Normally, my drive to work is a peaceful time for reflection. But recently my easy-listening lineup has been interrupted by some rapid-fire ads for term life insurance. While they initially just went in one ear and out the other, the ads eventually got me thinking: Do people really understand the basics of this valuable coverage?
In my effort to cut through the noise and achieve clarity, here are three things you need to know about term life insurance.
- The “term” is mostly about the premium. You may know that when buying term life insurance, you can choose terms of 10 years, 20 years or 30 years, or you can buy an annual renewable policy. What you may not know though is that the term does not define the length of the policy. Instead, it merely determines how long the premiums (your cost) are guaranteed to remain level. Here’s why that’s important.
Like it or not, the older you get, the more likely you are to die. For life insurance companies, this means the older you get, the more likely it is they’ll have to pay out money to your beneficiaries. In other words, they’re taking on more risk. To offset the cost of this increased risk, the insurance company generally increases your premiums each year if you haven’t locked them in for a certain period. This is why your premiums will often increase when your initial term expires. At that point, you’ll be 10, 20 or 30 years older, so the increase could be substantial.
For example, a healthy 25-year-old might be able to purchase a $250,000 policy with a 20-year term for $15 per month. During the first 20 years, the premium would remain the same. But at the end of the 20-year term, when the policyholder is 45, the premium might increase to $30 per month. This amount would then likely increase every year thereafter.
- It’s relatively cheap during the initial term. As illustrated in the previous example, if you’re young and healthy, you can typically get hundreds of thousands of dollars of coverage to protect your family at premiums that amount to pocket change each day. With some products, low cost can mean low quality. But that’s not the case with term life insurance. If you compare the daily cost of protecting your family to the daily cost of some of your other expenses, you might find yourself wondering why anybody would ever forgo this valuable coverage.
- Most people won’t keep it forever. Because term life insurance premiums will often skyrocket after the initial term expires, many people will purchase it with no intention of keeping it beyond the initial term. This is why term insurance is often viewed as “temporary” protection. You buy it to cover needs that will eventually go away. Mortgages will be paid off, kids will grow up and go to college, and your retirement nest egg will eventually support you and your spouse (hopefully). If you need or want coverage for your whole life, term insurance probably isn’t the ideal product. In this case, a more costly cash value policy would likely be a better fit.
If you’re responsible for another person’s financial well-being or even their day-to-day care, you want to protect them with life insurance to ease their burden if you die. And if you want to provide that protection for a certain period of time at a relatively low cost, term life insurance could be just what you need.
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