BE HONEST, IF YOU’RE CONFUSED AS OTHERS ON YOUR LIFE INSURANCE OPTIONS — YOU’RE IN THE RIGHT PLACE!
I have a confession to make. I assume way too much when I talk with people about their life insurance. I’m immersed in insurance every day — rates, carriers, underwriting, new products, product updates etc. etc. I love insurance and I enjoy the personal interaction with my clients and advocating for their loved ones when and if the bottom drops out of life. So many times I make the mistake of assuming that people have a basic understanding when comes to their life insurance and their coverage needs. But one thing I’ve learned is that people will not buy what they don’t understand. I’m convinced that many people do not own life insurance because they just don’t know much about it. So, for everyone who has asked me in the past few months, “what is term life insurance,” — this is for you! My goal is that you understand a little bit more about what life insurance is, specifically term life insurance so that you’re able to make good decisions with your financial planning.
term life in·sur·ance
life insurance that pays a benefit in the event of the death of the insured during a specified term.
What is Term Life Insurance
There are two and only two types of life insurance. (For those of you who’ve shopped for life insurance before, you just guffawed) I’m being serious though. There are only two types of life insurance: term life insurance and permanent life insurance. Now, there are numerous types of permanent insurance to be sure. But for our discussion, just two. For this piece, we’re focusing on the first and will come back around and talk permanent insurance some other day.
Term is temporary life insurance. To use the definition above, it pays a benefit in the event of death during a specified period of time. That specified period of time is called a term, hence, term life insurance. For example, the death benefit will pay out in the event the policyholder passes away during the specified period of coverage. To put it in other words, the term in term life insurance is the duration of the coverage. 10, 15, 20, 25, and 30 are all common duration of coverage in term life insurance.
History of Life Insurance
I’m going to get all insurance dorky on you for a moment but stay with me. Question: how old do you think life insurance is? Believe it or not, the first examples of life insurance can be found circa 100 B.C.! The Roman legions created burial clubs that provided for the burial of common members. Having a proper burial was culturally important to the Romans, so much so that even the lowliest of Romans were concerned with having a funeral done right. Money that was left, over or in excess of the funeral, was given as a stipend to the soldier’s family.
The modern concept of life insurance started in 1688 in Great Britain with Lloyds of London. Lloyds was actually a coffee house and meeting place for ship captains and sailors. Lloyds eventually branched out and provided life insurance for mariners called, marine insurance.
“You don’t buy life insurance because you are going to die, but because those you love are going to live.” – Unknown author.
What Term Life Insurance Does Well
So let’s get into the meat of this discussion. People buy term life insurance for a number of reasons, but the number one reason people buy is that term life insurance is the most affordable type of coverage available. You can purchase large quantities of term insurance for a very little amount of money. All of you have probably seen the, “online, application-mill,” life insurance agencies marketing large amounts of coverage for absurdly low premiums. I just saw this one this morning: “Jay, age 40, $500,000, 10 year term for less than $25 per month.” Here’s the deal, it’s all true! If “Jay” was a healthy guy, $25 per month would actually be expensive as there are plenty of A+ rated carriers that could get that premium down to $17 per month! Now of course you’re seeing all the best case scenarios. If Jay was moderately healthy, his premium would be $23 per month. Worst case scenario, Jay’s premium would be $36 per month if his health was just average. Question: how much are you paying for your cell phone bill every month? I’m currently paying $60 per month. $45 per month is supposedly the national average. The point is that you can buy a lot of insurance for far less than you’re paying on your monthly cellphone bill.
“I called an insurance company to get a quote. They gave me one of Oscar Wilde’s best.” – Jarod Kintz
Beyond the affordability of term life insurance premiums, people buy term insurance because it’s very flexible in nature. Being able to buy your insurance in 10, 20, and 30 year duration is a great way to do financial planning. Just bought a home with a thirty year mortgage? Great, you’re going to need at least thirty years of coverage. Just had a child? Then you should plan on your child needing at least 25 years of your income (that number is going up steadily…) Business owner looking to retire in ten years? No problem as you can load up on a good 10 year term life insurance policy. See what I mean? People love flexibility.
Probably the third most likely reason you’re buying term life insurance is that you can buy a lot of it. That’s important because whether or not you realize it, you more than likely need lots of it. If you’re a person with a spouse, two point two children, owning a home with a white picket fence, cars and credit card bills— you need lots of insurance. Your employer provided, $50,000 worth of coverage isn’t going to cut it. So term life insurance is a valuable tool for you at periods in your life when you need more of it.
Drawbacks to Term Life Insurance
If anyone disagrees with anything I say, it will be on term’s drawbacks. If you talk to ten different agents, you’re likely to get ten different opinions on term’s downside. But at the moment, you’re reading my article and not theirs so think critically and form your opinions accordingly. In my experience, the number one reason why some people do not like term life insurance is that it is not permanent. It just rubs some people wrong to pay for something for twenty to thirty years and not own something. Who wants to pay for anything for that long and watch it expire? So because of the temporary nature of term life insurance, many people will describe it as, “renting” your life insurance.
The second downside to term coverage is that the older you get, the more expensive the insurance becomes. This is because the closer you get to your life expectancy, the more the insurance company is going to charge you for the coverage. It’s extremely affordable when you’re young and healthy, but as you age those premiums will grow exponentially as you grow close to retirement. For example. If you have term insurance coverage currently and you know where your policy booklet is, take a moment and look at the annual premium after your term expires. If you’re like many, you haven’t seen your policy since the last couple of times you’ve moved. So I ran a quick illustration to illustrate what I’m talking about. The first example to the right is an average policy table. It shows the annual premium for the amount of coverage through the duration of a 20 year term.
Again, this is a good way to plan as you know exactly what your premiums will run for a set period of time. Now, look at the second example on the right. This is the 21st year after your 20 year term has expired. You can still keep the insurance but you’re out of your contract now and the insurance company charges you a premium commensurate with your age. Talk about an exponential jump right? If you decided to keep this policy for a few more years, one year’s premiums in the 21st year would cost you more than the first twenty years combined.
“The best-laid plans of mice and men often go awry.” To a Mouse by Robert Burns
Now, I know what some of you are thinking. You’re thinking, but I’m not going to need much term coverage when I’m, “fill in the blank age.” Is your crystal ball that good? I spoke with someone yesterday who was 64 and had just purchased a new home. The wife was terrified that she was going to be stuck with $200,000 of debt if something happened to her husband. My point being is that life seldom goes the way you plan. Few people think they’ll be paying a mortgage in their 60s, much less their 50s. But statistically, you will. So buying that 20 year term policy in 20s is going to have to be rewritten in your mid 40s when you’re older and probably not as healthy as you were.
Do I Need Term Life Insurance?
Of course you do. (I make money when people buy life insurance — what did you expect me to say?) I’m constantly made fun of by other agents. In the world of life insurance, I’m what’s known as a, “term-ite.” I sell a great deal of term insurance. You may not realize it, but when you consider your life insurance, you’re doing financial planning. As you plan, term life insurance needs to be considered in your financial planning for all the reasons that we mentioned.
If you’re reading this (kudos for making it this far!) and there is someone in your life that depends on your income be they your children, spouse or even your aged parents and you currently have no life insurance or if the only amount of coverage you have is what you’re employer is giving you; just. get. something. ANY amount of coverage can soften the blow to your dependents. I can name at least three times recently where I’ve seen people on Facebook need a GofundMe campaign to put together enough money just to bury them. Heaven help the family that is left behind. If you’re this person, term life insurance is a great place to get started.
If you have any questions at all or interested to see what term life insurance would look like for your planning needs, don’t hesitate to shoot me an email at: firstname.lastname@example.org or call/text me at: (205) 578-2097. I’ll never make millions selling life insurance as I hate pestering people -so don’t be afraid to chat with me.