Life insurance is a great way to help offset a lot of costs for your family when you pass away. It is also a topic that most people don't want to talk about. Preparing for one's death is like a big elephant in the room everyone tries to avoid, but the reality is, talking about it is very important, especially for the well-being of your family.

Life Insurance: What is it All about?

Unfortunately over the years life insurance has gotten a bad rap. There is a lot of confusion and even skepticism regarding life insurance. So, how do you know it is a right decision for you and your family?  If anyone relies on you financially, you need life insurance. Life insurance does not apply a monetary value to someone's life, instead, it helps compensate for the inevitable financial consequences that accompany the loss of life. 

What Are Common Varieties of Life Insurance?

  • Life insurance is a contract (called a policy).
  • There are two broad varieties of life insurance: term and permanent.
  • Universal life insurance: life insurance characterized by flexible premiums, benefits, and payment schedules, by the indexing of cash value to money market interest rates, and by the periodic reporting of current value and company costs charged to the account
  • Variable life insurance: life insurance in which all or part of the cash value of the policy is located in a tax-deferred investment portfolio with risk assumed by the insured for investment losses — compare variable annuity at annuity
  • Variable universal life insurance: universal life insurance that includes the investment component of variable life insurance —called also universal variable life insurance
  • Whole life insurance: life insurance that provides coverage over the life of the insured and that can be sold for surrender value or used as the basis of low-interest loans —called also ordinary life insurance, straight life insurance
**Fun Fact: The first known use of life insurance was in 1781!

3 Must-Know Facts About Life Insurance

Life insurance is an excellent way to provide financial security for your loved ones after you pass away. While life insurance is a straight forward process, there are benefits of your policy you may not know about. Here is a look at three of them.

Cash value loans: This is where you can take a loan out of your life insurance policy to finance anything from medical bills to home improvements. What’s best about these is they are tax free, since the IRS doesn’t classify them as gains. However, you still have to pay these back, with the principal and interest going to your insurer. If you don’t pay this off and you pass away, your heirs will receive your life insurance benefits minus whatever you owe on the loan.

Accelerated benefit rider: If you are diagnosed with a terminal illness, you can use part of your death benefits to pay for basic expenses. This is helpful in that you can pay off medical debts and make up some of the income you may miss from time away from work. Similar to unpaid cash value loans, the rider will decrease the amount your heirs receive upon your death.

Death benefits can be probate-free: When you pass away, your estate will go to a probate court unless you have a trust set up. However, with life insurance benefits, there’s no need for your beneficiaries to go to court to receive these benefits unless the estate is the beneficiary. This makes it easier for your loved ones to receive your estate.

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A Few Life Insurance Statistics

• In 2016, there are nearly 5 million more U.S. households that have life insurance coverage, compared with 2010 results. However, 30% of households (37.5 million) remain uninsured.

• There are 3.1 million more households with individual life insurance than in 2010, a 6% increase from 2010. However, the individual life insurance market penetration remained steady. Only 44 percent of U.S. households have individual life insurance, equal to the 50-year low set in 2010.

• Approximately 50 million households recognize they need more life insurance (40% of households).

More Millennials own life insurance:

• Overall, 70 percent of Millennials own some life insurance (individual, group or both) - 10 percentage points higher than in 2010. In addition, Millennials’ ownership of individual life insurance has increased 48% since 2010.

• The top three reasons Millennials own life insurance is to pay for final expenses (funeral, burial, etc.): 49 percent; to replace income: 35%; and to pay off

mortgage: 22%. This aligns with the general population.

• 65% of Millennial households say they are likely to buy life insurance within the next 12 months, 29 percentage points higher than in 2010.

• Millennials are as likely to have bought life insurance face-to-face as other age groups but Millennials are more likely to have bought life insurance through other channels as well. The ability to purchase life insurance at their workplace is a plus for Millennials – and improves the likelihood that they will purchase life insurance.

More households with children under 18 have life insurance:

• One and five households with children under age 18 are uninsured in 2016, which is 3.7 million fewer households, compared with 2010 results.

• Of those families who have no life insurance coverage, 73 percent recognize they need life insurance and 62 % say they would be in immediate financial trouble if a primary wage earner died.

• Two-thirds of the households said they were likely to purchase life insurance within the next 12 months.

Life insurance coverage adequacy has declined – Market need exceeds $12 trillion:

• In 2016, there was a significant decline in life insurance coverage adequacy for U.S. households. In 2010, those insured had coverage to replace their income for 3.5 years. Today that has dropped to 3 years, which is far lower than most industry recommendations.

• Across all age groups under 65, the income replacement rate (# of years covered) has declined.

• Using LIMRA’s Life Insurance Needs Model, LIMRA estimates that 48% of households (60 million) have a life insurance coverage gap of $200,000 on average, which amounts to more than $12 trillion in total market need.

• Among households with children under 18, 4 in 10 say they would immediate financial trouble if a primary wage earner died today.

• Another 3 in 10 would have trouble keeping up with basic living expenses after several months.

• Overall, 7 in 10 of all households said they would have trouble covering everyday living expenses after several months if the primary wage earner died.

• Forty-eight percent of households need more life insurance based on LIMRA’s need model. That’s 60.1 million families. The average need is close to $200,000.

Why don’t they buy?

• Eight in 10 households who believe they need more life insurance say they don’t buy because of other financial priorities. Or they can’t afford it. But prior research shows that, on average, people estimate life insurance to cost three times what it actually does.

• Six in 10 say they don’t know what to buy or how much they need. One of the biggest obstacles is lack of information (up 23 percent from 2010).

• More households who believe they need more life insurance say the reason they haven’t purchased is because they haven’t been approached by a financial professional (25% in 2010 vs. 35% in 2016).

Reaching Consumers:

· Almost half (45 percent) of U.S. households say they are likely to buy life insurance in the next 12 months; an 80 percent increase from 2010. This is most likely among younger households (under age 45) and married couples with children.

· More than one-third (35 percent) of married couples with dependent children want to speak with a financial professional about their life insurance needs.

· Across all age groups and income levels, insured households said they want to review their life insurance coverage annually. This is significantly higher than in 2010.

· The majority of households said they were more likely to buy when advised by trusted financial professional (56 percent).

**All facts are from several of LIMRA’s life insurance consumer studies. Fact sheet may be reproduced in whole or in part if attributed to LIMRA (Life Insurance and Market Research Association).