Term life insurance, by the simplest definition, is a type of life insurance policy that has a set term during which benefits will be paid out to named beneficiaries in the event of your death. The term is specified at the outset and you could select a term of 10, 15, or 20 years, just for example. When the term is reached, your policy will expire and your benefits will be lost, supposing you’re still alive at that point. If you think about it, term life insurance might sound like a waste of money, especially when compared with permanent (whole or universal) life insurance policies that allow you to continue paying a set fee for the duration of your life. In this case, it won’t matter when you die – your loved ones will receive benefits (supposing you never lapse in your payments). So why would you choose term life insurance? What do you stand to gain?
There are a couple of good reasons why you might elect to purchase a term life policy instead of a more permanent form of coverage. For one thing, term life insurance policies are often the less expensive option. Granted, the tables turn over time. Taking out a term policy while you’re young and healthy will result in lower premiums for the same coverage of a whole life policy, all things being equal. But down the road, when your term expires and you find yourself negotiating for a new policy, the price for premiums will have increased dramatically because you are now 10 or 20 years older. Whether you want another term policy or a permanent life policy at that point, you’re going to pay more than you would have when you were younger. This again begs the question: why choose a term policy?
The reason why most people select this type of coverage, especially when they’re young, is that they can’t afford a permanent life policy but still want some form of coverage for a worst case scenario (i.e. untimely demise). If you’re a twenty-something, just out of college, saddled with student loan debt, and looking to start a career, get married, buy a house, and have some kids, chances are you don’t have a lot of disposable income. Between paying rent and squirreling away a bit of cash every month for a down payment on a house (while likely working at an entry-level job), you may not have two nickels to rub together, much less devote to life insurance that you probably don’t need. After all, you’re in the lowest-risk age group for death.
That said, you never know what’s around the corner. And whether you have a partner, young kids, or even parents, it will fall to your loved ones to pay for your funeral expenses, at the very least. And a spouse will be on the hook for debt accrued during the marriage, including a mortgage, credit card debt, and so on. You want to make sure your loved ones are financially cared for in your absence. And if you can’t afford a permanent policy now, you may be able to afford a short-term policy in the interim. By the time the term is up, you will have advanced in your career to the point where you can afford a better policy. And with a short term policy, you’ll still be young enough to get a decent rate. By covering the gap between the life you have and the life you have planned, term life insurance can come in handy, just in case you don’t make it to the second half of that scenario.
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