Term Life Insurance Information

Term life insurance is designed to provide temporary coverage for those who do not need open-ended life insurance policies. You can buy a term life policy that runs for a specific number of years and then allow it to expire when the policy is no longer needed. Term policies tend to be more affordable than other types of life insurance. Many people choose a term life policy during the years when their children are at home as an extra level of security.

Advantages of a Term Life Policy

A term life policy provides the largest payout for the smallest investment. Under the most favorable conditions, a brand new policy could cost as little as a few dollars per month. The low cost of a term life policy compared to a whole life policy can make it possible for individuals to purchase larger benefit amounts. Although term life policies do not accumulate cash value over time, they do provide the most effective security for dependents upon the death of the insured. A term life policy is not a financial investment, rather an affordable way to protect the financial health of your dependents.

One of the main advantages of term life insurance is that the coverage expires at an appropriate time in your life. Term life policies will not continue into the later years when you are less likely to need them anyway. This fixed end date is part of the reason these policies are so inexpensive. There is a good chance that most term-life policyholders will outlive their policies. When that happens, the customer can choose to renew the policy for a certain number of years or take advantage of the opportunity to change the type of policy so that it better fits their situation.

Different Types of Term Life Policies

Term life policies come in several different forms. A straight term policy is the simplest and most popular type of coverage. With straight term life insurance, the premium and the death benefit remain unchanged throughout the term of the policy. Policies come in increments of 5, 10, 20, or 30 years. Straight term policies are the most affordable because they base premiums on the health and age of the insured individual at the beginning of the policy term. Personal changes, such as illness, do not have any impact on the premium or the death benefit at any time during the coverage period.

A decreasing term policy charges the same monthly premium, but the amount of death benefit decreases every year. The monthly premiums are generally lower with a decreasing term policy. Annually renewable term policies become more expensive every year of coverage. They are the least expensive option for younger individuals who need insurance, but they can become expensive over a long period. Many insurance providers have begun to offer return of premium policies that will pay you back the premiums you have invested in the policy if you outlive your coverage. Return of premium coverage is generally much more expensive than a typical term life policy. Most financial advisers recommend against this type of policy, but you need to make the decision about what type of policy is best for your situation.

When to Consider Term Life

Term life insurance allows individuals to choose specific periods for their insurance coverage. The best time to choose this type of life insurance is during the times in life when you have dependents relying on your income. Many people choose term life coverage for the years when their children are living at home. Others may purchase term life policies as safety nets while their spouses are not working. These policies are also a good fit for adults who provide financial support to elderly parents. Any time a person of limited financial means provides supporting income for any family member is a time to have term life insurance coverage.

As with all life insurance, younger individuals can receive more affordable rates. People who have the opportunity to purchase life insurance when they are young adults will pay far less for their coverage. For example, a young couple that is planning a family would save money by purchasing a 20-year term life insurance policy when the child is born, rather than waiting to purchase the coverage when the child is 10 years old. If a couple plans on having more children in the future, a 30-year term policy may be more appropriate. People between the ages of 25 and 44 receive the lowest rates because they pose the least risk of filing a claim for life insurance benefits.

Choosing the Right Amount of Insurance

There are three ways to approach the question of how much term life insurance to purchase. First is a standard formula that works for most individuals but does not take into account unique individual needs. The second approach involves figuring out to what level a family relies on a specific person’s income, and what that person’s income should be over the span of the policy. The third way to look at how much insurance to purchase is to compute financial expenditure details during the coverage years and create a policy specifically designed to cover those expenditures.

The standard formula for term life insurance is to purchase a policy 10 times the amount of income a person brings home. If someone makes $20,000 per year, he or she should purchase a policy that is worth $200,000. Most financial experts believe this formula is inadequate because everyone has different needs. This formula came about from life insurance agents looking to get higher commissions by driving up the amount of insurance you really need. Do not assume, however, that the standard calculation is wrong. It could be correct for your situation, depending on many factors.

Using the second approach, or human life approach, your life insurance needs will vary greatly depending on how much you contribute to your family’s finances. In figuring these numbers, remember that your family only receives your after-tax income. Therefore, you only need to account for approximately 80% of the money you take in. Determine how much of your income the family would lose over the term of the policy and insure for that amount.

Computing the actual financial expenditures your family will have is the most detailed way to ensure that you buy enough coverage. This approach can take time, but it will pay off if your family ever needs to file a claim. Begin by compiling all known debts and creating a budget of expenditures that covers the entire length of the policy. Choose a policy amount that will comfortably cover those expenditures should include mortgage and funeral costs. It is debatable whether you should also include colleges tuition for your children. This is one of those difficult decisions every parent must make. If you can afford to buy enough coverage to put your children through college, it will help them graduate free of tuition debt.