You have heard about the need for life insurance, but you are not sure how exactly it works. Perhaps you have put off getting it (we have had it all) but now you are ready to mark this off the list. However, you are left wondering: what is life insurance? What do you mean by term life insurance?
Term life insurance is not nearly as complicated as you may believe. We will explain the essential information it is important to understand about it so you can ensure your income and your family’s financial future. We will also explain why in the tangled world of life insurance policies term life insurance is the best choice.
Let’s dig in!
What Is Term Life Insurance?
Term Life Insurance (also known as purity life insurance) is a kind that is a life insurance plan that runs for a specific number of years or the term. If you pass away before time expires the insurance company will pay you the death benefit (also known as payout). If you die before the expiration date the insurance company won’t pay. It’s pretty simple.
Life insurance is the type of insurance that takes the care of people dependent on income if the worst happens to them. If you have the right policy, you will be able to provide for them after your death. It is not something you want to contemplate but we all know. However, making the effort to research the issue today is a million times better than leaving your loved ones in a bind if you were to suddenly die.
Another feature that makes term life insurance different from permanent insurance plans is that it does not have cash value. This means it is more affordable because the sole benefit of the policy is after your death.
How Does Term Life Insurance Work?
How does term life insurance function? In the beginning, it is much like insurance for your automobile or your home. You pay a fee, typically monthly and the company promises to make payments to your beneficiaries if you are no longer around. It’s an agreement that you sign with your insurance company. The insurance company takes into consideration your health, age life expectancy, and several other aspects. It is recommended to buy life insurance while you are young and healthy because the older you become the higher your premium.
Consider Steve, for instance, a healthy, non-smoker, 30-year-old who earns $40,000 annually. Steve’s death reward is $400,000, as we suggest getting insurance that is 10-12 times your annual income. If he dies before the 20-year period is up the $400,000 will be paid to the Beneficiaries (his spouse and his two children). Although the most likely beneficiary to be someone you love however it could also be legal guardians or your estate, a charity, or a legal trust.
How to Get a Term Life Insurance Policy
There are a few things to consider when you contemplate getting a sturdy term life insurance policy. Learn how to obtain life insurance specifically term life insurance and term life insurance, so that you will know what you can be expecting. These guidelines will ensure that you do not make many of the mistakes that are common when establishing your policy.
It is recommended to contact your employer to determine whether they provide an insurance group that is a term policy. The policies offered by employers typically do not meet all your needs, but they may help you get towards achieving that.
Once you have received your quotes and selected the firm you had like to go with, the next step is to apply. Based on your specific situation the company can decide”no. They will look into the risk it is for them to cover you (technically known as the “underwriting” process). Sometimes, a medical exam is required, however, certain companies are now offering no-medical-exam alternatives.
Pick the Length of the Term
We recommend purchasing an insurance policy with a term that will last between 15 and 20 years. This is because, if you have children who are young and they will be able to support themselves when the policy is over. The only insurance that you need is the period between those 15 and 20 years when they are dependent on your earnings. If you do not have children (or you are an adult) this will give you enough time to self-insure (more about that later) and protect your spouse in the event of something happening to you.
Choose How many payouts You Need
This is the math. (Do not be concerned, this is not maths and anything else.) We suggest making a list of your annual earnings and then multiplying by 10-12. The objective is to figure out the amount of money your family would require in the event of your death. Funeral expenses as well as childcare costs, the education of your children (including college) as well as your mortgage are the main expenses that you will need to cover. If you are married, can your spouse continue to work following your passing? If so, you will not have to contribute more than a portion of the income to cover the expenses.
Your family must have enough of a savings cushion to recover. It also gives them cash to invest so that it can generate additional income. If, for instance, they do not require dips to the cash payout of insurance companies, they could put it into good growth mutual funds for stocks that provide an annual return of 10% and this will help replace the lost income.
Here is the math If you earn $60,000 in a year, then multiply by 10, you had like the death benefit to be $600,000.
Now is the time to identify your beneficiaries. They will get the cash. Do not forget to include the contingent beneficiary. The person named would be eligible for the money if something occurred to you and your primary beneficiary. It is like an emergency plan to back up your backup plan.
What does an insurance policy for term-life cost?
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How Is Term Life Insurance Different From Whole Life Insurance?
Whole life insurance is also known as permanent insurance because it’s in force throughout your entire life (and we had love to see that it continues until your 80s or even beyond!). It is still an enormous amount of premiums you have to pay, and some very high ones! This is 5-10 times higher than a term premium.
Why are premiums for whole life insurance so high? Because they try to function as the investment funds (along with other products in the insurance family known as cash value such as universal life insurance).
The main reason to go with the pitch for cash value insurance claims is that they aid to build an investment that can be further utilized in the future. This means you pay more, in the beginning, to build up your cash value to help offset the rising cost of insurance in later years. In reality, however, whole life is not as good as term life in the “making money. “making money” part.
Let’s return to our friend Steve. Steve is fond of dabbling in the stock market, however, the insurance company says that If he takes out whole life insurance, the insurance premium will cover the life insurance policy, and will include the option of investing. What the insurance agent is not likely to inform Steve is:
The amount Steve earns with whole life insurance is a disaster when compared to what he would earn if he went with term life insurance and invest a little bit of money each month into a different type of investment pool (like an excellent mutual fund). This is because the returns on entire life insurance plans are very low in comparison to the rate of return that is similar to an investment fund.
Consider whole life policies as timeshares from the life insurance industry, a scam to avoid!
What Are Riders?
Unfortunately, riders do not have anything to be associated with either motorcycles or horses in the realm of insurance. Riders are additional insurance products that “ride” on your regular term insurance policy and serve as a solution for “what if” questions like:
- What if we had to pay for funeral expenses that are unexpected for family members?
- What happens if I’m disabled and cannot pay my insurance?
One type of insurance worth considering pays the funeral costs of your kid. However, when it comes down to riders such as AD&D (accidental loss or dismemberment) or critical illness, obtaining decent disability insurance can cover the costs of those events.
The truth is that you can pay for other unplanned expenses by establishing an emergency fund of 3 to 6 months of expenses. This makes up one of Dave Ramsey’s seven Baby Steps. If you can get started, you will have yourself a “rider” or cushion just by saving and taking charge of your cash. It is not necessary to spend your money to purchase an item you do not require. We are sure you will pay a significant amount due to the jacking up the cost to twice the amount it’s supposed to be.
What Happens When Your Term Life Policy Ends?
If your insurance policy is due to expire, you can renew it according to your age and your life situation. If you are on a level-term plan (more on these types shortly) the cost of your insurance will increase as renewal is scheduled (since you will be getting older and therefore more costly to cover). Also, your premiums will decrease when you select the less expensive death benefits.
However, you should aim to be self-insured and have an emergency fund before the policy is due to expire. It’s much easier than you believe! If you allocate 15 percent of your household earnings into investing, you will not require the death benefit until the date your term life plan expires because you have made quite a bit of money from the investment.
What Are the Types of Term Life Insurance?
So here is what most people will want to go for a look at because they are just . . . insurance. When you are considering the term insurance market, you will need to know the various kinds:
Level premium (or term of level) assures that the price remains at a level regardless of the term you are seeking (we recommend a timeframe that lasts between 15 and 20 years). It’s the simplest type of life insurance because once you have got it, the cost of the premium, as well as the death benefits, will not change. It is a great feeling Is not it? This is the reason Dave recommends level premium life insurance. You are aware of the amount it is likely to cost each when your premium is due and you can incorporate the cost into your spending plan. Is insurance as simple? Yes!
Yearly Renewable Term
The policy renews each year and the amount of the premium is increased each year until the time expires to pay for the rising costs of the insurance. How much the increase can be calculated by an insurance firm when they assess the “risk” every year at renewal time (yikes!). While it may appear to be cheap at the beginning of the policy, costs will increase with time, and eventually be more expensive than if you had chosen an affordable level premium plan.
Decreasing or Mortgage Term
A decrease term policy is one in which the amount you pay reduces as your mortgage gets lower. The idea is that you won’t require more of a death benefit when you are paying to pay down your mortgage. The premiums are usually about the same, meaning you will pay the same amount each month, however with the added “benefit” of a decreasing amount. We do not recommend this.
Return of Premium
It looks great on paper as it is designed to refund the cost of the insurance should you make it to the expiration date (and we are sure you will!). What happens to the premiums you have paid? You will receive them back. However, the premiums are higher than they were in the first place. It’s 30-40% more than a regular premium. It’s not worth the cost to pay more for the service in the initial place.
Guaranteed or Simplified
A simplified or guaranteed term life insurance policy is one in which you do not have to take a medical examination. It’s possible to submit a medical form instead of being probed or prickled. Certain no-medical exam policies are now very affordable which makes them a viable alternative.
Convertible Term Life Insurance
An insurance plan that is convertible that you can convert into permanent insurance later on. But do not do it! The cost of your insurance will go way up when it’s time to change. Certain people may convert if they are nearing an end date for their coverage and suffer from an illness that is terminal however, that is a rare instance.
Voluntary or Group Term Insurance
The employer may provide group term life insurance as a benefit for employees. It could even pay the entire cost in certain circumstances. In any case, it’s a bargain. We will always advise you to take the option that is free However, make sure you compare it to what you can find by yourself before you pay for it. Be sure to check the death benefit, as the payout from your employer is typically much less than the one you could get by yourself. Keep in mind that if you switch jobs your insurance will not go with you.
3 Main Benefits of Term Life Insurance
The purchase of a term life insurance policy could be among the smartest insurance choices you could make. Here are the three most important advantages:
Your family will be protected
Should you have a spouse and children it’s the most effective method to ensure their future and also your income should something happen to you (God forbid!). You will feel more secure knowing that your children are taken care of together with your spouse.
The term life policy is one of the most affordable insurance options that you can find. It provides the greatest value for money, most definitely.
Term life is a predetermined time when it runs out, meaning you only pay for the time you will need it. It means you won’t end up spending money later paying monthly premiums when you do not need the security in the future.
The Bottom Line
To summarize to sum it all up, we suggest a standard premium term life insurance policy that has the protection that is 10-12 times your earnings and a term of 15-20 years long.
Keep in mind that life insurance only is designed to pay for your lost income if you pass away. It is meant to support your loved family members and not to help them become rich. You can accomplish this on your own by adhering to your Baby Steps and investing wisely.
If you are searching for a new life insurance policy or would like to speak with an experienced professional, we suggest RamseyTrusted’s service Zander Insurance. Do not let another day pass without having insurance.