Probably the most often asked question in life insurance. What is the difference between term and whole life? I will deal with whole life and universal life at another time, but let’s talk about term and what it’s really made to do.
Term life insurance provides a policy with a level death benefit and a level premium (payment) for a guaranteed length of time. The most common term lengths are 10 years, 15 years, 20 years and 30 years. Once you come to the end of that guaranteed period, the price is going to go up dramatically, so it is not a product that is designed to have in force longer than the guaranteed term.
While there are those that would argue that “they are just betting against themselves” when they buy term, they are just kind of missing the target of what the product is made for. If a person wants a policy to be there absolutely until they die, then whole life or universal is the answer. Another blog will cover that.
Term insurance is the right choice for probably 90-95% of life insurance needs for us normal folks. We all have pretty much the same three main basic life insurance needs and the truth is that those needs actually diminish and often disappear with time.
The first need is family protection while we have children that are dependent on us. We don’t want to leave prematurely and have our spouse and children suffer because of the lost income. Children grow up and go away and at some point (this is just a theory), and they are no longer dependent on us. If we were to die, they might miss us emotionally, but should be just fine financially. The need for that insurance goes away. It is a term insurance need.
The second need is also centered around replacement of income. After the children are out of the picture there is generally still a spouse who is partially, if not wholly dependent on our income. At retirement age several things come together. A retirement income will generally (more discussion in an upcoming blog) continue on to our spouse after we die. Social security will offer some part of offset in the financial change and lastly, this is the point in our lives where our assets are generally at a maximum. At that point income has been mostly, if not totally replaced and we have assets that can be used to further supplement the picture, reducing or negating the need for the large amount of term insurance that was carried for income replacement. The need goes away. It is a term need.
Third is our mortgage. As long as, at some point, people quit refinancing their homes every other year, our mortgage will get paid off or at least get paid way down. At that point the large amount of term insurance set aside for that purpose is likely not needed anymore. The need goes away. It is a term need.
That’s the big three, but there are plenty of places where term is simply the right product. I advocate term for use in most business life insurance. The truth is that businesses change and generally a term policy can be used to cover the particular need. Buy/sell agreements don’t usually go on to age 100. The need goes away when a partner retires. It is a term need. The bank wants a business person to assign all or part of a life insurance policy to back up a loan. The loan doesn’t go on forever. The need goes away when the loan is paid. It is a term need.
Sometimes for health reasons, term is all a person can afford. Something is always better than nothing. It is a term need.
Bottom line. Term is a great product for most needs. It is tremendously affordable. I’ll write more about how to make term work for those needs that don’t go completely away at a later time.
This post is somewhat dated. Life insurance underwriting is changing and evolving continually. For more updated information check out some of the key word links. If you have a specific question or topic you need information for do a search. If you don’t find the answers you need contact me and we’ll make sure you get the information that is important to you.