Death insurance is more commonly referred to as life insurance. It is insurance that provides a cash benefit to survivors upon the death of the insured person. Choosing life insurance can be confusing, as there are many different types and features available. Death insurance can be used for whatever purposes the beneficiary sees fit.
Surviving spouses and children of adults who die without any kind of life insurance can be hit hard by both the costs of final expenses and the loss of income. According to JD Powers and Associates, studies indicate that fully 40 percent of the adult population of the U.S. has absolutely no life insurance. Of those who are insured, it is estimated that more than 50 million have policies that are inadequate, and which force the surviving spouse to make drastic lifestyle changes to stay current with the family's financial obligations. This can force the family to change residences, sell possessions or switch jobs.
In the past, life insurance was called "death insurance" because its primary function was thought to be simply to pay for funeral expenses. Now, however, life insurance has become important in helping the surviving family members maintain their regular lifestyle and place of residence. This is particularly important if one spouse is a stay-at-home parent or may not be prepared to immediately enter the workforce after the death of her partner. In the case of cash value life insurance, it can also be used as a form of investment and turned in for cash at a later date.
There are two primary types of life insurance: term life insurance and whole life insurance. Both types of insurance pay a lump sum of money to the beneficiary upon the death of the policy holder. Term life is the least expensive insurance option, as it accrues no cash value. With a term policy, the premiums (the amount paid for the policy) are locked in only for a specific amount of time, after which the rates for renewal can be higher. Whole life insurance, in contrast, is more expensive, but builds cash value over time. The premiums for a whole life policy remain the same throughout the lifetime of the insured, provided that he maintains coverage.
Determining how much life insurance to buy can be difficult. State Farm's insurance website explains that although there are many different methods of calculating how much life insurance a family needs, the best way to get adequate insurance is to sit down with a qualified agent and discuss your family's finances in depth. He can help you choose the proper benefit amount for all adults in your household. Ideally, there should be enough money for the family to pay off any existing mortgage and debt, as well as providing the amount that the deceased's income contributed for a period of two years. This amount will generally fall somewhere between six and 10 times the insured's gross yearly salary.
Consumer expert Clarke Howard offers many tips for getting the most out of your life-insurance premium. He notes that one common mistake that many consumers make is buying more than one policy per person--for example, purchasing a policy as part of an employee benefit package and then buying additional individual insurance. Because each policy has some fees attached, the price of two policies that add up to $100,000 will be more than that of one policy worth the same amount. Howard also notes that the most efficient way to find the best life-insurance policy is to go to a reliable insurance comparison website. As long as the company is financially stable, there is very little difference from policy to policy. Rates between different companies can vary greatly, so it pays to shop around.
- Internal Revenue Service. "Life Insurance & Disability Insurance Proceeds." Accessed June 20, 2020.
- USA.gov. "Personal Insurance." Accessed June 20, 2020.
- Insurance Information Institute. "What are the different types of permanent life insurance policies?" Accessed June 20, 2020.
- Insurance Information Institute. "What are the principal types of life insurance?" Accessed June 20, 2020.
Dayna is a freelance writer, artist and former high school teacher. She has been writing professionally for three years, and hold degrees in physical anthropology, art and special education. Her particular areas of interest include anthropology, health and nutrition, fitness and beauty and skin care.