Your insurance agent may cringe at the the thought, but term life insurance isn't for everyone. Click To Tweet Many people have good reasons to purchase life insurance, but some people don’t need it or will find only a minimal benefit in its purchase. While this is true for both whole life insurance and term life insurance, this article specifically addresses term life insurance.
Term insurance is designed to provide coverage for a specific period of time.
The time period you choose for your term life insurance might coincide with the term of a loan or with the length of a financial obligation. Common reasons to buy a term policy might be a new mortgage, or a refinance, a large loan, starting a business, getting married, or having children.
Term life insurance to cover a loan balance
Mortgages are usually 15 or 30 years in length. There are all sorts of tricks you can do to shorten the term, but insurance is about planning for the unexpected, or perhaps the worst-case scenario. In this case, we are betting that those tricks, like extra-payments, don’t work out as planned and you have to make payments for the full term of 15 years or 30 years.
Many, and perhaps most, family households are two-income households these days. Both incomes are needed to meet the family’s financial goals and obligations, including the mortgage. If one income-earner dies before the mortgage is paid off, the other probably has a very large problem, a problem with a roof and a chimney, and leaky faucets. Now with only one income, the mortgage still has to be paid, somehow. If that isn’t possible, the house has to be sold or given back to the bank. Term life insurance can prevent difficult and unpleasant situations such as this one.
A term policy can be purchased to match the length of the mortgage, or for some lesser amount of time if there are savings or other assets available the bridge the gap.
Of course, term life policies can be purchased to help cover other loans as well, such as auto loans, student loans, or anything else which might leave someone else in a bad spot if we pass unexpectedly.
Term life insurance to insure a long-term financial commitment
There are many ways we can find ourselves facing long-term financial commitments, including starting a business, or going back to school, but the most common way for most of us weighs about 8 or 9 pounds when they arrive. Having children is a beautiful gift, and a decades-long commitment. Our children are dependent on us until their late teenage years, and perhaps longer.
While our children are of adult age (for most things) at age 18, many will go on to trade schools, or to college, or even graduate school. This common consideration should be part of planning when evaluating term life insurance options. If purchasing a policy when your children are first born, or are toddlers, 20 years should be considered. If you really want to be prepared, a period of longer than 20 years may be appropriate. Bear in mind that there is often a mortgage to consider as well, which is an expense that occurs at the same time that the children are still dependents.
By the way, if you co-signed a student loan for your child, and he (or she) passes unexpectedly, the lender can call the loan due, payable in full, within 60 days. Your children might need a term policy as well, specifically for this instance.
Hey, it’s starting to sound like EVERYONE needs term life insurance.
For most of us, at some point in our lives, term life insurance is the right choice. We are leaving others in a better financial position by having a term policy as opposed to saving the money we would spend on premiums. Whether planning around a mortgage, children, a business, or a large loan, term life insurance can be a big part of ensuring that nobody else gets stuck with the bill for our decisions.
With that said, some people still don’t need it.
So, who doesn’t need term life insurance?
Term life insurance is designed to cover financial commitments that have an end date, a term. If you find that you can get through life without any of those, then there really isn’t much value in a term policy.
Some people might rent a small space, instead of taking on a large mortgage. They don’t need a term policy to cover their housing situation. There’s no housing debt.
Maybe you have liquid assets (that means cash) in a shared account, enough to cover final expenses, and no major financial commitments or dependents. In that case, term life insurance isn’t of much value either. In fact, in that case, you may or may not see any value in life insurance at all. This wisdom might be affected by our age, meaning that when we are younger some whole life insurance policies can be an investment. As we get older, and closer to the actuarial finish line, life insurance loses some of that dual-purpose goodness, behaving less like an investment and more like, well, just life insurance.
Term life insurance is not whole life insurance.
Most term policies become annually renewable at the end of the term. What this means, and I’m going to make up some numbers here, is that the price will change after the term is up.
For example, during the first 30 years of your 30 year term policy, your payment might be affordable at $50 per month. After that, you may still have the option to renew, albeit at a much higher price, maybe $150 per month, or maybe even higher. The premium increases can be dramatic. The price will continue to increase every year thereafter as well. Unless you find out that you have a condition which would make you uninsurable, there probably isn’t much value in a term policy after the guaranteed-price term is up.
Maintaining a term policy can easily become price-prohibitive after the term has expired. One possible solution for the long term is a whole life policy, or even a final expense policy, which is a simplified whole life policy with smaller available coverage amounts. A whole life policy provides a fixed premium for the entire length of the policy. In many cases, the best solution to provide for your family is to have both types of policies, as each serves a different purpose.