How Term Life Insurance Works

WHAT IS TERM LIFE INSURANCE?

 

Term Life Insurance lasts for a specific amount of time before terminating (an easy way to remember). Term policies typically last between 10 to 30 years before ending. They do not accumulate cash value, and they typically do not come with living benefits.

How Does Term Life Insurance Work?

Most people purchase Term Life Insurance to protect their family in the event of their untimely demise. It is most commonly used to cover large debts/liabilities when you have a family member relying on your income. 

Term Life Insurance provides a large face value for a very low premium. If you're 20 years old and get a 20 year term policy, the policy will be very cheap. After that term runs out, if you reapply, they will re-evaluate your current health status (as insurance rates are based on age, health, and smoking status) and that will determine if you're able to qualify for another 20 year term policy. Once you turn 65 most companies will no longer sell term policies because you are statistically closer to the most common age of death (80-85) and they don't want to lose money.

Mortgage Protection

What is your biggest asset? Most clients tell me it's their house. However, until your house is paid off, it is actually your biggest liability. Term insurance is the perfect way to cover the cost of a mortgage. If anything were to happen to the breadwinner of the household, the mortgage would continue to be able to be paid off and the house would not be lost. 

Would your spouse / significant other be able to keep up with the mortgage payments, along with all the other bills (that won't stop coming if  you die), without the help of your income?

It's also good to cover yourself if you have a large amount of debt, such as student loans. These can be just as much as a mortgage and should be protected just the same. Even if you've just racked up some credit card debt, cover yourself with a term policy so nobody else is left with your mess if something happens to you unexpectedly before everything is paid off.

Income-Loss Protection

Let's say in the next 10 years you'll make 1 million dollars. I know it seems crazy, since we don't ever have it all at once, but you'll make one million dollars in 10 years if your income is around $100,000 a year. 20 years if you're closer to $50,000.

Income protection is recommended for individuals who are married / living together with their SO or anyone who has a child / children. If something were to happen to you tomorrow, that means your family is out one million dollars in the next 10 to 20 years. If losing your job would affect the quality of life your family currently enjoys, make sure you're protecting them with a term policy that will provide them enough money to continue their lifestyle until they figure out another source of income.

Children's Education

It's common these days for everyone to attend university to further their education. Do you wish for your children to have the opportunity to attend University? It is very expensive to send your child to achieve a college degree. If you're not around to help them, will they still be able to pursue their passions?

Even if university isn't in their future and they want to become a rock star or a fashion designer, will they have the necessary funds to begin their journey?

Protect their future by setting up a term policy. If anything were to happen to you, the face value will convert into a trust fund they won't be able to touch until they are 18. Even leaving the policy to your SO means they will have the opportunity to send your child / children to college. It's setting them up for success, even if you're not there to help them.

Return of Premium Term Life

Some companies offer a return of premium term life insurance policy. These are more expensive than normal term policies, however if you outlive the policy term, the company will refund 100% of the premiums you paid in. If  you die within the term coverage, your beneficiary will receive the full face value of the policy.

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Overall Term Life Insurance is used to cover any outstanding debt, the mortgage, income replacement, and to ensure your children will continue to have the same quality of life if you're not around.