There seems to be a fairly prevalent lack of understanding about term insurance, whether it’s the right product and if it is, how to determine which term is best for you. So, a little term 101. Hopefully I won’t leave everyone scratching their head.
Generally speaking, almost all life insurance is “need specific”. In other words you don’t buy life insurance just because, but rather to ensure that a certain need or possibly more than one need is financially met if you happen to pass away while that need still exists. We buy life insurance because we have children and we want them to be able to have all of the advantages of our income even if we’re not there to provide it anymore. We buy life insurance because we love our wives and know that whether we are a one or two income family, the loss of our income could be devastating. We buy insurance to cover debt because the responsible thing to do is not leave someone unpaid if we pass away.
But, there are very few needs in life that go on forever. There are very few life insurance needs that can’t be covered appropriately with term insurance.
What about those kids? If you’ve just had your first child your instinct might be to get a 20 year term. I’ve always been of the opinion with my own insurance that carrying life insurance with the idea that I want to make sure they get to a point of being able to take care of themselves is the goal. I figure if I have insurance that will last until they have at least a bachelor’s degree, I’ve done the responsible thing. So, when that first child comes, I would probably recommend a 30 year term, especially if you expect to have more than one child.
What about my wife? I carry enough life insurance at staggered term lengths, so that it decreases over time, that my income will be replaced and she will likely never have to rely on our assets if I die prior to retirement. I love her and consider her future to be very much my responsibility.
What is the right term length? That’s a question that you really may need to wrestle with. The right term length provides coverage until the need is gone. If the need goes away earlier than you expected, you can always cancel the insurance. There’s no penalty for that. I would say that if you’re really a little uncertain, if budgetable, it is always prudent to take out a longer term. For instance, if you have about a 10 year need but it might go 11 or 12, take out a 15 year term. It may seem like overkill now, but I guarantee it will beat what happens if you take out the 10 year term and at the end of the term you do need it longer.
Is term insurance right for you? Almost always the answer is yes. With the exception of estate preservation uses, permanent coverage is almost never really needed. If there is a permanent need, use universal life with a no lapse guarantee, a cashless universal life. Never use cash value whole life or universal life.
Bottom line. Determining if term insurance is right for you is pretty easy. Is there a point when the need will be gone? The right term length may take a little more thought, but don’t let it bog you down and keep you from applying. You can change the term during underwriting and honestly, better to have something in force even if it’s the wrong term length. Then you’re covered and have time to work on getting it right. If you have more than one need, don’t be afraid of carrying two or more policies of different lengths. It makes more sense than carrying insurance longer than you need it just for the convenience of having one policy.