Term life insurance is life insurance that provides consumers with coverage at a fixed rate for a limited period of time. Term life insurance is generally used for income replacement needs for an individual. It works in a similar way as most insurance policies, satisfying claims for what is insured.
Term life insurance is a pure death benefit. It provides financial coverage for the insured or the policyholder’s beneficiaries. Maybe you are one who has a considerable amount of debt or maybe you have children headed to college and you are looking to fund their tuition. Maybe your health is a concern and you don’t want to risk your dependents having to cover the cost of your mortgage. Term life insurance can provide financial assistance to these sorts of things, in the event of a death. Consumers often choose term life insurance in favor of permanent life insurance because it is much less expensive, depending on the length of the term. For example, a person may purchase a term life insurance policy at the age of 55, that expires in 10 years, at which time they expect to retire and have enough funds in retirement saving to provide financial security for their dependents.
Term life insurance can come in two forms; annual renewable term and level term life insurance. The most basic form of term life insurance is a term of one year. The death benefit would be paid if the insured party died during this one-year term. The premium paid is based on a probability that the insured dies during that one year, which is calculated by a number of health factors considered by the insurance company. The problem with one-year term life insurance is the requirement to prove insurability. If someone were to develop a terminal illness within the year term, but not pass until the term expires; the insurance company would likely see the person uninsurable after the expiration of the first year and would be unable to renew the policy or purchase a new one. If a one-year policy is what you are looking for, you should ask your local independent insurance agent about guaranteed re-insurability, which allows the insured to renew without any proof of insurability.
More common than a one-year term life insurance policy, is a level term life insurance policy, which provides coverage for a specified term. The most common terms that insurance companies provide include 10,15, 20 and 30-year policies. With this type of term life insurance, the premium paid each year remains the same throughout the contract. The longer the term the premium is for, the higher the premium will be because as the person grows older, the more expensive it is to insure.
Most level term life insurance programs offer a renewal option that allows people to renew for a maximum guaranteed rate. Renewal is not guaranteed with all polices, so consumers should ask their local independent life insurance agents about this option. Some term life policies have the option to convert the policy into universal life insurance. This is a good option to have in the case that one is diagnosed with a condition that would make it difficult to qualify for a new term policy.
The reason that term life insurance polices are so much cheaper than permanent life insurance policies is because there is a chance the program expires without any payout, while permanent life insurance polices will eventually have to pay out. If you have an interest in protecting your family’s financial future in the event of a death, but are not sure about a life insurance policy, a term life insurance policy may be right for you. If you or your loved one has been denied a term life policy, speak to an independent agent about applying through another insurance company. You can also contact an agent to hear about further benefits that term life insurance may provide you and your family.
How long do I need my term insurance?
In working with clients, the question inevitably comes up, “How long will I need my term insurance?”
Traditionally, the belief was that you really needed life insurance until only about age 50 or so. The prevailing thought was at that point, the children would be grown and no longer dependent, the 401(k) would start to be massive from years of savings and fantastic returns, the home would be paid off, and all the family debt would have been eliminated. Sound familiar?
In reality, many of the age 50+ group are looking back and realizing that their children have been dependent longer than was planned for, the 401(k) was both underfunded and also under performed, the home is not only not paid off, but in many cases underwater, and there is still family debt!
These people have evolved their financial thinking. No longer are they looking to rid themselves of all of their life insurance! At 50 or 55 the prevailing thought is that they need the last 10-15 years to aggressively fund their retirement plans to catch up for lost time. A premature death today means that much of the retirement plan never gets funded for the surviving spouse. It means that there are not adequate resources to finish paying off a home mortgage. Many are finding that they want to keep some level of insurance even beyond age 65.
It is with this evolution of thinking that you should have a strategic plan in place designed with your financial advisor. Some insurance can be and is meant to be temporary. Some may need to be carried longer, and yes even some insurance might need to be there permanently. Insurance policies with varying terms can be layered with some permanent insurance to create a financially strategic plan for you and your family. Seek out an advisor to implement a plan today!
Is it okay to have my children as a beneficiary on my life insurance policy?
Honestly, you can but there are far better options. Typically, your spouse is the primary beneficiary. Then, generally most people will leave their children as the contingent beneficiary. In the opinion of this writer, that is a bad move. Usually the best option for leaving money behind to minors would be to leave it in a trust.
Money left outright to minors is held in a custodial trust, created by the insurance company, which is very hard to access prior to age 18 even for the guardian. And then the proceeds are fully accessible as of the child’s 18th birthday with no restriction whatsoever. This is problematic for many reasons, some obvious and some not.
In a recent case, both mother and father were victims of a violent crime and died. The couple had four children, two minors, and two in college. A trust had not been written and the children were named as outright beneficiaries. Because of the nature of the death, the children were extra grief stricken. Also, because of their vulnerable age, two of the children fell prey to the wrong group of friends and ultimately, drug use. The unlimited access to the life insurance proceeds at age 18 and 20 proved to be less a blessing and more a curse as these children blew through thousands of dollars supporting their new found drug habit. Clearly, the intent of the parents was to provide for and take care of their children in the event of their untimely death, and not what ultimately came to pass.
If you do not have a will or trust in place, many life insurance companies have a trust provision for minors that can be used. Using this provision will not lock money in trust indefinitely, but can be used to defer the unlimited access to an older age. Also, it might allow you to assign a fiduciary trustee for this money, somebody of the parent’s choosing that the minor needs to go to for access to the proceeds. This provision is usually offered for no additional cost. It does not take the place of a will and trust that you create, but is a giant leap forward from the minor child as beneficiary designation than the majority of the people reading this have currently in place. Please see your trusted Financial Advisor for help on how to make this change today.
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