When do you need term life insurance?

Term life insurance

As a young adult, I never really thought about buying term or any life insurance. Maybe because a 20-year-olds don’t think about their own mortality. And because I was lacking the life experience. However, now that I am expecting my first child, many thoughts are crossing my mind that hasn’t before. I want to make sure that if something happens to me or my partner, my family will be covered financially.

The insurance industry is wild and at times complicated. Perhaps that’s why, according to LIMRA, only 54% of Americans have life insurance, which is down 9% from just 10 years ago. Insurance is, of course, not mandatory, but highly recommended for any individual that is not financially self-sufficient. That means that if you or your partner die, your family won’t have to worry about money. Since we are not at that point yet in our lives, finding life insurance presents an excellent solution that doesn’t have to come with a stiff price. So, let’s talk about it!

What insurance options do you have?

You can choose between term life and whole life insurance. In this article, I will focus on term life insurance, but below you can find a quick comparison between the two of them.

When you purchase a term life insurance you are covered for a specific period of time, say 10, 20, or 30 years. You enter the contract with the insurance company that in case you die during the time of your policy term, the company will pay your beneficiaries an agreed amount of money called the death benefit. The money they receive will be tax-free.

It comes with another guarantee: the premium won’t go up as long as you make your payments. If you stop paying, the policy will collapse and you will lose your coverage.

There is no cash value built in this type of insurance.  Essentially, if you die after your policy expires, the beneficiaries are not getting any money, despite all the premiums being paid. Some people perceive this as “throwing the money”. But, it is the same as with car insurance: you never know when the accident might happen. Wouldn’t you rather be safe than sorry?

How much insurance is enough?

The recommended amount for the term life insurance policy is at least 10-12 times your annual salary. When you are making $40,000/year, you should get around $500,000 in coverage. You can scale that up if you believe that your income will increase over time, or go down if your nest egg is already significant.

What can a portfolio of half a million dollars do for your family? Let’s say it is invested in a mutual fund comprised of growth stocks. The dividend yield is 4%. In that case, the portfolio will produce $20,000/year. That is absolutely not a full replacement for your income, but surely it is helpful.

How long do I need the insurance?

Depends on your age, health, income, and family situation. The younger you are the longer coverage you will need. If you are 30 years old and have 2 kids age 5 and 3, you might want to think about getting 20 years, just to make sure the children are all grown up when your coverage expires. In your forties, you might be happy with a 10 or 15-year policy.

The cost of term life insurance

The best part of this type of insurance is the cost. It is extremely affordable. When I say it is affordable, I mean it.  For example, if you are a healthy 30 years old male, wanting to purchase a $500,000 policy for 20 years, your monthly payment will be around $20/month. Yeap, that’s right. And if you want a $250,000 policy for 10 years, the cost is less than 10 dollars.

Of course, it is wise to lock an amazing price while you are at low risk (meaning young and healthy) than getting it later in life. Also, if you decide to take on a shorter length of, let’s say 10 years, but decide to renew, the premiums will go up. So, take into consideration how long you think you will need the insurance.

Where can I find one?

Shopping for a term life insurance comes in two ways: you can either work with a licensed broker or look for one yourself online. I recommend zenderins.com and quickquote.com

Getting a quote online is easy. You have to provide only basic information about yourself: age, gender, the amount of coverage you will like, the length of coverage, and if you have been using tobacco in the last 12 months. The medical history plays a huge role in determining your premium price. If you provide your contact information, expect a phone call from an agent who can further assist you with applying for term life insurance.

Keep in mind that the quote you get is not a guaranteed price you will pay for the coverage. You will most likely have to go through a medical exam first. (Not all of the insurance companies require one.) The good news is it doesn’t come out of your pocket.

Brief recap

  • If your nest egg is not large enough to provide for your family in case you die, you need life insurance
  • Term life insurance can cover you for a specific period of time, just long enough until you become financially self-insured
  • The younger you are when you decide to buy one, the lower the overall cost will be
  • The process of getting one is fairly easy

 

 

 

 

 

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