a family business, higher education for children and many other situations.

Paying for Chronic or Terminal Illness 

You might think that life insurance is only useful after the policy holder has passed away, but that’s a common misconception. In reality, some policies have optional benefits that can help pay for chronic or terminal illness care expenses. Carrying that kind of policy can give your loved ones peace of mind while they’re living through a difficult time.

Access to the Cash Value 

If you purchase permanent life insurance, you may be able to access your insurance policy’s cash value through a policy loan or withdrawal for emergencies, retirement income and more. Depending on your policy, you may have the flexibility to access your accumulated cash without the restrictions that other investments may carry.

Leaving a Legacy 

Everyone wants to leave behind a better world for their friends, family and neighbors. With a life insurance policy, you can create additional wealth for your family or a charity you want to support. This is an excellent tool for building the funds you need to make an impactful donation to community organizations that are important to you.

Life Insurance Needs at Every Stage of Life

Young Adult 

It’s often suggested to purchase a life insurance policy when you’re young and healthy. You will likely have access to lower rates because of your younger age. And while life insurance needs are unique to every individual, life insurance generally becomes more critical when you have young children. Building assets now will assist in protecting your family later if something happens to you. 

However, even if you don’t have children, an insurance policy can be a smart financial move. Many permanent life policies provide not only a death benefit but also allow you to use your accumulated cash value to help fund future financial objectives, such as buying a home or retirement.

Midlife 

Perhaps your children are grown and do not need as much financial support as they once did. But in midlife, there are other factors to consider. Do you have a spouse who you financially support? Do you provide or plan to provide financial support for an aging parent or a dependent? Your assets may be growing in a 401(k) or another retirement fund, but will that be enough for you and your family in the future, especially if you’re gone? When deciding which type of life insurance is best for you, consider the financial implications to your family when they lose your income. 

Seniors 

Many retirees no longer have dependents and may be thinking about reducing their life insurance benefit. Be sure to first discuss coverage changes with your insurance agent or a financial advisor. There are ways to use life insurance that you may be overlooking, such as providing income while Social Security benefits grow, asset replacement and inheritance equalization.

Common Types of Life Insurance

There are different types of life insurance with additional options available so you can find a policy that best fits your needs. Here are the most common types you’re likely to hear about as you begin your search for coverage.

Permanent Life Insurance

Permanent life insurance policies typically have two components: cash value accumulation and death benefit. A permanent policy is designed to be kept for a lifetime and may involve slightly higher premiums than with a term policy. Remember: with a permanent policy, you’re earning cash with your premium dollars, and you have coverage for life.

There are two kinds of permanent life insurance policies: whole life insurance and universal life insurance. 

Whole Life Insurance 

Whole life insurance is ideal for those with long-term goals. It provides guaranteed protection for your whole life. As a policyholder, you’ll pay consistent premiums and have guaranteed cash value accumulation. You can also choose to borrow from your whole life policy to help purchase a home, start a business or even fund retirement(1).

Universal Life Insurance 

Universal life insurance generally offers more flexibility than whole life insurance, but it also covers you throughout your lifetime. Along the way, you can adjust things like your premium payment amounts and frequency(2), as well as your death benefit, to meet your needs and goals. Similar to whole life, universal life insurance allows you to also borrow from your funds for future financial needs(1).

Term Life Insurance

A term life insurance policy provides a predetermined sum (also called death benefit) if you, as the insured, die during a specified period of time. The term could range from one year to more than 20 years, depending on the policy you choose. Because term life insurance is designed to be kept for a shorter amount of time, it is one of the most affordable options. Unlike whole and universal policies, there is no cash value. 

If you want term life insurance with more flexibility, you might be interested in Increasing Term life insurance. It’s an ideal way to get life insurance if you need a policy now, but also think you’ll need more coverage in the future. With Increasing Term, you’ll be allowed to increase coverage up to double the face value of your policy over the first five years without having to go through the underwriting process again.

Converting Life Insurance

Some term life insurance policies can be converted to a permanent life insurance policy. In this case, you can obtain a less expensive policy at first, while also being able to switch to a permanent policy as insurance needs and financial situations change. By converting to a whole or universal life insurance policy, you’ll be able to take advantage of the additional benefits, such as a policy that never expires and accumulating cash value from which you can borrow.

How Much Life Insurance Do I Need?

When it comes to deciding on your life insurance policy, one of the biggest questions to answer is how much you need. There are a variety of factors that come into play when it comes to your needs, including age, salary, expenses, debts and future financial needs.

But there’s good news: uncovering your life insurance needs is easier than you think! Connect with a Farm Bureau agent to learn more and to find the coverage option that fits your needs.