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. Whether that entails paying off a mortgage, covering debts or funding education costs, the right type of life insurance can help support a person’s loved ones when they need it most.

How does life insurance work?

At its most basic level, 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 — or recipients — for the death benefit (the amount of money paid out when the policyholder passes). 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 such as:

• Funeral costs — final expenses including funeral and burial/cremation costs.
• Housing — rent or mortgage payments.
• Loss of financial contribution — lost income from the insured.
• Debts — outstanding debts like loans or credit card bills.
• Living costs — regular expenses like groceries and utilities.
• Childcare — costs associated with raising children.
• Education — school or college tuition.
• Inheritance — funds to leave to an heir(s).
• Benefits for small business owners — allowing the remaining partners to buy out the deceased partner or possibly using the cash value during a downturn.

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 be:

• 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?

The cost of life insurance varies and depends on the type of life insurance and other factors discussed below. For example, a $250,000 10-year term life insurance policy starts at $15.02 per month^{footnote 1}. It can be helpful to look at the cost of having life insurance versus not having life insurance.

• The cost of having life insurance. 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. Many people overestimate its cost. Talking to a State Farm® agent about your budget and goals can help you find the right policy that fits your needs.
• 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? What about helping with childcare? Groceries? Home maintenance? Now, imagine if that person weren't here. How would the family’s life be affected financially? What would the cost to their future be without life insurance? 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.

Looking at the “cost” in this way could give insight into what age to get life insurance based on your individual situation.

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. For a more in-depth look, review these tips for determining the amount of life insurance you need.

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 vs. permanent life insurance

Term life insurance

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. Keep in mind, the rate will be much higher. The insured can choose whether to continue the policy, convert it to permanent coverage or cancel coverage at the end of the guaranteed level term period.

Permanent life insurance

Permanent life insurance offers coverage that lasts an entire life. State Farm provides the following options for permanent life insurance: whole and universal. Typically, permanent is more expensive than term because it’s a lifelong policy. Permanent life insurance also provides cash value^{footnote 2}. That value can be used for life emergencies, such as helping with education costs or allowing it to grow tax-deferred^{footnote 3}. As the owner, the choice is up to the policyholder.

• 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. In addition, whole life insurance is eligible to earn dividends. Although not guaranteed, the dividends can accumulate interest, purchase paid-up additional insurance, reduce annual premiums or be paid out in cash.
• 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.

Is there a best type of life insurance?

Determining what life insurance is right for you depends on your individual situation. For some, term may be better due to its initial affordability, whole life for its guarantees, or universal life for its flexibility. Some people find that one type of policy satisfies all their needs, while others may select a combination of different coverages. Every situation is as unique as the customers we serve. Having choices allows you to put together a life insurance plan that fits your life and budget.

Mr. Blevins shares that "State Farm has a product, and a price point, for most customers." You can get a life insurance quote now, or give us a few details and a State Farm® agent will reach out to you.

You might also want to explore the Life Enhanced® mobile app for guidance and motivation to help strengthen key areas of your overall wellness. The app provides access to a wide variety of activity goals, educational materials, and digital tools that can help you achieve physical, emotional, social, and financial well-being.