Term Life Insurance
Term life insurance is a form of life insurance that provides a death benefit for a specific number of years. Most term life insurance policies sold today are Level Term insurance under which the premiums stay level for the full term of coverage. A twenty year term life insurance policy will provide coverage for a maximum of twenty years, with the exact same premium due in each of those twenty years. While the insured can terminate the policy at any time, the insurer is bound by the contract to keep the coverage in place for the full twenty year term, so long as the premiums are paid in a timely fashion. The key factor to consider with term insurance is that almost all term policies lapse or end while the insured is still alive. Term Life Insurance is a disaster management product designed to protect a family in the face of an untimely death. While a permanent life insurance policy is designed to last until the insured’s eventual passing, a term life insurance policy will ideally term out or lapse without any claim ever made. Because the likelihood of the insured’s dying in within the term is lower than his likelihood of dying someday, term insurance involves less risk to the carrier, and is priced considerably lower than the equivalent permanent life insurance policy. Because insurance policies are priced based on the scale of the risk or commitment you ask the carrier to make, a short term policy will always carry a lower annual premium than a longer term or permanent policy. As a general rule of thumb, for a male in his thirties or forties, a 20 year term life insurance policy will be twice the cost of a 10 year term policy. A 30 year term life insurance policy will be double again, and a permanent life insurance policy could be at least double again in annual target premium costs.
Basics of Term Life Insurance
In a term life insurance policy, the insurance company agrees to provide insurance on the life of the insured person and to pay a death benefit equal to the policy’s face amount if the beneficiary provides proof that the insured died while the policy was in force. If the insured does not die during the term period, the coverage expires at the end of the term. Convertible term life insurance policies contain a provision that allows the policy owner to convert the term insurance policy to permanent coverage any time during the policy’s term. The insured does not need to prove that he is still insurable. The new policy assumes the health rating class of the old policy, and is priced as if it were a new policy taken by an insured at the age of conversion. There is generally no credit given for any premium paid to date. Term life insurance is the ideal solution when the insurance need will exist for a fixed period of time. The most common use is for families with young children looking for guaranteed income replacement in the face of a potential financial disaster upon the death of a primary wage earner.
Term Life Insurance Case Study:
Mark and Janet are married, 35 years old and have three children aged 7, 4, and 2. Janet is a stay at home mom, and Mark is an engineer earning 82,000 per year. Their takehome pay is $51,000 per year and their annual expenses are 49,000 per year. If Mark were to be die in a freak meteor shower, Janet would be left to fend for herself and raise the kids without any visible means of support. She would likely end up raising them on welfare and food stamps in a van down by the river. Mark and Janet have several options:
- Option 1: Cover Mark with $1,000,000 in 20 year term insurance. In this scenario, the coverage would last until the youngest child was 22 years old, and likely ready to move out of the house and towards independence of her own. If Mark died during the policy term, Janet would be able to invest the policy proceeds and guarantee a lifetime income of forty to fifty thousand dollars per year. The overall annual cost of this coverage would be about $650 to $700 per year.
- Option 2: Cover Mark with $1,000,000 in 10 year term insurance. In this scenario the coverage would last until the youngest child was 12 years old. Janet would face the necessity of covering the teen years on her own. This coverage would cost about $430 dollars per year – a savings of almost 20 dollars per month. (hint: probably not enough of a savings to justify the additional risks.)