Life Insurance Basics

Navigating life insurance can feel overwhelming, but it can be a way to help plan for the financial future of the people you love. Learning about life insurance can help you make more informed decisions.

What is life insurance?

Life insurance is a legally binding contract between a business (the insurance company) and its customer (the insured). Many people hope to grow old with their families and give back to communities well into their golden years. However, the future has no guarantees, meaning people must plan for that uncertainty. Life insurance is a way to help protect against the unpredictable and provide more stability for loved ones.

How does life insurance work?

The primary purpose of a life insurance policy is to provide a death benefit that can help protect the financial stability of a family. When a life insurance policy is purchased, the purchaser names a recipient/recipients for the death benefit. The recipient of a death benefit is known as a beneficiary. When a life claim is paid, the beneficiary can use the death benefit to cover financial obligations and more.

Many causes of death are covered, whether it be an accident, an illness, natural causes, homicide or suicide. However, there are exceptions where insurance companies may deny a life insurance claim, and a few examples of that can include: if the insured is participating in high-risk activities, such as skydiving, at the time of death. If the insured is not truthful about the condition of his or her health when applying for life insurance. If a beneficiary is found guilty of, or in some way responsible for, the insured’s death. If suicide occurs within the first two years of the policy, this is known as the suicide exclusion period.

How much does life insurance cost?

This varies based on factors like the type of life insurance purchased, the amount of life insurance coverage desired, health and age. Typically, the younger you are, the more affordable life insurance is. It will cost less today than it will tomorrow. Life insurance doesn’t necessarily become unaffordable over time.

The cost of not having life insurance.

Take a moment and consider what a family needs. Is the potential policyholder the main household provider for the mortgage or other expenses? Does the potential policyholder contribute to the family’s savings and overall cost of living? Now, imagine if that person weren’t here. How would the family’s life be affected financially? That absence of both the person and the financial support that life insurance could provide in the event of their passing can be a helpful way to understand the potential impact of letting a life insurance policy expire or forgoing one altogether.

How much life insurance do I need?

It’s natural to wonder how much life insurance you might need when first learning about it. You could get a better idea of that by using a life insurance needs calculator or simply multiplying your current income by 10 or 15.

Types of life insurance

There are two main life insurance types — term and permanent. Both offer protection in the form of a death benefit paid to beneficiaries; however, term coverage is short-term or temporary and only lasts for a certain amount of time, whereas permanent coverage lasts your entire life.

Term life insurance is coverage that lasts for a specific term or length of time (commonly 10, 20 or 30 years). If the insured passes away during the specified term and the premiums have been paid, beneficiaries will receive the death benefit on the policy. However, if the insured is still alive at the end of the specified term, the guaranteed level premiums will end and the insured may then choose to continue the policy on an annually renewable basis, up to age 95 at a higher cost.

Permanent life insurance offers coverage that lasts an entire life. State Farm provides the following options for permanent life insurance: whole and universal. Whole life is permanent life insurance that offers a set amount of coverage with level premiums that will never change while the policy is in force. The death benefit, premium and cash value are guaranteed when premiums are paid as scheduled. Universal life insurance is permanent life insurance with more flexibility allowing the policy owner to adjust coverage and premiums over time to better suit their needs. Whether that means increasing coverage due to a new family member or increasing premiums to help build tax-deferred account value, universal life provides options.

The information in this article was obtained from various sources not associated with State Farm (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

Each State Farm insurer has sole financial responsibility for its own products.

State Farm Mutual Automobile Insurance Company

State Farm Indemnity Company

Bloomington, IL

State Farm County Mutual Insurance Company of Texas

Richardson, TX