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- Who is a good candidate for term life insurance?
- January 12th, 2012 12:12 PM
Financial security is a top concern for anyone these days, especially for young families or those just starting out in life. Saving up for a down payment on a house, car or college tuition means the topic of life insurance can take a back seat to seemingly more pressing issues.
Yet this is precisely the kind of financial instrument that can provide parents with the financial security they and their offspring would need in case of an untimely death—through a tax-free payout from the insurance company.
Designed with younger individuals and families in mind, term life insurance is intended to serve those with a shorter-term policy needs, say 15 to 20 years, although much shorter policies are available. Ashe says someone 35 years old could probably buy $500,000 in term coverage for around $30 to $35 per month.
“Term life insurance, at least initially, provides the largest death benefit for the smallest premium,” says Brian Ashe, treasurer of the Life and Health Insurance Foundation for Education. “It’s the perfect way for people who have little in terms of discretionary income to immediately create a substantial estate.”
One way to consider the benefit of term life insurance would be to imagine if a family’s main breadwinner lost their job and the financial impact it would have.
If that income were lost because of death, the financial impact would be ameliorated with a sufficient level of term life insurance. Ashe said the level of insurance needed depends on each case, but a general rule of thumb is to have a policy with a dividend of 10 times a family’s annual income.
At a time when turmoil on Wall Street could wreak havoc with a 401k plan. He says a level of 15 times annual income might be a better option as it not only protects a family from the loss of a breadwinner, but can also help make up for any unexpected loss in a financial portfolio.
While an estimated 60 percent of employers provide life insurance, Ashe says it’s usually not enough to fully meet a family’s needs as the average level of employee-provided policies is just three years of the employee’s annual income.
“Three times income, for those who own it, is woefully inadequate because when people die, they’re dead a lot longer than three years,” Ashe says.
In this case a supplemental term life insurance policy would provide a family with enough money to not just see them over their initial loss, but would also give them a substantial sum they could invest for the longer-term, thereby replacing the breadwinner’s salary with income from dividends.
When shopping for a term life insurance policy, Ashe says it’s important to make sure it has a conversion clause that would allow the term policy to be converted into a permanent or whole life insurance policy or a universal life insurance policy, which can often be done without the need for a physical. This not only guarantees continued coverage in spite of an illness, it also allows the policyholder to avoid a two-year contestability clause that would be attached to a new policy. For more about term life insurance products and contestability clauses, see What is a life insurance contestability clause?
Riders can also be attached to any policy to insure a spouse or kids, each with their own conversion clauses. Ashe does not recommend accidental death and dismemberment clauses, which typically double a policy’s dividend under certain circumstances, as the odds of that happening are low. He says it would be a better idea to just increase one’s overall coverage instead.
This article was originally published by Life Quotes, Inc.
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