Many financial products on the market can protect your family after you die, but one in particular targets short-term needs with a high payout.
Term life insurance for your dependents’ financial security
Term life insurance is an affordable way for your family to maintain their standard of living if you die unexpectedly. It pays out a lump sum upon your death, which can be used to cover expenses like mortgage payments, school tuition and daily necessities. For this reason, young parents often choose term life insurance so their children will be financially secure until they can earn a living of their own, should one or both parents die.
Term life insurance can also be used to make provisions for an elderly or disabled relative if a caretaker unexpectedly dies.
How rates are determined
Term life insurance is surprisingly affordable, especially for young, healthy people. Rates are tied to risk factors, such as age, sex, weight, smoking and known diseases. Insurers may require a medical exam before qualifying you for coverage. But even people with less-than-optimal health can qualify.
Coverage through your employer
Some employers even offer term life insurance through their employee benefits group plan. If you have term life insurance through your employer, you are guaranteed coverage and may receive preferential rates and terms. However, employer-provided term life insurance is usually limited to one to two times your annual salary, or a flat amount, such as $20,000. For many, that wouldn’t be enough to make ends meet for long. In addition, you’ll only have coverage through your employer as long as you remain with the organization.
For higher coverage amounts and coverage that stays with you (as long as you pay your premiums), look to the individual life insurance market. We can help you find the right policy for your needs. For example:
- Do you have a 30-year-mortgage or a 10-year?
- Do you have three children under 10 or just one teen?
- Do you owe on cars or a student loan?
- Do any of your dependents have costly medical needs?
All of these factors will help determine how to structure your policy.
Timing and structure of your policy
Term life insurance is effective for a set period. Policies often expire after 10, 20 or 30 years. For example, a 35-year-old parent of two might by a 20-year term policy to cover their children while they’re financially dependent. Or, a 70-year-old might buy a 10-year life insurance policy to leave an inheritance for family members who have taken care of them.
Note that a term life insurance policy can often be converted near the end of its term into a type of life insurance called whole life insurance, which covers final expenses. That is a convenient way to prevent leaving funeral expenses to family if you don’t have other life insurance in place.
Your term life policy can be structured in multiple ways, so pick the one that best suits your financial needs.
Level term:
This is a popular type of policy that provides a set lump-sum payout upon your death. Level term charges the same monthly premium for the duration of the policy. This provides you with great predictability for your monthly budget. The policy term can be five, 10, 20 or 30 years. The duration depends on your age at the time of purchase and other factors.
Term to age 70:
This type of policy charges the same premium for the first 20 years, and then that premium increases, sometimes substantially. But because your income will most likely increase as you age, a higher premium may not be such a burden in 20 years.
Annual renewable term:
Under this type of policy, you renew your coverage every year. Your premium will rise annually, but usually not by very much in the early years of coverage. Ask us how cancellation works. Often, there is no forfeiture cost; you just simply don’t renew the policy.
Decreasing term:
Don’t let the word “decreasing” fool you into thinking your monthly premiums will go down. The rates typically stay the same, but the amount of protection decreases.
These policies are attractive to people who are trying to cover a mortgage or child care costs and whose dependents’ expenses will decrease over time. Premiums remain level over the policy period and are usually lower than with a level term policy, where the benefits never decrease.
Guaranteed issue:
Employer-provided benefits are a type of guaranteed-issue life insurance. But there is another type of guaranteed-issue term life insurance that you purchase from a private insurer.
This type of life insurance, usually purchased online, can often be acquired without a medical exam or medical questions. It also runs at a higher price. This is because the insurer knows less about you and your health, and therefore assumes more risk. The benefits of guaranteed-issue term life insurance are generally indexed, so the policy pays less if you die soon after purchasing it and pays more if you live longer.
In general, guaranteed-issue term life insurance pays out less than what a standard term life policy would offer. It is widely used as a form of final expense insurance and by people acquiring insurance in their later years.
Return of premium:
Some people want to use life insurance as an investment tool with potential payouts later in life, if they live long. A return-of-premium term life insurance policy is somewhat of an outlier, but it generally returns the premiums you have paid if you are still alive at the end of your policy term. The premiums are higher than those of a normal policy, and you don’t earn interest.
How term life fits into a financial portfolio
Term life insurance is one tool in an overall financial suite. It is generally designed to have a high payout over a short period to protect families from the untimely loss of an income earner. It has gained other uses over time, including end-of-life investments to cover funeral and other final expenses. But mostly, it is an affordable way to support your dependents until they can support themselves.
Ask us about the right term life insurance policy for your family. We’re here to help.
