“The Life Insurance Conversation” with clients is always a little awkward. Most people do not like discussing what would happen if they were to die. I was the same way, but now that I have kids my desire to provide for them helps me address this difficult subject. Term life insurance can be a cheap and uncomplicated way to plan for the unexpected. In this article I am going to cover the definition of term life insurance as well as a few situations where it makes sense to have some coverage.
Term Life Insurance will provide a fixed dollar amount to your beneficiaries if you die within the stated time period (term) of the contract. For example, a $1 million policy with a 20 year term will provide one million dollars to your beneficiaries if you die any time over the next 20 years.
Premiums are what you pay to the insurance company (annually, monthly, etc…) to maintain the policy. Once your policy is issued, premiums on term life insurance do NOT increase – they stay level over the stated term. With traditional term life insurance, if you do NOT die within the stated term, the premiums you paid are gone forever.
To be approved for term life insurance you will have to go through medical under-writing. The insurance company will want to know about your medical history – you will be required to provide blood and urine samples for testing. If you are young and healthy, the premiums will be very low. If you have health issues, your premiums may be high or you may be denied coverage by the insurance company altogether. Individuals aged 20 to 50 are in the sweet spot for this type of insurance. Once you get past that age range, the premiums on term life insurance may not be worth the coverage.
Now let’s look at a few situations to see if term life insurance may be appropriate…
Married With Child(ren)
If you are married with children, then both you and your spouse should have some form of life insurance. If you die tomorrow, will your family be able to maintain their current standard of living without your income? If your spouse dies tomorrow, will you be able to maintain your current standard of living without his/her income? If both you and your spouse die in a terrible car crash on the way home from “date night”, will your children be taken care of financially? When children are involved, term life insurance goes a long way towards being able to answer “YES” to the questions above.
Even if your spouse does not work and stays at home with the kids, life insurance may still be needed. Will you be able to work AND take care of the kids if your spouse passes away? Probably not. A term life insurance policy will allow you to hire someone to assist with the children and household while you work to maintain the current standard of living.
Married – No Kids
Without kids in the picture, term life insurance become a little less “necessary”. If both spouses are working, the surviving spouse will most likely be OK without your income. Maybe the standard of living decreases somewhat if one spouse dies, but without kids a working spouse will be able to take care of themselves in the event of the death of the other. But remember that you have to go through medical testing to be offered term life insurance. If you are planning on having kids down the road, you may want to get insurance now – an unexpected occurrence (car crash, cancer, fall from a ladder, etc…) could change your status from “highly insurable” to “un-insurable”.
If you are single, you probably don’t need term life insurance. Aside from a desire to pay for funeral expenses if you were to die within the stated term, there really isn’t a need.
Of course these are broad generalizations and each individual or family has a unique insurance situation. If you would like me to review your personal insurance situation, feel free to reach out.
Charles Brown is a Portfolio Manager and Financial Advisor at M. Brown and Associates in Naperville, Illinois.