Term Life Insurance

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What is term life insurance?
Term life insurance provides coverage for the beneficiaries in the event of death of the insured. Also called term assurance, term life insurance premiums are payed at a fixed rate for a limited period of time. Many financial advisers commonly recommend term life insurance until such time that there are adequate funds available from savings to cover heirs in which the term life insurance payout would cover. In this video, David Ramsey, a nationally syndicated financial adviser and radio program host, gives a strong argument in favor of term life insurance.

Life insurance, no matter what type, is designed to replace the lost income of a family member in the event of a death or debilitating injury. However, millions of families do not any kind of assurance plan.

Employer provided life insurance
Many companies provide life insurance for their employees, but it’s often not a sufficient amount of coverage. Employer provided life insurance if typically no more than a year or two worth of salary. In general, a household should have 8-10 times their income in guaranteed term life insurance. Other points to consider include:

• Will your life insurance expire upon retirement?
• If you are fired will your life insurance become void?
• Is your life insurance policy directly tied to your employer’s business and if so, what happens if the company fails?

The percentage of U.S. households with life insurance coverage is at its lowest in 50 years, leaving millions of families without a safety net, according to a recent survey by LIMRA. The economic downturn in recent years has led to an industry wide outreach program throughout the life insurance industry like the ability to shop for life insurance online. The adaptation of online life insurance shopping has given purchasers a significant advantage in finding custom insurance policies specific to their needs.

Why does anyone need life insurance?
At the beginning of one’s professional career there is a limited amount of accumulated wealth, which increases the risk of detrimental expenses upon the death of the insured. With term life insurance the insured will be able to continue building their wealth through the years in which dependents are financially reliant upon their family.

• Wage earners: Replace missing income and provide for additional needs like paying off the mortgage and career training for a spouse that may re-enter the workforce.
• Death expenses: Insurance can cover the cost of burial and funeral expenses as well as cover the cost of so that a spouse can take time away from their job after a loved one’s death.
• Homemaker transition: The switch from a single income family to a single parent family might require help for day care, housekeeping, cooking, and shopping.
• Financial Obligations: Upon the death of a debtor, funds will be needed to cover debts or liabilities that will then transfer onto any cosigners, such as the spouse.

Benefits of term life insurance
There are many forms of life insurance and they each have advantages over other policies. Below are some of the benefits of term life insurance.

Term life insurance is…

1. The least expensive way to purchase a substantial death benefit on a per dollar basis over a fixed period of time. Read about the cost of term life insurance.
2. Simple to understand. One low monthly premium for a specific length of time.
3. Great for short term needs. Read about how term life insurance solves short term expenses.
4. Customizable. Choose the term (5, 10, 15, 20, 30 years) that covers you until your dependents are able to provide for themselves.

In addition to the variable terms in which life insurance can be purchased, term life insurance can be further customized to fit your needs using a feature called Riders.

Life Insurance Riders
Riders are the additional benefits that can be bought and added to a basic insurance policy. These options allow you to increase your insurance coverage or limit the coverage set down by the policy. Riders can be blended, for an additional cost, according to your present and future insurance needs. However, buying a rider means paying an extra premium for this supplementary benefit. Generally, this premium is low because relatively little underwriting is required.

An example of a life insurance rider is the accelerated death benefit rider which can be attached to a life insurance policy that enables the policy holder to receive cash advances against the death benefit in the case of being diagnosed with a terminal illness. Many individuals who choose the accelerated death benefit have less than one year to live and use the money for treatments and other costs needed to stay alive.

Life insurance riders include, but are not limited to:

• Guaranteed Insurability Rider – Purchase additional insurance coverage without the need for further medical examination.
• Spouse Insurance Rider – Insurance coverage for your spouse.
• Accidental Death Rider – Additional benefit if the insured dies as a result of an accident.
• Waiver of Premium Rider – Future premiums are waived if the insured becomes permanently disabled.
• Family Income Benefit Rider – Upon death of insured a steady flow of income to family members will be provided.
• Child Term Rider – Insurance payout upon the death of a child before a specified age.
• Long-Term Care Rider – Monthly payments are paid to insured upon the need for sustained care at a nursing home or for home care.
• Return of Premium Rider – Insured pays a marginal premium and at the end of the term the premiums are returned back in full. The main aim of this rider is to give back most of the premium that is put into the policy.

The many variations of life insurance policies can make the process confusing, but the cost of these riders and additional customizations are determined first by the health of the insured.

Cost of term life insurance
Procrastination is your worst enemy when purchasing term life insurance. A healthy, non-smoking 30 year-old male can get a $300,000 life insurance policy that will last up until the age of retirement for around $35 a month. However, when you add ten years to that healthy male the monthly premium for that same policy is twice the price. This is even more evident for a 50 to 60 year old male, as they may find it harder to even find an affordable term life insurance plan at that age.

Short Term Coverage
Term life insurance is a great solution for short term financial commitments. If your children are just starting college, a 5 year life insurance policy could cover your children’s college education as well as your mortgage and assure that your children will be able to complete their education if anything happened to the insured during that period of time. Another example would be to take out a policy that matches the length of one’s home mortgage. In the event of an untimely death or debilitating illness, the surviving family would have the means to pay off the entire mortgage.

Resources
Wikipedia.org
Investopedia.com