What is Term Life Insurance and Do You Need It?
We have all heard the words, “term life insurance” before. We have seen commercials with famous actors touting the benefits of one company or another. That’s all fine and dandy, but if I were to ask you what term life insurance really is, most people would be hard pressed to come up with the correct answer.
So, let’s do a little research and find out.
What is term life insurance?
The word “term” means for a certain period of time. So, when you purchase term life insurance, you are buying insurance for a certain period of time and making monthly payments, which are called premiums, on the policy. Usually you buy the amount of insurance you want in something called “units.” Each unit is worth $1,000, and there is a premium attached to each unit based on your health and habits.
Unlike a whole life insurance policy, which pays your beneficiaries a certain amount when you die and usually has a cash value, term life insurance only pays if you die within the predetermined time frame, and it has no cash value. When it comes to term life insurance, there are several options just as with a mortgage loan, which has fixed terms or adjustable rate, term life insurance has annual renewable term or level term policies.
Who should buy term life insurance?
Basically, everyone should purchase term life insurance and the sooner the better. If you purchase insurance while you are younger and still healthy, your premiums will be lower. While you are younger you may not have a lot of wealth built up, but you still want to make sure your family is financially secure in case of your death, and term life insurance is the most economical way to do that.
How much insurance should you buy?
The amount you need is based on several factors such as your age, whether you have children, and how much debt currently have. Typically, you need enough to cover the loss of your income, money to pay off some debts, and possibly some money for college. The loss of income is not for just one year, and the insurance payout will need to provide for your family from now until when you would have retired.
So, for a rule of thumb take your income and multiply it by the number of years until retirement. For example: $50,000 income X 20 years = $1,000,000 of coverage.
Or you can use the 10x benchmark. Take your gross income and multiply by 10.
Disadvantages of Term Life Insurance
The first disadvantage of term life insurance is the term. When the term is over you’re left with no insurance. If your health has changed you will be paying much higher premiums to get a new policy. Also, there is no cash value to term life insurance policies. Once the term expires or you stop paying, you get nothing. This means that, if your forfeit payments, then you are left with nothing. So, don’t bother contracting a term life insurance policy if you are not sure if it will continue until full term, as this might just turn out to be a waste of money.
Advantages of Term Life Insurance
An advantage of term life insurance, as compared to something like whole life insurance, is lower premiums. The payments are lower because the insurance company is only committing to a limited number of years. You can then invest the difference in premiums and hopefully make a good return on that money.
Another advantage is that you can provide financial security for your dependents at a low cost. This is great especially for low income earners, since they can still afford to make regular payments that secures the future of their family against unexpected events, while at the same time still being able to take care of their current needs.
An added bonus as compared to other ways to protect your families future is that you can buy as much or as little as your budget can afford. This is great as it leaves you the option to indirectly determine what you will be getting in case of death.
Despite the apparent disadvantages of term life insurance, it is still a great way to protect yourself and guarantee a future for your family in an event of a loss in income due to death. So, if you are still wondering if it is for you, then you are wasting valuable time, and you should act today and get yourself and possibly your family covered.
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