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Term Life Insurance Basics

Updated on April 18, 2014

Term Life Insurance Basics

When purchasing Term insurance there are some do’s and don’ts that are very important. Term insurance is a contract between the insurance company and the insured to pay a specified amount in the form of a death benefit to the insured’s beneficiaries if he or she dies during the specified term.

I liken it to renting a home vs. owning a home. There is no equity in renting. Just as there is no cash value that accumulates in a Term policy.

The primary benefit of purchasing Term insurances is it less expensive that it’s permanent alternatives Whole Life and Universal Life. It will allow you to purchase more coverage for less.

For example: A young family, parents in their 30’s with young children is likely to need more coverage should the unthinkable occur. Multiple years of income will be lost if a parent dies and the cost of raising the children will fall solely on the surviving spouse. This includes food, shelter, schooling, college, etc.. There may be car notes, student loans that need to be paid off. There may be mortgage that needs to be kept up with in not paid off as well. A twenty of thirty year term policy may be give the necessary death benefit at a cost that’s affordable to this sample young family. Additionally, at the end of the twenty or thirty year term, the children should be out on their own, the mortgage should be paid off, and the overall daily cost of living should be reduced for this young couple who is now in their 50’s or 60’s. As a result the policy can just be allowed to terminate rather than renew at a higher rate because the need for coverage is no longer as great.

There is one negative you should be aware of, when the term has come to an end the policy contract terminates. This means, your policy either no longer exists, or if renewable, it renews at a higher premium rate commensurate with your current age which is 5, 10, 15, 20 or 30 years older than you were when you first purchased the policy, and therefore much more expensive. Thus, eventually pricing you out of that policy.

For this reason, it’s usually a good idea to put a permanent option in place in addition to the larger Term policy. That way you will have something in place to handle your final expenses that is far less expensive than it will be if you wait until 60’s-80’s to sign up.

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