What Is Term Life Insurance?
Term insurance is temporary life insurance designed to protect families that have a large need with a limited budget. Young families typically have a new mortgage, auto loans, credit card payments, student loans, new jobs, and young children. Losing a family member, especially the one that earns the highest income, can be a huge detriment. Financially speaking, surviving alone as single parent is impossible. That’s many young families turn to GoFundMe when tragedy strikes.
How Does Term Insurance Work?
Term insurance is temporary insurance. A term is simply a time period that the rates are locked in. It may be set for 10, 20, or 30 years. The younger you are when you purchase a term policy, the cheaper the rates are. The advantage of choosing a longer term is that you will pay less when you are older. For example, a 25 year old that purchases a 30 year term will still be paying 25-year-old rates at age 50.
Term policies often come with high face values that usually range anywhere between $100,000 and $1,000,000. High income earners will typically purchase policies with face values in million dollar increments.
Rates are based on fatality statistics. Therefore, the older someone gets the more expensive it will be to purchase a term policy. For example, a 55 year old that purchases a 30 year term policy will pay very high rates. This is because the insurance carrier’s chances of paying a death benefit during the term go up significantly.
Who Should Buy A Term Policy?
The most common buyers of term insurance are young families with large debts and expenses.
I’m Single. Do I Need Life Insurance?
This is a common question single people ask when being approached about life insurance. It’s very easy to say you don’t need life insurance. You don’t have a family relying on you. But what’s to say you won’t ever? While studies are showing marriage rates going down, the likelihood of becoming a parent still remains high at 89%. This means that you are very likely to have someone relying on you at some point in your life. Those that choose to wait pay more in the long run.
What Are The Different Types of Term Insurance?
Traditional Term Insurance is designed to cover debts, pay off a mortgage, pay for final expenses, and replace lost income. Traditional term insurance can be purchased at face values higher than $100,000 with terms ranging from 10 to 30 years.
Return of Premium insurance works exactly like traditional term insurance but offers a cash value feature inside the policy. Most return of premium policies will build a cash value equal to the exact premium amount that was paid over time, at the end of the term. Although theses policies work exactly like traditional term, it costs more up front. Traditional term might cost $25/mo for $150k face value while return of premium might cost $55/mo for $150k face value. This is because you are paying for the cash building feature. While it may cost more up front, it actually saves money in the long run. For example, traditional term (assuming a 30 year term and using the values above) costs a total of $9,000 (payments over 30 years). The premium is kept by the insurance company. The return of premium policy would cost a total of $19,800. However, in most cases, all of the premium is returned to the policy owner.
Mortgage Protection is a term policy specifically designed with a face value equal to the mortgage value. In some cases, the face value decreases, otherwise known as a decreasing term policy. A decreasing term would usually result in a decreasing insurance cost. However the decreasing option is almost never utilized. Rates have become so affordable that most policy owners just choose to keep the face value the same. A decreasing term would be very advantageous for an adult over age 50 who still has a mortgage.
Simple Term insurance typically provides coverage for individuals who want less than a $100,000 face value. This policy is great for someone with a lower coverage need, with a limited budget, that still wants to be able to convert to permanent insurance later when he/she can afford it.