Too Many Americans Don't Understand Life Insurance -- or Have the Coverage They Need

by Maurie Backman 

Image source: Getty Images

Are you in the dark about life insurance?

You wouldn't go out and buy some fancy kitchen gadget without truly understanding what it does, right? Well, the same thought process might apply to life insurance.

If you don't understand how life insurance works, you may not be so motivated to bump it to the top of your list of things to prioritize. But that could end up putting your loved ones in a dangerous financial spot.

See, the purpose of life insurance is to make sure your loved ones are covered in the event of your untimely passing. And the sooner you put that coverage in place, the more peace of mind all of you might enjoy.

But according to a recent survey by Life Happens, only 17% of consumers who don't feel they know a lot about life insurance have coverage. By comparison, 62% of those who feel very knowledgeable about life insurance have a policy in place. And so if you fall into the category of being under-informed about life insurance, here are a few key things you should know.

1. The sooner you apply, the cheaper your coverage might be

It's easy to look at life insurance as something with an insurmountable price tag attached to it. But actually, life insurance can be quite affordable. And the younger you are when you apply, the greater your chances of snagging a more competitive rate on your premiums due to being in good health.

2. Term life insurance is your most affordable bet

Term life insurance is coverage that lasts for a limited period. It's common to buy a term life policy for 20 or 30 years, though you may only need a 10-year policy, depending on your circumstance

Now one thing you should know about term life insurance is that it won't accumulate any sort of cash value. If you don't end up passing away while your policy is in place, there will be no payout coming your family's way. But term life insurance is generally your best bet for affordable coverage, so it often pays to go that route, especially if cost is a concern.

By contrast, whole life insurance will give you permanent coverage, and your policy will accumulate a cash value. But the premiums you're charged could be many multiples of what you'll pay for a term life insurance policy.

3. You can choose the amount of coverage you secure

For some people, it's appropriate to have life insurance with a $2 million or $3 million death benefit. But if you only earn $60,000 a year, and that's enough to support your whole family, then you can probably get away with a much lower benefit -- and lower premiums to boot.

A good rule of thumb for buying life insurance is to secure enough coverage to replace 10 to 12 years of your income. So in our example, a policy with a $600,000 death benefit might suffice for your family.

The more you know about life insurance, the more confident you can feel about buying it. Take some time to educate yourself about life insurance, and then start pricing out options so you can give your loved ones the financial protection they deserve.