Term insurance: what is it, who needs it, and who doesn’t need it. I will answer those questions right away.
What you need to know…
Term insurance is the most basic form of Life Insurance. It gives you a defined sum of money (eg. $250,000) during a specified period of time, or “term” (eg. 20 years). What’s so great about Term Insurance? It’s inexpensive. There is no cheaper way to have a large death benefit, and the younger you are, and the shorter amount of time you need the coverage, the lower the price is.
Why is it so inexpensive? It’s cheap because it is rarely “used”. Most people who have Term Life Insurance never actually see a death benefit paid out. If you took out a 20-Year Term policy when you were 30 yrs old, the odds are good that you are still alive at age 50 when your 20 years of coverage has expired. Because of these odds the insurance company can give you a lot of coverage for not much in the way of price. You might be only paying $20 or $30/mo for the coverage above. Because of that, a lot of people enroll in Term Insurance.
Who needs it? I have some examples below. Who doesn’t need it? People who are trying to cover a permanent need for a death benefit. A mortgage ends after 30 years… great time for Term Insurance. Paying Estate Taxes after you die…. that’s not a temporary need. Paying for Final Expenses like a Funeral… that’s also a permanent need. Those are situations where you want your life insurance to stay with you your whole life. Hence, Whole Life Insurance. It’s the opposite of Term. But it’s a lot more expensive because the insurance company will be paying out the death benefit eventually, unlike Term which has likely expired.
Replacing income is a great use of Term Insurance. Let’s say a 35-year old makes $60,000 per year of salary. If he passes away, his wife is missing out on 30 years worth of a $60k income, which is $1.8 MM.
Term Life Insurance is by far the least expensive way to provide security to a surviving spouse so that he or she will not have enormous financial stress couple with the emotional stress of such a loss.
Sometimes this coverage is provided by a person’s workplace, but it is usually not a sufficient amount, and the coverage almost always ends as soon as employment ends, so people want their own policy.
You just bought a $350,000 house with your spouse. Should one of you die, the other is left paying the mortgage payment on just the surviving salary. This can be very difficult.
People like to take out a Term Life policy that will pay off the entire mortgage immediately should a spouse pass away. That lessens the financial stress by a large measure. The spouse can breathe a sigh of relief, “Well, at least the house is paid for. Now I live mortgage-free, and I just may be able to survive financially now.” That gives a great sense of peace in an otherwise stressful time.
Leaving Money to Family
A husband and a wife have 4 children. It is their wish that all of their children are afforded the opportunity of a college education. Although the parents may be saving money towards that goal now, should one spouse die (or even both), that chance for saving has ended.
A Term Life Insurance policy is a way to provide peace of mind that the goal of college education is provided for. Let’s say a year of college costs $20k. For 4 years that’s $80,000. With 4 children we’re looking at over $300,000. Coverage of that amount, or more, can be obtained as inexpensively as possible with Term Insurance.
In a similar vein, lump sums of cash provided by a Term Insurance death benefit can “leave a legacy” to surviving children so that they have a head start on life. They can perhaps buy a car and a down payment on a house of their own later. They can use the money to go into business. The possibilities are endless. The bottom line is they’re able to improve their financial situations considerably without having to take years to earn and save to achieve that goal.
Business Ownership and Survivorship
A couple is married and the wife has decided to open a restaurant with a partner. The wife dies. The husband now inherits the wife’s 50% of the restaurant business. The only problem is: the remaining partner at the restaurant never agreed to go into business with the husband! He has no business skills and knows nothing about the restaurant. What an unfortunate situation!
The solution is the wife and the other business partner each take out inexpensive Term Life insurance policies on each other. An attorney draws up a very simple “Buy/Sell” agreement that states when one partner dies, the deceased partner has already agreed to sell her half of the restaurant to the existing partner. How much is the partner paying? $250,000? Ok, no problem. They make the policies have a death benefit of $250,000. Now the surviving husband doesn’t get half of a restaurant. He gets the $250,000 from the Life Insurance policy because the partner just bought him out! Easy peasy.