Hoping to increase your family's security without breaking the bank? Term life insurance may be the product for you. Life insurance is classified as either "term," or "permanent" insurance which includes whole life, universal or variable insurance. Term insurance is the best way to buy a large amount of coverage if you are relatively young and healthy and want insurance primarily to replace your income in the case of your death.
Affordable Replacement Income
As the name implies, "term life" insurance is purchased for a term, or set period of time. The cost is not fixed forever, only for the period of time covered by the policy. Some policies are good for only one year before they must be renewed but others last for five, 10, 15 years or more. At the time of a policy renewal, the rate will rise because the covered person ages, and is more likely to die. The person covered may have to prove they continue to be insurable, or healthy. Upon death, the person or people listed as beneficiary collect the death benefit.
This means that term insurance is most affordable when a person is young and healthy. Term insurance is a good way to ensure that minor children or dependent spouses can replace the income lost after an unexpected death. Online calculators help individuals tally up how much coverage is needed. A policy that will cover home mortgage payments, children's education and funeral expenses makes good sense.
Term insurance can be purchased from many companies. While some of policies do not require a medical exam, these policies are generally offer little coverage, and also may not pay the full benefit if the person covered dies within the first year of the policy. Proving that you are generally healthy, or "insurable" will likely involve a medical exam.
What Term Insurance is Not
A term policy has no cash value. It is only valuable if the person covered passes away. Since the cost of term insurance increases as a person ages, eventually it becomes too costly. The benefit of the other type of insurance, permanent insurance is that, while it is more costly in the beginning, the premium is set, and oftentimes the policy gains cash value. Since the cash value of life insurance grows tax-free in the United States at present, permanent life insurance can be used as an investment to decrease taxes or to borrow against. Permanent insurance is used for estate planning purposes such as inheritance or charitable giving.
Personally, I have enough term insurance through my job to cover my funeral expenses. But I maintain a whole life policy to borrow against and provide some retirement income and possibly a legacy for my grown children. But for young families, term insurance will provide security for less.