Introduction
Term life insurance protects you for a set period of time (generally 1 to 20 years), after which you can usually renew the policy and start a new term policy without having to provide proof of insurability, however at a higher cost. The insurance company pays the death benefit to your beneficiaries if you die during the policy’s term. Because the insurance company is more likely to have to pay out the death benefit as you get older, term insurance becomes more expensive. Term life insurance rates will be very high by the time you are in your seventies, but if you have properly planned, you should not need it.
What are the different types of term life insurance policies?
You may choose to choose a level term policy, annual guaranteed-renewable term, declining term insurance, or rising term life insurance, depending on your specific position and needs. Your premiums on a level term policy will remain the same for the term you choose, which is commonly 5, 10, 15, or 20 years. You can also purchase annual guaranteed-renewable term insurance, which means that if you renew your policy at the end of the year, your premiums will increase to match your new age. Another alternative is to lower your term insurance, which lowers your death benefit over time. This is generally utilized by people who desire the peace of mind of knowing that their mortgage will be paid off in full in the event of the breadwinner’s death. (This is a term life insurance policy that is frequently referred to as mortgage insurance.) This type of insurance begins with a fixed death benefit that diminishes each year until it expires, which usually coincides with the payoff of your mortgage. If your needs are met, growing term life insurance, which gives a death benefit that climbs slowly as the term lengthens, may be an alternative. When choosing the number of years of coverage for your term policy, be sure it is long enough to secure your family financially, even if you die and your earned income is lost.
How do I compare term life insurance vs permanent life insurance?
Permanent life insurance is far more expensive than term life insurance. Term life insurance, in our opinion, is the best type of life insurance for the overwhelming majority of individuals, and it costs a fraction of the price of permanent insurance. Term life insurance is a cost-effective option to protect your family, as it provides the greatest coverage for the least money. One of your objectives should be to ensure that by the time you retire, you will have sufficient income from your retirement plans to sustain yourself—and your loved ones after you have passed away. There may be no need for life insurance after you have enough money to live on. That said, you should never cancel or modify a policy without first consulting your doctor and getting a comprehensive physical, as you may want to preserve insurance that you would not have needed otherwise due to medical reasons. Your need for life insurance and the ability to pay the premiums may be obsolete by the time you are ready to retire and financially independent.
Remember life insurance companies have an obligation to their shareholds to maximize profits. Marketing is a key area of spending to create brand awareness. Whereas the top life insurance brokers goal is to determine the the best policy for your family’s needs. When that is achieved it is more likely you would refer that broker to a friend or co-worker.
ProtectQuote is a firm believer in “buy term life and invest the difference,” when analying permanent life insurance vs term life insurance. The premium difference can often be 8-10x the monthly premium.
What are the benefits of a term life insurance policy?
Life insurance was created to safeguard people when they were still young, in the event that the family income earner died unexpectedly. There was no longer a need for life insurance later in life, once the children were grown and the couple’s retirement nest money had been established, and the policy would be cancelled. For many people, I believe that this is how their life insurance should be handled today. Most people, in my opinion, should not use life insurance as a savings plan. If you’re single and don’t have any dependents, you probably don’t need life insurance.
When calculating your life insurance needs, you should ask yourself four basic questions:
1. Do I actually require it?
2. How much protection do I require?
3. How long will I require it ie. 10 years, 20 years, 30 years?
4. What kind of life insurance policy type would be most appropriate for my needs?
Consider what your family’s cash flow statement might look like if one or both wage earners were no longer living and their income was no longer available. Is your family’s residual income sufficient to meet your financial commitments and ambitions for the future, such as paying for your children’s education? You do not need life insurance if your survivors have enough money to sustain their level of living. If there is a shortage, you will need to make up the difference by purchasing the appropriate type and amount of life insurance. To be honest, life insurance should be referred to as income-replacement insurance. After all, the policy can’t bring you back to life; all it can do is replace the money you would have made if you had lived. Many life insurance consultants advocate having a death benefit of at least 10 times your yearly pay, since this will allow your family to produce income with these assets and partially replace your lost earnings when you are no longer alive.
Term life policies also have an advantage of being “portable.” Unlike a group life insurance policy which is typically not portable, once you leave that employer the policy is canceled. People assume as long as they have a job they have coverage, while that is true while you are employed it is often far too low amount of protection to really help your family. Typically the protection amount is 1-2x your annual salary. That would be mean from year three and beyond your family would have to make drastic lifestyle changes.
Conclusion
A term life insurance policy is a great way to protect your family in the event of an unexpected death. It is important to compare different carriers to secure the best premium rate.
