How term life insurance works

How term life insurance works

Term Life Insurance Explained

If you’re newly married, a new parent, or even the parent of young children, it might be time to think about life insurance. Why? Because it could be the best financial protection you can offer them.

Life insurance would protect your family – commonly your spouse and children – if something were to happen to you. If you are the sole breadwinner and your spouse or children depend on you financially, it’s crucial to make sure they would be able to survive financially if something were to happen to you.

Life insurance is all about protecting those you love from financial hardship in the event of your death. It’s possibly one of the most important things you can do for your loved ones.

How Does Term Life Insurance Work?

For any term life insurance policy:

  • You purchase a 10, 20, or 30-year term policy
  • You pay the premium each month or annually
  • If you pass away while the policy is active, your beneficiaries receive the death benefit
  • If you’re living when the policy ends, you stop paying your premium, and your policy concludes

When it comes down to it, a term life policy is not intended for savings, retirement, or college funds. A term life policy is a safety net to ensure your family will be able to have finances available to live on if the unthinkable happened to you.

Let’s say you’re thirty years old, have a five and a two-year-old, and a stay-at-home spouse. If you died today, what would happen to them? Would they have enough money to pay for groceries? What about the electric bill? Phone company? Mortgage?

It’s a lot to think about, but if your family suddenly found themselves without you as their provider, they would be in significant trouble. At a minimum, your spouse would need money to cover the necessary costs of living in addition to daycare since they will be forced to find work to support the family.

With a term life insurance policy, you can set the term for how long you want your policy to go, ensuring your children will be raised, out of the house, and fully self-sufficient before the policy expires. You can also use this to ensure your spouse will be provided for until retirement kicks in if you decide on a policy later in life.

How Much Insurance Should I Take Out?

Every term life insurance policy has two numbers you need to determine: the term and the coverage amount. We’ll tackle both of these in detail.

What Should My Term Be?

When deciding how much insurance to take out, the first question you need to ask is how long you want your policy to run.

Term life insurance policies come in 10, 20, or 30-year increments, typically. How do you know which one to choose?

Choose a 10-year policy if:

  • Your children are within ten years of being financially stable, independent, and on their own.
    • You’re looking at a few years of high school, college tuition, and potentially the last few years of your own mortgage.
  • You are within ten years of retiring, and you want to be sure your spouse is covered if something happens before then.
    • You want to make sure our spouse has enough money before social security and retirement savings kicks in. This is especially important if you upgraded your house location and still have a mortgage to pay.
  • You want more coverage than the policy you purchased 20 years prior offers.
    • Rather than scrap the old policy and purchase a brand new 30-year policy, you can keep your old policy, add a 10-year policy, and have enough coverage for whatever life brings your way.

Choose a 20-year policy if:

  • You are a young married couple with small children wanting financial assurance for your family.
    • You currently have a mortgage, student loans, car payments, and minimal savings or retirement funds.
  • You will be financially stable with enough savings and retirement in twenty years to cover your spouse, and any final costs for your children should something happen to you.

Choose a 30-year policy if:

  • You are a young married couple or a young person with children with high debt or a 30-year mortgage.
    • If something happened to you, your family needs the ability to continue paying down on the mortgage – or pay it off completely. Otherwise, they might be forced to sell, foreclose, or declare bankruptcy and move into an apartment they can barely afford.
  • You want to lock in a low rate when you’re young and healthy.
    • Rates go up 8-10% each year you wait to purchase a policy.
  • One spouse stays at home with the children while the other is the breadwinner.
    • A loss of the breadwinner is devastating for stay-at-home parents. They’ll need to come up with the money for babysitting while they job search, babysitting while they’re at work, and possibly even weekend care. That doesn’t even touch mortgage and other debt payments they’ll incur without your salary.

How Much Coverage Do I Need?

Now that you’ve had time to consider the various term policies, the next step is to determine the amount of coverage you need. The questions you need to ask in this category cover your debt load, dependents, and costs you want to be covered. Add up:

  • All debts including:
    • Mortgage
    • College Loans
    • Car Loans
    • Credit Card Debt
    • Small Business Loans
  • Future Expenses including:
    • Children’s College
    • Children’s Weddings
    • Long-term Dependents
      • Special-Needs Children
      • Aging Parents
  • Regular Financial Needs Including:
    • Utility Bills (phone, electric, water, gas)
    • HOA Fees
    • Groceries
    • Gas for Vehicles
    • Health Insurance
    • Car Insurance
    • Property Tax
  • Financial Padding Including:
    • Money for Savings Accounts
    • Money for Major Unexpected Expenses
    • Money for Birthdays and Christmases
  • Your End-of-Life Expenses Including
    • Funeral Expenses
    • Medical Expenses
      • Hospital Fees
      • Hospice Fees (if applicable)
    • Lawyer and Attorney Fees (if applicable)

The easiest way to calculate these expenses is to list them all out and come to a final number. While it may feel like you have an extraordinary amount of money to cover, your figure may not be out of the realm of possibility. Keep reading for the average costs you can expect.

What Will a Term Life Insurance Premium Cost?

Term life insurance is one of the most affordable insurance premiums on the market. Its high affordability is the reason many people like taking out a policy. Insurance companies base your premiums on a number of items, including your health, age, the amount you want to be covered, and the length of the policy.

Heath: The healthier you are, the less your premium will cost.

Age: The older you are, the more your premium will cost.

Amount to Cover: A higher potential pay-out will result in a higher premium.

Length of Term: The shorter the policy, the less expensive your premium.

Out of all these deciding factors, age is, by far, the most critical factor when an insurance company charges you.

Bottom line: The younger and healthier you apply for a policy, the less you will pay during the life of that policy.

Here is a chart of averages covering the monthly premium for a male in good health with a 20-year policy. These are averages; for an exact premium, be sure to request a quote.!

Age at Time of Policy

Policy Coverage

$250,000

$500,000

$1,000,000

Monthly Premium

30

$12.50

426.20

$45.10

40

$17.50

$38.14

$69.48

50

$38.75

$91.53

$174.14

60

$104.50

$245.81

$382.50

Term Life Premium Options

While all term life insurance policies work for a specified amount of time – typically 10, 20, or 30 years – there are different types of term life insurance options. It’s crucial to understand which policies offer what types of premiums in order to choose the best policy for your needs and budget.

Level Term Policy: Premiums stay the same for the life of the policy. Also known as a fixed-rate policy.

Annual Renewable Term Policy: Renews yearly. Premiums start low and increase yearly.

Decreasing Term Policy: Premiums stay the same, and the benefit decreases yearly.

Return-of-Premium Term Policy: Total paid premium is refunded at the end of the term.

No-Medical Term Policy: Policy is granted without a medical exam.

Group Term Policy: Policy offered through an employer; non-transferable if you change jobs.

Mortgage Protection Term Policy: Decreasing term policy that potentially pays out to your mortgage broker. The term length depends on the length of the mortgage.

Which is Better: Term Life or Whole Life?

When you start shopping for insurance, you’ll be asked whether you want a term policy or a whole-life policy. You can learn more about whole life policies, but here is a quick breakdown explaining the differences.

Term Life

Whole Life

Policy exists for a specified period, usually 10, 20, or 30 years

Policy exists for the entire life of the policyholder

Payout guaranteed only if the policyholder dies within the term limit

Payout guaranteed upon the death of the policyholder

No cash value

Has cash value similar to a savings account that can grow or lose value

Relatively inexpensive premiums

Costly premiums 6-10 times higher than term

Term life policies work for the purpose of most people wanting to ensure financial coverage and stability for their families in case of unexpected death. Individuals favor whole life policies with wealth management needs.

If you’re looking for an insurance policy to cover your family financially, you’re relatively young, or you’re looking for a short-term policy, we recommend a term life policy.

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