For this post, I want to quickly cover term life insurance. What it is, when it makes sense, and how to customize it to your needs.
In our last post, we explored the difference between whole life insurance and infinite banking. Revealing that the infinite banking strategy can be a far superior approach than whole life insurance.
However, in this post, I want to discuss the cheaper alternative to covering your life insurance needs.
First off...
What is Life Insurance?
Life insurance is a form of insurance that pays out a sum of money upon the death of the insured.
Sounds morbid, right?
Well, consider the loss of income, funeral expenses, and potential debt left behind that comes with the loss of a loved one. Life insurance helps alleviate this pain that can have a pretty devastating financial impact on families.
So there are effectively two options with life insurance:
- Term
- Permanent Coverage
As of 2019, 71% of consumers who owned life insurance owned a term policy and 44% owned a permanent policy, which means 15% of consumers owned both.(source)
Term coverage is more popular because it is the cheaper of the two options for getting a death benefit.
How it Works
Term coverage will last for a specific amount of time that you select, often to a target age in which premiums typically will dramatically increase.
The most common terms are 10,15, 20, 25, and 30 years.
Let’s say you get a...
- 20 Year Term Policy
- $500,000 Death Benefit
- That costs $50/mo
You will make those $50/mo payments every month and if at any time within those 20 years, you were to pass away, your loved ones would get the exact $500,000.
At the end of the term of your policy, some companies allow you to convert it into a whole life policy without another health check. Or you could reapply for another term of coverage if you felt you still had a need for the insurance.
However, renewing your policy can be very costly assuming that you do qualify. For this reason, if you are banking on just your term policy, in general I would advise you to make sure that you are in a financial position to not need any life insurance by the end of your term.
I say this because a lot of people are shocked at how much more it now costs them to get another policy, so make sure to plan accordingly.
Obviously the older you get with both term and whole life, the more expensive the coverage will be.
You’re statistically more likely to die.
Match Your Needs
Term coverage can be a great option for affordably covering temporary needs.
For example, if you are 45, you may elect to get a 20 year term policy to cover your loss of income if you were to die prematurely during your working years. You may bank on having built your retirement accounts to a point that you feel replace your need for life insurance by the age of 65.
Another example may be if you and your spouse just had children. You may opt to get a 20 year term policy to make sure if you were to pass while your children were still reliant upon you that your children would have money to cover things like their college education.
You may get a 30 year $350,000 term policy to cover your mortgage that you just got.
We all have different needs that change throughout our lives, and your life insurance coverages should match these ongoing changes.
That may mean having multiple policies, such as a 35 year-old having a 30 year $1M policy for income replacement and a 20 year $200,000 policy for the two kids to go to college.
After the first 20 years, if you planned accordingly, you have saved for their education and your $200,000 policy drops off and then you’re just paying to have a policy to replace the income until you have properly saved for retirement.
Rules of Thumb
For most people, loss of income would be the most detrimental. Many experts will advise having 10x your income in life insurance throughout your working years if you have kids or a family to support.
Without kids some drop this number to 5x your income in order to avoid your loved ones having to make significant financial changes to cover the financial burden of your passing.
The actual amount of coverage you should have will depend on you, your unique financial circumstances, and what you’d like to have happen when you pass away.
Closing Remarks
Term policies are cheaper because on average they are far less likely to actually pay out. This does not mean that they are bad or that you shouldn’t take advantage of the low rates to cover yourself throughout the years when your passing would cause the greatest financial impact for your loved ones.
Term coverage is a fantastic option for getting a lot of death benefit for very little cost.
In fact, consumers well overestimate the cost of term life insurance, with millenials on average overestimating the cost at 5x the actual amount.(source)
Next week I will be doing a similar summary on whole life insurance and will wrap it up the following week with how a person might blend the two types of coverage to better protect themselves.
If you want stay on top of the content and learn more about financial strategies that will help you plan and protect your financial future, then you should check out my YouTube channel as well as Stephen Spicer's.
Until next week,
Take care!