Why is life insurance important?

Life insurance supports your family’s current and future financial needs by paying out a lump-sum cash benefit when you die.

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Andrew HurstSenior Editor & Licensed Auto Insurance ExpertAndrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

Edited by

Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

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If anyone depends on you for financial support, you should own a life insurance policy. A policy can help your dependents replace your income and cover their expenses if the worst should happen and you pass away.

Every person’s life insurance needs are different. Here’s why life insurance should be part of your financial plan, who can benefit from your policy, and how to find the right protection for your family.

Life insurance terms you should know
  • Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.

  • Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.

  • Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.

  • Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.

  • Insured: The person who is covered by the insurance policy.

  • Policy: The legal document that includes the terms and conditions of your life insurance contract.

  • Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.

  • Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.

  • Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.

  • Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.

  • Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.

  • Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.

Why is it important to have life insurance?

A life insurance policy provides a tax-free, lump-sum cash payment called the death benefit to your loved ones when you die, which can be put toward shared debts and living expenses. It ensures that when you pass away, your family can still meet their needs.

There are no restrictions on spending the death benefit, so your beneficiaries can use the payout for short or long-term obligations, including:

  • Child or dependent care

  • End-of-life medical costs

  • Everyday expenses

  • Funeral expenses

  • Future education expenses

  • Investing

  • Outstanding debts

Learn more about how life insurance works

Who does your life insurance policy protect?

Your policy proceeds can support anyone whose finances will be impacted if you die and no longer provide an income. That includes your:

  • Spouse

  • Children

  • Aging parents

  • Other family members

  • Business partner

Even if someone doesn’t rely on you to fulfill their everyday needs, the loss of your income could affect them in other ways. Parents who cosigned private college loans would become responsible for the unpaid amount, for example.  

Once your beneficiaries file a claim, your insurer pays out due to any cause of death. There are rare exceptions, like if you lie on your application or die while carrying out a crime.

Learn more about who needs life insurance and why

Ready to shop for life insurance?

Author

Andrew Hurst is a senior editor and a licensed auto insurance expert at Policygenius. His work has also been featured in The New York Times, The Wall Street Journal, Forbes, USA Today, NPR, Mic, Insurance Business Magazine, ValuePenguin, and Property Casualty 360.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

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