Term Life Insurance: What, When, Why

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There’s nothing fun about insurance. Whether it's home, auto, or health, the goal is to pay a monthly premium and never have to use the benefits. On its face, that seems like a waste of money.

Of course, being caught without insurance makes clear exactly why you needed coverage in the first place. A few hundred dollars a month feels like a financial strain when you’re paying it, but emptying your savings account because of a health scare or a house fire will cause much greater hardship. We have to insure the things we care about, and since I care about you and your family’s security, I’m going to beg you to get life insurance if you haven’t already done so.

Of all the coverages, life insurance certainly makes you feel the oldest. To buy it is to admit your mortality, and that’s not something any of us think about when we’re young. Acknowledging the limitations of our lives almost feels like a concession, and that causes people to avoid and ignore life insurance altogether. Unfortunately, that only sets you and your family up for unnecessary hardship down the line.

Life insurance belongs in your portfolio of coverages, and it doesn’t need to be as confusing as some people make it out to be. The easiest and best way to provide for your loved ones is term life insurance, and the sooner you buy, the better off you’ll be.

What Is Term Life Insurance?

The verbiage is pretty straightforward, as term life covers a set term of your life. That term will typically range from five to 30 years with a monthly premium for the life of the policy. Things get more confusing when you try to figure out the term, the amount, and everything in between.

To help wrap your mind around the concept, it’s useful to compare term life insurance to whole life. Whole, obviously, doesn’t expire until the date of death. You’re able to lock in a premium that you pay forever, and these policies often build cash accounts that earn interest. In many cases, you have the option to borrow against your life insurance.

With a limited term, you aren’t accruing any wealth and you should plan on getting another policy before the first expires. While those might sound like points against term life, these are the very reasons why you can get a better price on term life and avoid some of the traps of whole life insurance. People get enamored with the idea of an insurance policy being an investment when in reality it doesn’t pay out particularly well, certainly not when compared to other investments.

Term provides flexibility that you don’t know you need until you have it. For instance, people will purchase life insurance policies that cover a corresponding reimbursement term, such as paying off a mortgage or covering college tuition. That way, you eliminate the possibility of your children inheriting bad debt or losing the house they live in.

The difficult part for many is deciding what the term should be, and that will depend on a handful of factors:

● Age

● Income

● Dependents

● Professional outlook

● Debt

These and countless other factors that influence your financial decisions should also play into your choice of insurance. While situations and circumstances vary, I routinely recommend 20-year terms, repurchasing every 5-10 years. Again, it all depends on where you are in your job and journey, but 20-year terms offer a fairly stable standard for people in various stages of their lives.

When comparing term life and whole life policies, the contrast comes down to philosophy. One presents insurance as a way to invest in the future, and that feature adds to the cost of the premium. The other delivers peace of mind for a select period of time, dropping the cost of the premiums while increasing the likelihood that the policy will never come into play. Since there are much smarter ways to invest the money you’d put into a whole life premium, I feel like keeping yourself covered through repeating terms makes the most sense.

When Should You Buy Term Life Insurance?

Now is the time to buy life insurance if you don’t have it. You can find every excuse and reason to wait - saving money on monthly premiums while you still feel young and healthy - but your reality can change in the blink of an eye. Should your health take a turn for the worse, so will the affordability of your insurance if you don’t already have it.

Once you own your 10-, 15-, 20- or 30-year term, you have to think about when to purchase the next round of coverage. A lot of people go with the option that occupies the least amount of brain space by renewing for another term just as the policy expires. This makes things easier on your end, as the insurer will pick up the slack and do the work to get you re-enrolled. Your premiums will go up, of course, because premiums go up as you age. There’s also inflation and pricing competition to account for.

For these reasons, I advise people to buy a new 20-year term well before the old one has expired. You have the option to stop paying the premium on your first policy, allowing it to lapse, or you can maintain two policies for the amount of overlapping time. Lots of people buy life insurance coverage from multiple sources, ensuring a bigger payout in the event of their passing while still keeping the cost lower than it would be with one overpriced whole life policy.  

By purchasing 20-year terms, you get strong value and long-term coverage. I find 30-year policies to be a bit excessive and anything less than 20 has you feeling like there’s hardly any time before you have to buy your next policy. The 20-year option gives the coverage you need for an amount that makes sense while keeping the monthly payment reasonable. Then, as opposed to waiting for it to expire, you buy anew every decade to avoid your premiums climbing too high while you’re still in good health.

With a whole life insurance policy, you’ll pay a lot of money. You have the chance to recoup some of that when you get older while still providing a safety net for loved ones, but you’ll mostly pay a lot of money. In my mind, it doesn’t make sense to treat this like an investment when what you really need to do is deliver security for your family. Just like home and auto insurance, your life policy should aim to provide in the worst of times. It’s not a fun way to spend your money, but it is the smart way.

Why Choose Term Life Insurance?

I’ve gone over this loosely, but let’s get into the specifics.

1. Cost

You will pay thousands of dollars a year for whole life insurance. After doing so for a couple decades you’ll be able to borrow against the cash you’ve accrued, but that’s still a lot of money to spend every year for the rest of your life. And, should something happen to you before the policy has much time to mature, your family won’t see any more money than they would have with term coverage.

By comparison, a term policy is dirt cheap. If you’re in your 30s or even your 40s, you can get a $500,000 policy for less than $50 per month. The right coverage bought at the right time might cost you less than $250 a year. Granted, you most likely won’t cash in on that policy, but that’s the whole point. At the end of your term, you won’t be mad about the $25 you spent each month; you’ll be glad you only spent $300 a year and very happy to be alive.

This cost issue brings up another reason I’m not a fan of whole life insurance. The only reason to get whole life is to have a policy worth something in your later years. However, if you were investing the money you spent on expensive life insurance in actual investments like stocks or real estate, you’d accrue very solid wealth long before you could touch your life insurance policy. If you could pay far less for decent term insurance while putting the savings toward strong, proven investments, wouldn’t that seem like a better way to use your money?

In case you aren’t sure, the answer is yes.

2. Flexibility

I mentioned this in an earlier section, but it will make more sense now that we’ve gone over the strategy with term insurance. While I recommend buying 20-year policies, you could always start with a different term and change partway through. You have no obligation to renew the same type of insurance and can let the circumstances within your life dictate your choice.

The biggest and best flexibility comes from having coverage and not having to worry that something could happen that would leave your family in the lurch. If you buy even a five-year policy worth $250,000, that gives you peace of mind with a low monthly premium. Over the next five years, you can research different insurers and talk to people who either like or don’t like their coverage.

The commitment is minimal with term insurance, whereas buying whole life immediately sets you back financially and then becomes harder to get out of. Once you’ve paid a $700 monthly premium for a few months, you’ll be inclined to keep that policy in hopes of getting some of your money back after retirement. It’s a chasing philosophy that has no place in your financial planning, least of all your life insurance policy.

3. Straightforward

When you turn your insurance policy into an investment strategy, it becomes much more complicated than necessary. As you look into different whole life policies, you’ll see so many numbers your head will spin. At the end of it, you might buy a policy you don’t love just to end the confusion.

Term life cuts the strings and makes it easy for you to compare quotes and test the waters. You know what your policy pays out, how many years are in the term, and what your premiums will be. Those three numbers are all you need to bounce between insurance providers and see who will get you the best rate. As long as you go through an established and credible provider, you know exactly what you’re getting and don’t have to worry about whether or not your “investment” will pay out in 30 or 40 years.

4. Smart Choice for Families

If you have young children, a mortgage, student debt or any of the other financial stresses that plague most young professionals, you need the cheapest, easiest option. Cheap life insurance isn’t like getting a cheap car that might break down - it only means you’re paying a reasonable amount for reasonable coverage. You want the policy to pay an amount that will help your family stay afloat through hardship, not a policy that turns your children into millionaires.

You have to keep reminding yourself that this is a safety net. While it might be fun to show off a safety net made of gold, you’ll get just as much security from a net made of nylon. Providers will try to push the fancier, whole life option on you, singing the praises of this investment strategy. If you follow the money, you’ll see insurance brokers taking a bigger check home after selling whole life, which is reason enough to set you sights on term life insurance instead.

When I take on a new client, I’m not just trying to increase their net worth. That’s my goal for growing their money, but my real mission as an advisor is to help people live a better life. It’s not fun to plan for what happens when we pass on, but it’s an important part of our overall happiness. With that stress removed from your life, you can put your energy and attention toward the things that matter most.

If you want to ease your anxieties and focus on the things you care about most, treat yourself to a 20-year term policy. You won’t be stressed by the payments or worry about whether or not your cash account is growing. It’s a big thing to check off your to-do list, and taking care of it every 10 years or so will have you confident about your finances and less overwhelmed by the uncertainty of the future.

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