Term life insurance can be a useful tool to ensure that some or all of your family’s financial goals can still be met if you or your spouse was to die prematurely. For example, most people who own a home with a mortgage should consider an insurance policy that equals the length of the mortgage. This guarantees that the balance is paid off, so the surviving spouse or family members are not left trying to pay it off unexpectedly. Other common goals include guaranteeing children’s college educations will be paid for or that the spouse can still maintain a certain standard of living.
The above examples usually necessitate temporary life insurance because there is a specific amount of time a person needs to be covered. A mortgage may require coverage that lasts 15, 20, or 30 years. Once the mortgage is paid off, the need to insure against this debt goes away. The same idea applies to when your children’s college educations are paid off. Once they are done with college, your need to cover that expense with insurance disappears. Coverage to guarantee a spouse’s lifestyle may only be necessary until you reach your planned retirement date. By the time you retire your spouse’s standard of living should be guaranteed if you properly saved and planned.
If your life insurance needs are temporary, then term insurance likely offers the most appropriate solution. Term insurance has no cash value or savings component attached to it, meaning that if you don’t use it, you won’t get any of your premiums back. However, because of this, term policies tend to be significantly less expensive than policies that have a savings component such as a whole life or variable product. Quite simply, you pay your premium, and if you die during that policy year, the death benefit is paid to your beneficiary.
The design of the policy will vary by need. For example, decreasing term insurance has a level premium, but a decreasing death benefit. It is generally used in conjunction with financial obligations that decrease over time, such as mortgages or other types of amortized loans. Annual renewable term insurance has a yearly increasing premium, which increases with the higher mortality cost associated with being a year older, and a year closer to your expected mortality age. It is primarily used for financial obligations that remain constant for a relatively short period of time. Level premium term insurance, on the other hand, offers a level premium payment amount over a fixed number of years, typically 5, 10, 15, or 20 years. This would be appropriate for needs that are finite in length, such as ensuring coverage until a young child has completed college, becoming self-insured through an increased net worth, or reaching retirement age with sufficient retirement income to meet your needs.
Other provisions, known as riders, can be added to certain policies for an additional cost. The waiver of premium rider allows you to stop making premium payments if you become disabled and are unable to earn an income. The accidental death rider obligates the insurance company to pay out double or, in some cases, triple the stated death benefit if the insured dies in an accident. An accelerated death benefit rider allows you to receive a portion of your own death benefit while you are alive if you have a major medical condition that is expected to lead to death within a short period of time.
Overall, term life insurance can be a cost-effective way to cover a temporary insurance need. The features of these policies will vary. We recommend speaking with your financial advisor about which policies and features would be most effective for you.
Jeff Witz, CFP® welcomes readers’ questions. He can be reached at 800-883-8555 or witz@mediqus.com.
200 North LaSalle Street – Suite 2300 – Chicago, Illinois 60601
312-419-3733 – Toll Free 800-883-8555 – Fax 312-332-4908 – www.mediqus.com
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