Term life insurance offers a guaranteed level death benefit and a guaranteed level premium for certain period of years, the term.
Is there a chance you could outlive that term and spend the money it took to keep your policy in force without the policy paying out a large sum to your beneficiaries? Of course there is. Does that mean that term insurance is a bad way to ensure your family is taken care of during those years when they are dependent on you? Absolutely not.
I’ve talked a lot over the years about how I firmly believe that 95% or more of life insurance needs are term insurance needs. Let’s get real. Do you carry auto insurance on a car after you sell it? Do you continue to pay for homeowner’s insurance after you sell the house? Do you really need to carry life insurance for the benefit of your children after they are no longer dependent on you? The answers are no, no and c’mon, let’s get real, NO!
With the exception of very small final expense policies and policies to provide money for estate taxes, everything else, if properly put together, can be covered by term life insurance. Permanent policies such as universal life and whole life are simply like using an elephant gun on a mouse hunt. The ammunition and the gun are just way too expensive for the target you need to hit.
So, with affordable term insurance policies going out to 40 years, let’s kind of review life insurance needs and see how it works. The two most prominent needs for life insurance in my mind are income replacement for the care of your children, and in the absence of children for the benefit of a spouse. Other needs worthy of consideration for term insurance are mortgages and business interests.
Just for the sake of this example let’s say there is a 30 year old couple expecting their first child. The husband could take out a 20 year term policy and call that good, as the child would then be grown, but probably the more prudent route would be a 25 or 30 year term. That covers the child on the way and in all likelihood, any additional children they choose to have, or are surprised by, over the next 10 years. If a child really sneaks up on them in their 40’s, they could always take out a separate policy just for that reason. With many of us working into our 60’s and 70’s a prudent consideration for the 30 year old couple might be to carry some 35 or 40 year term insurance for income replacement. Another important consideration would be to carry more than one policy and choose different term lengths depending on how long you believe that need will last. Surprisingly this practice, call layering, can actually save money. A periodic review of those term lengths and the needs attached to them is a good practice. You might have outlived the need for a policy and could safely discontinue paying for it,
So, if a need, on the face, appears to be temporary, don’t buy permanent insurance to cover it. If everything goes wrong and your temporary needs all become permanent, well, term insurance comes with a conversion option that allows you to adjust your policy in the future to make all or part of it permanent.
Bottom line. I take the responsibilities in my life very seriously and have carefully chosen term life insurance policies to cover different aspects of my life. I look forward to the day when I outlive each of those term life policies because it will mean that I’m alive and a need was taken care of.