If someone else financially depends on you, term life insurance can be an inexpensive way to transfer the financial risk of unexpected death – with the knowledge that your dependents will not lose your financial support. The substantial benefits from these policies can provide income replacement, pay off debt, and ultimately cover your family’s financial needs in your absence. This could mean that a spouse does not have to find additional work or sell the home to cover living expenses, among other sources of relief.
“Knowing that my family members will benefit from my future economic value even if I pass away gives my family peace of mind, and for a low cost.”
Example: A $1,000,000 20-year level term policy for a 30-year-old male in excellent health could be quoted an annual premium of $480. If the insured dies unexpectedly within the last month of the policy term, they would have paid a total $9,600 into the policy, only 0.96% of the tax-free $1,000,000 death benefit.
Keep in mind that risk transfer (insurance) should only be used if the risk of loss is of low frequency and high severity. In the case of human life, there is low frequency (death only happens once) and high severity (there may be significant financial need).
Term life insurance is temporary protection that provides coverage for a specific period of time (the term). The chosen term should correspond with the number of years your dependents will rely on your financial support – typically 10 to 30 years. Term policies provide for the greatest amount of coverage (death benefit) for the lowest premium, since they do not provide cash value or other living benefits. There are numerous insurance products that feature permanent coverage (whole life), investment options, and other bells & whistles, but we are looking for pure insurance in this instance to keep premiums low.
If the insured dies during the term, the insurance company pays the death benefit to the designated beneficiary, usually income tax free! This benefit is received tax free because the insurance premiums are paid with non-deductible, after-tax dollars.
Level Premium Term: The death benefit and premium amounts do not change during the policy term. The policy may be renewed when the term ends, but a new (higher) premium will be calculated at that time. This is most appropriate for long-term (but not permanent) needs.
Annually Renewable Term (ART): The death benefit does not change, but the premium increases each year. Since the premiums increase over time, it’s possible to pay more over a long period than you would have for a level premium term policy. This is more appropriate for short-term needs.
Decreasing Term: The premiums do not change during the policy term, but the death benefit decreases each year. The death benefit reduces to $0 by the end of the term, and is not renewable. This type of policy is commonly purchased if the financial needs of the beneficiary will be reduced over time, typically to cover a mortgage or other debts.
Return of Premium (ROP): The death benefit increases each year, because the premiums paid in are added to the death benefit. The return of premium is also paid if the insured outlives the policy term. These policies are significantly more expensive (+25-50%) than traditional term policies, since the insurance company returns the contributions.
If you want to consider purchasing term life insurance, reach out to a licensed life agent/broker in your state. You can start by calling the insurance company that already covers your other bundled policies to ask for their options. They should help you calculate your economic life value to determine the appropriate benefit amount; if they don’t offer this calculation, reach out to a fee-only financial planner to help. You may also shop policy quotes online, but be aware that many online brokers will spam your phone and email for days!
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