Eric Stauffer provided this post exclusively for Finance Plaza. He is an insurance agent that teaches his clients how to buy term life insurance without getting ripped off. His website also reviews insurance brokers like Efinancial, as well as full service insurance companies.
Most individuals will come across a time in their life when obtaining life insurance is a good choice, such as getting married or having a child. There are always uncertainties as it pertains to the future, and insuring against those uncertainties is one of the best gifts that can be passed on to a loved one. While most people are aware of the need for life insurance, many have no idea where to start and what kind to go with.
Life insurance comes in many different forms: whole, variable, term, permanent, just to name a few. The variations are endless, and the additional riders which can be added to a policy can make a person’s head spin. The important thing to remember when it comes to life insurance, is that the purpose is usually to replace lost income (or duties) in the event of a death. By keeping that in mind, it becomes easier to wade through some of the noise when it comes to life insurance offerings.
Term Life Insurance Defined
Term life insurance is perhaps one of the easiest products to understand because it operates similar to other insurances which people are accustomed to. There is a period of time which a policy is in force (the term), and a person pays a fee (the premium) every year that they wish to maintain coverage. A typical term policy will be written for a specific time period, such as 5, 10 or 20, and the premium payment will stay the same the entire time.
Term Life Insurance Cost
The cost of a term policy is typically related to the age, gender and health of the applicant, as well as the length of time for which the policy will be written. Healthy young people are less likely to pass away, so their policy amounts will be lower. In comparison to other life insurance products, term life insurance almost always provides the most insurance coverage per dollar.
Term vs. Other Life Insurance Types
As stated before, life insurance is designed to replace lost income or duties of a particular person in the event of their death. Term life insurance works exactly in this way. For example, a married couple where each person makes $50,000 a year may take out a $500,000 policy on each person to help cushion the financial blow to the household should one person pass away. The insurance payout could then be invested and drawn upon to help replace the deceased’s income.
Since insurance premiums for term life insurance are some of the lowest around, the additional savings can then be invested for long-term retirement or other goals, while still maintaining adequate insurance coverage.
Other insurance products such as whole life and variable life policies cost a substantial amount more than term. These types of policies use some of the excess premiums and invest them on the policy owner’s behalf. That means down the road they will have funds available through the policy, but the returns are often sub-par compared to a typical investment portfolio.
The cost of these other types of insurance products can often be 5-10x that of term, and many times offer less coverage in the event of a death. While there certainly are scenarios when these products make sense for individuals, it is very important to speak with a financial planner before signing up for one. The commissions on these other types of life insurance products are tremendous, so sales agents are very eager to get their clients into them.