Low cost term life insurance is one of the best ways to protect loved ones from the unforeseen consequences of early death. Because it’s frequently considered a no frills financial product, term life insurance offers lots of value for your money. The premiums to buy term life insurance are usually lower than other types of life insurance. You can buy more coverage for less money and have more funds available for life’s other wants and needs.
How Term Life Insurance Works
Underwriting your term life policy considers factors like your current age and life expectancy. It is written for a certain period of time. For instance, a term life policy may be written for 10, 25, 30, of 40 years:
- In some instances, you’ll pay a level rate throughout the life of your term life insurance policy.
- In others, premiums go up as you age.
- In any case, at the end of your term life policy, you’ll need to self-insure or purchase new life insurance.
That’s why your term life insurance costs less than a whole life insurance policy. Unless you die while the insurance is in force, term life insurance doesn’t generate a return. If you die while insured by a term life policy, your beneficiary receives the cash.
Term Life vs. Whole Life
These are some of the reasons many people believe that whole life insurance policies are worth higher premium payments. You can take cash out of the policy if desired. However:
- Whole life insurance premiums are much higher than term life insurance rates.
- The return on your investment in a whole life policy is typically lower than other long term investments. For instance, your whole life policy probably won’t perform as well as an index mutual fund.
Buying term life insurance is a smarter choice for most people. Purchase term life insurance from a company that’s registered with your state insurance office. Brand name life insurance companies like AARP, New York Life, and Transamerica Life may offer term life insurance policies through your bank.
If you’re wondering how much term life to buy, consider the following items.
Low Cost Term Life Insurance
Before asking an insurance company to underwrite a term life insurance policy, know how much coverage you need. Weigh the term insurance policy’s premium costs against current responsibilities and potential risks you’ve already assumed by answering the following questions:
1. What are my current responsibilities? A young single person without children doesn’t need as much term life insurance as an older married individual with four children:
- If you’re starting a family now, buy enough term life coverage to take care of your future family members. For instance, if you don’t plan to have more than two children, plan accordingly.
- If your spouse carries personal life insurance on his or her life, take this into account.
- In comparison, if your beneficiary doesn’t work, what financial needs would he or she have over a period of time? If you and the beneficiary have a home mortgage, your term life insurance policy could pay off the loan to lessen future financial burdens.
- If you’re responsible for elderly parents or other family members who are unable to care for themselves, you should consider their costs of care before buying term life insurance.
2. What financial obligations do I have? If you die, your beneficiary isn’t financially responsible for debts you assumed. If a cosigner helped you qualify for student loans, a mortgage, or car loan, you’ll need to pay these off with term life proceeds. Other financial obligations may include:
- Children’s education – private elementary or secondary school and college.
- Funeral costs – include the cost of your funeral.
According to the Insurance Information Institute (III), you’ll need a term life policy face amount of about eight times your current annual compensation to pay off current financial obligations. Adjust this amount higher if you’ve assumed a large mortgage or have higher than average obligations.
3. How do I help my beneficiary or family to replace my current salary? Term life insurance proceeds should help to reduce your beneficiary or family’s total expenses but you’ll also need to consider how your family will live in the future:
- Start with the amount of money you’d need to invest to create an income stream. At today’s low savings rates, you could keep money in short-duration bond funds or invest in high dividend yield stocks.
- Add to the face amount of your term life policy to include child care costs if your spouse plans to return to work.
- If your spouse planned to stay at home to raise children until they’re in college, increase the value of your term life insurance policy.
If your current financial scenario changes, such as you buy a larger residence or have another child, consider buying more term life insurance. When in doubt about how much term life insurance you need, ask your financial advisor or insurance agent.
Buy Term Life Insurance
If you own a term life insurance policy, think carefully before converting to a whole life policy. Your premium payments will increase and you won’t gain any current financial benefits.
However, if a health condition prevents you from purchasing new or additional term life when you need it, converting an existing term policy to whole life may be a sensible move.
Alternatively, if you own a whole life policy, you may have the option to cash out and buy term life insurance. Never cancel a current life insurance policy until you’ve secured new life insurance.
Low cost term life insurance isn’t a replacement for a will. Make future plans for those who depend on you in the event you and/or your beneficiary die. Your wishes, not those of the state, will ensure that loved ones receive the care they need.