- How can term life insurance help me?
- January 13, 2014
Term life insurance provides coverage for a specific period of time and generally pays a benefit only if the policyholder dies during the “term.”
Lifetime rate guarantees are also available on some universal life insurance policies that look and act exactly like term life insurance.
According to the Life and Health Insurance Foundation for Education, one of the biggest advantages of term insurance is its low cost – especially when compared to permanent insurance, which usually contains a forced cash value account that requires funding in the form of higher premiums.
With term insurance, the insured is generally just paying for the death benefit. Term life insurance is a policy with a set duration on the coverage period that varies from one to 30 years. Once the policy has expired, it is up to the policy owner to decide whether to renew the term life insurance policy or to let the coverage end upon payment to their beneficiaries if the insured dies during the term of the policy. Upon death, companies will typically also offer extended-term payout options, some with attractive interest rates.
There is also no side fund or cash value, so you are paying only for pure death protection.
Term life insurance covers death by any cause, at any time in any place, with the exception of suicide within the first two policy years (one year in some states). This feature makes comparing one policy to another very simple.
The most common use for term life insurance is to replace the income of the family breadwinner or caregivers.
Term life insurance is often a good choice for people in their family-formation years, especially if they’re on a tight budget. It allows them to buy high levels of coverage when the need for protection is often the greatest.
It’s also a good option for covering needs that will disappear in time. Buying more than one policy with differing rate guarantee periods is called “laddering” and can often be pegged to when children leave the nest or when a mortgage gets paid in full.
For example, if paying for college is a major financial concern but life insurance coverage won’t be needed after the kids graduate, then it might make sense to buy a term policy to cover that time period.
One of the nice features of term life insurance is that most of them contain the no-cost right to renew beyond the initial rate guarantee period without any physical exam, although at a higher cost. Policyholders who would take advantage of this clause would be those who have become uninsurable due to a catastrophic illness.
Another key feature of term life insurance is that most policies are convertible into permanent insurance during a set period of time, or before age 70, whichever comes first. Policies that contain this right are called “convertible term life insurance.”
Financial planning experts recommend that the household breadwinner carry no less than 10 times their total annual income, excluding passive income such as dividends and interest.
Some policies offer an extra cost rider called “return-of-premium.” With these policies, if a policy is kept for the entire term, say 20 years, the insurance company will refund all of the premium payments made over that 20-year period. Of course, there is a price to be paid for this added benefit.
The cost of the return-of-premium rider raises the total policy cost by 20 to 30 percent, but the net effect is that, if you outlive the initial rate guarantee period and collect on the premium refund, the total cost of insurance is greatly reduced.
Financial planners caution that people who buy a return-of-premium policy should plan to pay the premiums for the entire duration as dropping such policy before the full term has expired would mean the consumer paid a high price for their term insurance coverage because only a partial refund of premiums paid is allowed in later years.
Term life rates are dirt-cheap right now and have dropped considerably over the past decade, mostly because people are living longer. Anyone with a term policy might benefit from dropping it in favor of a newer and cheaper term policy, which would now contain a new and longer rate guarantee.
Term life insurance is popular with consumers because it is simple to understand and does not contain the contract variances often found in more complex whole life or universal life policies.
Other popular provisions often found in term life policies include:
• Accelerated death benefits often mandated by state insurance regulators. This coverage allows a terminally ill person to collect a significant portion, if not all, of the death benefit while they’re still alive. This circumstance has the odd finale of awarding the money to the insured while alive instead of to the beneficiary after death.
• Disability waiver of premium waives premiums due if a policy owner suffers a defined long-term disability, typically one lasting six months or longer and certified by one or two physicians. Coverage on this option usually ceases at age 50 or 55.
• Accidental death benefit doubles or triples the benefit in the case of death by certain accidental means. Plenty has been written and said about this rider, and even a movie entitled “Double Indemnity.” This coverage is dubious at best because it puts you in the position of betting on how you will die, whereas the manner of your death means little or nothing to the beneficiary. From a beneficiary’s perspective, it makes no difference whether you die of cancer or an accident. You and your income are gone, and so the net effect of the loss is the same. If your beneficiary needs $500,000 of life insurance to replace the loss of income, then it’s recommended to buy $500,000 worth of life insurance to cover all causes of death, rather than buying $250,000 and on the assumption of a death by accident.
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