Six Tips on Term Life
James McGlynn | Oct 26, 2022
I RECENTLY LISTENED to a podcast during which the speakers lamented the death of a colleague who was in his 30s. They mentioned a GoFundMe campaign to assist his family, so I assume the deceased had no life insurance. According to LIMRA, which collects data on the life insurance industry, less than 50% of millennials have individual life insurance.
There are two major types of life insurance: term and whole life. Term insurance is intended to cover a specific period, such as 10 or 20 years. Whole life insurance is more expensive because it’s designed to cover the insured’s “whole life” and part of each premium goes to fund an investment account.
Want the maximum death benefit for minimal cost? Term insurance is the way to go. Here are six pointers:
- Life insurance is least expensive when the applicant is younger, healthier and a non-smoker.
- It’s more expensive for men, thanks to their shorter life expectancy.
- Both husband and wife should usually get coverage—even if one doesn’t earn an income. Why? The spouse who doesn’t work outside the home typically performs tasks—cleaning, cooking, child care—that would be costly to replace if he or she died.
- The death benefit from life insurance is usually tax-free.
- If a beneficiary is named, there’s no need for the policy’s payout to go through probate.
- When buying term insurance, a good rule of thumb is to structure the insurance so it’ll be in place at least until the children graduate college. The amount of coverage might include enough to pay for college and pay off the mortgage.
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I’d like to offer a clarification: the writer says that with whole life insurance part of the premium paid goes to “fund an investment account.”
This is NOT correct. The writer confuses “whole life” with “perminent” life insurance.
With traditional cash value whole life, part of the premium goes to build up a SAVINGS account. An “investment” account inplies that there is inherent risk in how the premium is allocated. With cash value whole life, there is no risk, The rate of return is fixed contractualy. The value of the cash will increase each year regardless of market or interest rates. Additionally, if the insurer is a mutual insurance company, there is the opportunity to benefit from the insurance company’s success via annual dividends (which are not guaranteed.)
What the writer may be thinking of is UNIVERSAL life policies which, depending on the type (Indexed, Variable etc.) take some on some risk with the money which comes in from premiums paid. The key thing to know about universal life policies is that there are certain types of risk which are transferred from the insurance company to the policy holder in order for the policy to work.
When I was a licensed broker it was easy to run the numbers. While at that time it was also popular to say term was always cheaper, it turned out not to be true (at that time) over the periods of time for which parents need life coverage.
Time value of money, guaranteed renewals, and sometimes dividends for participating mutual policies may all come into play, as well as any residual value. Over 20 years I spent less and cashed a check for $100,000,… but I didn’t buy a Porsche.
Also something to consider: disability insurance.
A working adult is about three and a half times more likely to be disabled and need disability insurance than be killed and need life insurance.
However, almost no one talks (or thinks) about disability insurance.
Group life insurance is another casualty of our multiple job-hopping economy, I’m afraid. Fortunately–unlike health insurance–individual term life policies can be very affordable for younger, healthy workers. Oftentimes, a few hundred bucks a year can buy several hundred thousand dollar’s worth of term coverage, and is a great peace-of-mind investment. In fact, I’m hard-pressed to think of any other insurance product that is a better value, it’s that cost-effective. Thanks for the reminder!
Thanks. I always wonder why parents don’t buy term insurance.
Great job neighbor. Keep pushing that content my friend.