Volume 47, Issue 10
"If your life insurance needs are temporary, then term insurance is likely the most appropriate vehicle," writes Jeff Witz, CFP.
I recently got married and my spouse and I were advised to purchase term life insurance. Is life insurance really worth the cost?
Term life insurance can be a useful tool to ensure that some or all of your family’s financial goals can still be met if you or your spouse was to die prematurely. For example, most people who own a home with a mortgage should consider a policy that equals the length of the mortgage. This guarantees that the balance is paid off, so the surviving spouse or family members are not left trying to pay it off unexpectedly. Other common goals include guaranteeing children’s college educations will be paid for or that the spouse can still maintain a certain standard of living.
The above examples usually necessitate temporary life insurance because there is a specific amount of time a person needs to be covered. A mortgage may require coverage that lasts 15, 20, or 30 years. Once the mortgage is paid off, the need to insure against this debt goes away. The same idea applies to when your children’s college education is paid off. Once they are done with college, your need to cover that expense with insurance disappears.
Also by Jeff Witz, CFP: Setting up a trust confers several financial advantages
Coverage to guarantee a spouse’s lifestyle may only be necessary until you reach your planned retirement date. By the time you retire, your spouse’s standard of living is guaranteed if you properly saved and planned.
If your life insurance needs are temporary, then term insurance is likely the most appropriate vehicle. Term insurance has no cash value or savings component attached to it, meaning that if you don’t use it, you won’t get any of your premiums back. However, because of this, these policies tend to be significantly less expensive than a whole life or variable product. Quite simply, you pay your premium, and if you die during that policy year, the death benefit is paid to your beneficiary.
Next:"The design of the policy will vary by need"The design of the policy will vary by need. For example, decreasing term insurance has a level premium, but a decreasing death benefit. It is generally used in conjunction with financial obligations that decrease over time, such as mortgages or other types of amortized loans.
Annual renewable term insurance has a yearly increasing premium, which increases with the higher mortality cost associated with being a year older, and a year closer to your expected mortality age. It is primarily used for financial obligations that remain constant for a relatively short period of time.
Level premium term insurance, on the other hand, offers a level premium payment amount over a fixed number of years, typically 10, 15, 20, or 30 years. This would be appropriate for needs that are finite in length, such as ensuring coverage until a young child has completed college, becoming self-insured through an increased net worth, or reaching retirement age with sufficient retirement income to meet your needs.
Other provisions, known as riders, can be added to certain policies for an additional cost. The waiver of premium rider allows you to stop making premium payments if you become disabled and are unable to earn an income. The accidental death rider obligates the insurance company to pay out double or, in some cases, triple the stated death benefit if the insured dies in an accident. An accelerated death benefit rider allows you to receive a portion of your own death benefit while you are alive if you have a major medical condition that is expected to lead to death within a short period of time.
Overall, term life insurance can be worth the expense when it comes to making sure certain financial obligations are met. The features of these policies will vary. We recommend speaking with your financial adviser about which policies and features would be most effective for you.
What is the typical process for getting approved for a term insurance policy?
Most companies require you to complete an application. In this application, you will sign a HIPAA release form. This will give the insurance company permission to request medical records from your physicians. Most companies will examine 5-10 years of past medical records. Additionally, depending on the size of the policy, they may require a paramedical exam. This typically includes collecting blood and urine samples.
Once all the information has been gathered, an underwriter will determine whether you are approved and in which health class you are approved.
The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.