Why Is Life Insurance Necessary?
You have to approach life insurance like you would any aspect of your life that poses a risk and ask yourself, “What’s the worst case scenario?”
If you’re on the fence about buying coverage, then consider how your family might fare if you were no longer around. How would they keep up with day-to-day bills? Or, how would your spouse afford childcare or education expenses?
Most people would agree that, without a financial cushion from life insurance, their family might face a dire money situation. That’s why term life insurance is so valuable. It’s an affordable way to protect the people you love most financially.
Life insurance helps provide financial security if you were to die suddenly so that your family won’t struggle to cover day-to-day expenses. It can help:
- Replace lost income and cover living expenses, like rent or a mortgage for the family you leave behind
- Spare your family from accumulating debt or borrowing from family members while coping with the loss of your income
- Cover expenses associated with burial, estate taxes and other final expenses
- Fund college expenses and marriage expenses for your children
- Leaving a way for your family to fulfill the wishes and dreams that you all planned
Even if you’re living the single life with no spouse or kids, term life insurance may still be necessary. It can help protect your parents or other co-signers from needing to pay off the mortgage, student debt, credit card debt, or even a car loan that you leave behind. However, for most people, life insurance becomes necessary when you get married and have a spouse and children who rely on your income.
How Term Life Insurance Works
Term life insurance is one of the simplest (in a good way) and most affordable types of life insurance. It insures your life for a period of time of your choosing, such as until your mortgage is paid in full or your kids are adults. This helps ensure that none of your financial obligations will burden your family if you were to die unexpectedly during the term length.
Most insurers offer term lengths of 10, 15, 20, 25, and 30 years. You make monthly payments for the policy term, and in the event of your death, the policy pays out a death benefit to your beneficiaries.
If you are young and have many working years ahead of you, a long-term policy (30 years) might make more sense. If you have small children, the same is true. Perhaps you want your term length to end around the time your home mortgage or student debt is paid off — in that case a shorter term length might make sense to protect your co-signers from needing to take over loan repayment before it’s paid in full by you.
Determining which term length you need is actually very easy. You can use an online life insurance calculator to receive a recommendation on a coverage amount and term length that best fits your financial situation.
How Much Does Term Life Insurance Cost?
Many people don’t realize how affordable term life insurance can be. It usually offers ample coverage at a much lower premium amount than many other types of life insurance.
A recent report from LIMRA found that many adults overestimate the cost of life insurance. Just how much exactly? The median guess was $600 per year or $50 per month for a 20-year, $250,000 policy on a healthy 30-year-old.
That’s over 4 times more than a policy would actually cost. A 20-year, $250,000 Haven Term policy for a healthy 30-year-old woman would cost about $12 per month. That’s less than your online TV streaming services.
And even if you’re slightly older, you can get affordable coverage to protect your family. A thirty-six-year-old man in excellent health can buy a 20-year, $750,000 policy for as little as $31 per month, for example.
Your individual rates will depend on a range of factors including your age and your overall health. If you’re curious how much (or little) your premiums might be, you can get a free estimate online.
Why Term Life Insurance Versus Other Types?
There are many types of life insurance policies. If you’re looking for a policy that offers more than $100,000 in coverage, term life insurance is usually the most affordable choice.
Another type of life insurance coverage that offers high death benefit amounts if permanent life insurance, but it’s usually far more costly. For example, a $500,000 whole life insurance policy for a healthy 35-year-old male would likely cost more than $500 per month, compared to $21 per month for a no exam term life insurance policy.
The price difference can be attributed to the fact that permanent life insurance policies cover you for a lifetime versus a term length. They also have a cash value component that you can borrow from over time which also can have certain tax advantages during retirement if structured properly.
Overall, term life insurance is a simple and affordable life insurance option. It has no investment components to track, and no cash value or loans that impact the final payout. You simply make the monthly payment, and you’re covered for the specified term length. Term life also requires only minimal maintenance – just a review of your financial needs periodically – like when you have another child or if your income increases considerably from when you first took out the policy (a good problem to have.)
In addition to affordability, term life is a product you can build on. If you start out with just $100,000 in term life insurance coverage when you’re young, for example, you’re not stuck with that coverage amount forever. Provided your health allows you to qualify for more coverage, you can continue adding term life policies as your lifestyle and situation changes. As we mentioned already, having another child might give you a reason to buy more term life insurance coverage. Earning more money over time or advancing in your career is another smart reason to buy additional term coverage to replace your income upon your death.
Employer-Provided Life Insurance is Often Not Enough
Many people assume that if they have life insurance through work, they’re set. Usually, employer-provided life insurance is not worth it if you are paying for coverage.
The fact is that most people don’t have enough term life insurance through their employer if they are married, have kids, or hold significant debt like a mortgage. Typically, employer-provided policies only cover, at most, two to three times your income, while the often-recommended amount is at least ten times your annual income.
Another important consideration is that coverage usually ends when you leave your job, which could leave your family without coverage. Your best option is to hold an individual policy to ensure you have enough coverage and to lock in an affordable rate while you’re young and healthy.
Keep in mind, it’s perfectly acceptable to have an individual term policy on top of the coverage offered by your employer. More coverage means more protection for your family. However, when many people realize they need additional coverage, they usually think it would be easier to add on more coverage to their existing work policy. Employer-provided policies are at group coverage rates, which means insurers charge everyone the same amount of money. If you’re young and healthy, you’ll likely be paying significantly more for coverage than if you were to receive an individual rate because you’re making up for the risk insurers take on some of the older, less healthy people at your company.
No matter what your employer offers, it’s worth it to carry your own coverage that keeps you covered no matter where you work.
Understanding Your Needs
Term life insurance isn’t a complex financial product and is a necessary part of financial protection. What’s most important is that you understand what your coverage needs may be and if you do need coverage, make sure you’re not putting off the purchase.
Like we mention above, term life insurance (and most life and health insurance for that matter) is more affordable when you’re young and healthy. The earlier you buy your term policy, the better your rates. So the time to comparison-shop and act is now. Given its low cost and high value, a term life policy that fits your coverage needs is clearly worth it. Picture the alternative: dying without a policy and the potential for leaving your family with a huge financial burden. That’s a high cost to pay.