The first step will be selecting what is called a death benefit. This is simply the verbiage used for the amount of coverage that is desired. The death benefit is the sum that will be paid to the designated beneficiaries should the applicant pass away during the policy term. When selecting a death benefit, it is important to calculate what expenses and debts are currently in place as well as what expenses my arise in the future. For example, let’s say a client has a 4 year old child and a $200,000 home mortgage. Obviously, it is important for this client to get enough coverage to pay off the home mortgage in the event of the client’s death. However, it may be equally important to look at obtaining a policy that will last long enough and contain enough coverage to pay for the child’s college education. If the client were to select a $250,000 20 year term life insurance policy, there would likely be enough coverage in place to pay off the decreasing home mortgage and offer financial assistance for the child’s education. This is a very simple example of appropriately selecting a death benefit by assessing current debts and potential future expenses.
The next step for obtaining a term insurance policy will be selecting the length of time in which the policy will be in force. This length of time is referred to as the policy term. As mentioned above, the most common policy terms are 10, 20, and 30 year options. It is important during this process for the client to determine the reason for obtaining the policy and appropriately select a policy term that fits that need. This is important because term insurance is only in force for a predetermined length of time. For example, if a 35 year old selects a 20 year term insurance policy, coverage under this policy will expire when the client turns 55 years old. Purchasing term insurance is often times associated with the analogy of renting a home instead of buying. The policy is only funded during the specified term. When the policy term ends, the payments, as well as the life insurance coverage, will cease. As described by the name, this type of policy only provides coverage for a temporary amount of time.
Like many important decisions, there will be pros and cons to the selection of a life insurance policy. Let’s explore some of the advantages and disadvantages of term life insurance.
• Affordability • Simplicity • Self-Investment Ability
The most well know and widely publicized benefit of term insurance is the low cost. Term insurance is undoubtedly the most affordable life insurance option available while still offering rather high coverage amounts. The affordability of this type of policy is mostly due to the low probability that the insurance policy will be required to pay the death benefit. The odds of a healthy, younger to middle aged person dying during the policy term is unlikely which allows for the lower cost of insurance. While the likelihood of payout is low, term insurance often offers high level of protection during the time in life when it is needed most.
Another advantage is the simplicity of term life insurance. There are limited policy options, additional features, or financial factors that can be added to a term life policy. In fact, there are only a few requirements to obtain a term life insurance policy. They include selecting a death benefit, the term length, what can be afforded, and to pass a paramedical exam. While simple to obtain, term insurance is a great way to ensure financial protection at a very pivotal juncture in life.
The final advantage of term life insurance is the ability for the client to self-invest their own money. The age old saying of “buy term and invest the rest” does have some validity if the client is able to make competent and safe investment decisions. With some other life insurance policies, the ability to invest and earn additional cash is built into the policy. By electing to buy a term insurance policy, clients can have the freedom to invest their own money, as compared to purchasing a permanent life insurance policy that offers predetermined investment components.
• No Coverage Late in Life • Limited Policy Features • Low Probability for Policy Benefit
The most glaring down fall of term life insurance is the inability to keep the insurance later in life. Although term insurance products do offer the ability to continue coverage once the policy term has ended, it is generally an unaffordable option. In most cases, by the end of a client’s term, they are now much older and finding another life insurance option is difficult and expensive. By selecting term insurance there will often times be no life insurance coverage during the point in life when the probability of death is greatly increased. Term life insurance is truly a temporary solution. However, one remedy to this complication would be to purchase a modest permanent insurance policy at the same time the term insurance is put in place. This insures maximum protection early in life when needed, and still something guaranteed once the term has expired. This sort of set up is often affordable and easy to obtain.
Another disadvantage of term life insurance is the lack of policy features and benefits. Some permanent insurance policies offer additional features which can be selected to compliment the life insurance portion of the policy. These features can include long term care, terminal illness coverage, and cash value opportunities. These features will be explained further in the permanent life insurance section. Term insurance does not offer a vast array of additional policy benefits. While this appears to be improving, there are still rather limited options.
The final disadvantage is the probability of the death benefit being passed on. In most cases pay out of the death benefit will not occur as the policy term expires prior to death. Of course in the grand scheme of things, this is a good thing! However, the fact remains, most people who purchase term insurance will never see a return on the money spent for a term life policy.
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