Life insurance is an important part of any financial plan. This may include term life insurance as well as permanent life insurance such as whole life and universal life insurance. All life insurance provides a safety net for your loved ones in the event of your death. While permanent or whole life insurance policies offer lifetime coverage and build up a cash value you can access tax-free, they come at a much higher cost. For those who are looking for affordable coverage for a set period of time, term life insurance may be a good option. Let’s look at what term life insurance is and explore when it’s advisable to own a term life insurance policy.
What is Term Life Insurance?
Term life insurance is a type of life insurance that provides temporary protection for a specific period of time, usually 10-30 years. It’s typically the most affordable type of life insurance, with premiums that are a fraction of the cost of whole or permanent life insurance. However, it’s worth noting that the longer the term, the higher the premium you will need to pay. This is because the longer the term, the higher the likelihood that you will die during the term.
Advantages of Term Life Insurance
One of the main advantages of term life insurance is its affordability. Since it only provides coverage for a set period of time, the premiums are much lower than those of permanent life insurance policies. This makes it a great option for those who need coverage for a specific period of time, such as until their children are grown or their mortgage is paid off.
Another advantage of term life insurance is its simplicity. Unlike permanent life insurance policies, which can be complex and include a cash value component, term life insurance policies are straightforward and easy to understand.
For those looking to create a permanent legacy and benefit from cash value later when they can afford to do so, term policies purchased today can be configured to be convertible to whole life policies without medical underwriting at a future date.
Some term life insurance policies can be configured to include a “return of premium” feature. This means that at the end of your term you can get most of your premium that you paid during the term returned to you by the insurance company. This is a great way to benefit from temporary coverage without forfeiting all of the premium you paid during the policy’s term.
When is it Advisable to Own Term Life Insurance?
Term life insurance is advisable in a number of different situations. Here are a few examples:
Young families: If you have young children, a term life insurance policy can provide peace of mind that your family will be taken care of financially if you were to die unexpectedly.
Mortgage protection: If you have a mortgage, a term life insurance policy can ensure that your family can continue to make mortgage payments if you were to pass away.
Business owners: If you own a business, a term life insurance policy can help ensure that your business can continue to operate if you were to pass away unexpectedly.
Affordability: Investing in a convertible term life insurance product when you are young and healthy and still building up your income can be a great way to lock in a relationship with a life insurance company. When you are older and have more income to afford a whole life premium, then it makes sense to convert the term life insurance policy to whole life insurance without the need to go through medical underwriting again.
You’re topping up coverage: When you already have a whole life insurance policy, but your death benefit falls short of the amount of coverage you need to protect your family and loved ones, you can use a relatively inexpensive term policy to temporarily make up the difference. The understanding here may be that when the term of your policy is up, your children will be grown and your mortgage largely paid off so there will be less need for protection.
You are “buying term and investing the difference”: If you are following the financial strategy that involves buying an inexpensive term life insurance policy and investing the savings you make compared to paying a more expensive whole life policy, then you will need to own a term policy. However, beware of using this strategy for longer term retirement planning. You may be leaving a lot of money on the table if you “buy term and invest the difference”.
Important Considerations
While term life insurance can be a great option for those who need temporary coverage, it’s important to keep in mind that it only covers you for a certain number of years. Additionally, since most people outlive their term insurance, less than 3% of term insurance ever pays a death benefit. It’s important to carefully consider your needs and make sure that you’re not leaving your estate or your loved ones vulnerable in the event that you outlive your policy.
“You may be leaving a lot of money on the table if you ‘buy term and invest the difference’.”
In conclusion, term life insurance can be a great option for those who need temporary coverage at an affordable price. It’s important to carefully consider your needs and make sure that you’re not leaving your estate or your loved ones vulnerable in the event that you outlive your policy. By doing so, you can make sure that you have the coverage you need to protect yourself and your family.
Reach out today to define your strategy
Find out which strategy can be tailored to help you accomplish your financial goals. My role in the process is to analyze your current financial situation, consider your future goals and help you to decide what type of life insurance product would be right for you. Reach out to me via my contact form or by phone (305) 613-1498 to learn how you might be able to benefit from life insurance as a component in your financial plan.