Lurking in the background of just about every conversation we have here at IBUSA is the fundamental question asking…
“Is buying a Term Life Insurance Policy worth it?”
Term life insurance rates are very affordable, more so than most people realize. But what is the point of paying for term life if you don’t die during the term?
After all, it’s not like your family is going to “get anything” if you outlive your term. Which would mean that you would be paying into something for years and years and ultimately getting nothing in return!
This is why…
We wanted to take a moment and discuss whether or not purchasing a term life insurance policy is worth it. This way, you’ll be able to decide for yourself whether or not you want to spend the money it would take to put one in place for your family.
Questions that will be addressed in this article will include:
- What is term life insurance?
- What does it mean for a term life insurance policy to be Guaranteed Renewable?
- Why would someone want to buy a term life insurance policy?
- What can I do to improve my chances of purchasing the “right” life insurance policy?
So, without further ado, let’s dive right in?
What is term life insurance?
If we’re going to discuss whether or not it’s worth purchasing a term life insurance policy, it only makes sense for us to begin our discussion by quickly defining what a term life insurance policy is.
We need to be careful because there are a lot of different term life insurance policies available in the marketplace.
So, we’re going to define a Term Life Insurance Policy as a life insurance policy that will provide an insured with a death benefit for a number of years (10, 15, 20, 30, 35 or 40) for a fixed premium.
Which means that…
If you were to purchase a $250,000, 20-year term life insurance policy for $35.00 a month, you would be expected to pay $35.00 each month for the next 20 years. In exchange for this money, if you were to die, your beneficiary would receive a $250,000 death benefit.
The only catch is…
If you don’t die during that 20 year term period, your policy will end, and the insurance company would profit $8,400 for offering you coverage for the past 20 years ($35.00 multiplied by 240 months).
Pretty simple right?
It should be, but sometimes things get a bit complicated, especially when people start talking about a feature that is available with some term life insurance policies that is called Guaranteed Renewability Benefit.
What does it mean for a term life insurance policy to be Guaranteed Renewable?
Now, in our previous definition of what a term life insurance policy is, we discussed how in most cases, once a person’s “term” ends, that usually marks the end of coverage.
A 10-year term would last for ten years, and a 20-year term would last for 20 years. Pretty basic and straight forward.
But here is where…
Things can get a bit “muddled” because, some term life insurance companies do allow an individual to keep their life insurance going through the use of a Guaranteed Renewable feature.
A feature that…
Will allow an individual to keep their life insurance policy in place after their initial term life insurance policy has ended, without having to REAPPLY for coverage.
This last part is so important because let’s imagine for a moment that someone purchased a 30-year term life insurance policy when they’re 44 years old and then fast forward 30 years from then.
And in this example…
This health 44 year old ends up developing inoperable stage 4 pancreatic cancer at the age of 74 and is told that he only has 4 months to live. Now we here at IBUSA are never big fans of a doctor’s placing odds on how long one may live or whether or not they may recover from a “terminal” illness, but that’s not where we’re really going with this “scenario.”
We want to spend a moment thinking about how someone might feel if they have recently been told that they only have four months to live, but their $250,000 30 year term life insurance policy is about to expire in three days!
“Probably not so good!”
In this situation…
Having a life insurance policy that would allow someone to continue their policy month by month without having to “re-qualify” for coverage would be a huge benefit. So much so, that stories and/or scenarios like these are often used to help “sell” the idea of purchasing a term life insurance policy with a Guaranteed Renewable feature (which we here at IBUSA firmly believe in).
The only problem is…
If your life insurance agent only uses these “kinds” of examples explaining how a Guaranteed Renewable feature works, one could fail to see how “relying” on a feature like this could become quite expensive if not completely unaffordable for some, over time.
What usually happens at the end of one’s term life insurance policy is that an individual will be given three options. The first option will be to let their term life insurance policy end and not pursue their Guaranteed Renewable feature.
In cases like the life insurance policy will have served its purpose, and the client won’t have a need for their insurance anymore.
The second option…
Will be that the client may still need some insurance in place, but will elect to apply for a new life insurance policy instead of taking advantage of their Guaranteed Renewable feature.
This is because…
While a Guaranteed Renewable feature is nice, you’ll rarely have a life insurance agent mention what it will cost to keep your insurance going once the term has expired.
Sure, you can keep renewing your life insurance policy year after year, but at what price? And even if you are “OK” with how much it’s going to cost this year, what’s it going to cost next year? Or in five years from now?
Where it may have made complete sense for the person suffering from inoperable stage 4 colon cancer to agree to pay the Guaranteed Renewable “rate” for their insurance because their doctor told them they only have a few months to live. It may not make all that much sense for someone who does not see their ultimate end in sight!
In cases like these…
It will make more sense for the individual in question to apply for a new term life insurance policy so that they can lock in a new rate for the next 10, 15 or 20 years so that they don’t have to worry about the price of their insurance increasing over time.
Which leaves us…
With the third option people which is the most difficult option one can be in. Because in this situation, a person will still have a need for insurance, but will probably not be able to qualify for a new term life insurance policy.
As a result…
They will either need to go without life insurance or rely on their Guaranteed Renewable feature to keep their life insurance going. Which sounds pretty…
And unfortunately, this is a situation that happens all to often. For example, just think for a moment about all the different “kinds” of health issues that could arise in your mid 70’s that could prevent you from being able to qualify for term life insurance policy.
Health issues like:
Which is why we now want to take a moment and discuss why someone might want to purchase a term life insurance policy at all, seeing how there is a good chance that it may expire before your family ever receives a benefit from having it.
Why would someone want to buy a term life insurance policy?
To answer this question properly, we need to first understand that this isn’t a single question.
It’s actually two questions combined into one. With the first question being…
“Why would someone want to buy a LIFE INSURANCE POLICY?
And the second one being..
“Why would someone choose to purchase a TERM LIFE INSURANCE POLICY?
And since we have two separate questions here, let’s address each one individually so that you’ll have a better idea if purchasing ANY kind of life insurance is going to be “right” for you.
So, why would anyone want to buy a life insurance policy?
We’ll that’s an easy question to answer because people generally choose to purchase a life insurance policy to protect their loved ones or financial interests against a financial loss. A financial loss, that would occur upon one’s death. Now this loss can take on many forms such as:
- Lost income,
- Inability to pay for mortgage or college tuition,
- Defaulting on small business loans,
- Loss of alimony or child support payments,
So, one could reason that:
- If you’re not married,
- You don’t have any children dependent on you,
And if nobody would suffer financially from your death, then there’s a pretty good chance that you may not need to purchase a life insurance policy, especially if you have the cash on hand to pay for any final expenses or burial costs.
If you do have a spouse that is dependent upon your income, or you do have dependent children living in your home with you, or your business would suffer financially if you died, chances are you might need a life insurance policy.
One question that we like to ask that will often help someone who is on the “fence” when it comes to whether or not they think they may need ot purchase a life insurance policy is…
“If life insurance were free, would you want to have any?”
We think this is a good question because it forces people to think about who they might want to leave this “imaginary” life insurance policy. If a person can’t really think of anyone who might need it or could benefit from it, chances are they probably don’t need to purchase a life insurance policy.
If there are a few people in their lives who they help financially and know would be affected by their loss, we’ve now established that they may have a need, now it’s just a matter of determining if this “need” justifies what they might have to pay.
It’s also a good question…
Because it allows one to determine whether or not you see any “value” in owning a life insurance policy. After all, someone could knock on my door right now and offer me a box of kittens for FREE, it doesn’t mean that I would want to own them now does it (no offense to all of our cat lovers out there)!
It’s at this point that we can now “shift gears” and begin discussing why someone might want to purchase a TERM LIFE INSURANCE POLICY.
Why would someone choose to purchase a TERM LIFE INSURANCE POLICY?
Now there are several arguments about why someone might want to purchase a Term Life Insurance Policy vs. Whole life insurance.
Many of which make a lot of sense, however, we always get a bit “nervous” anytime a so called “expert” says that one should ALWAYS buy a Term Life Insurance policy and NEVER purchase a Whole Life insurance Policy
This is why…
We wrote an entirely separate article outlining some situations where purchasing a Whole Life Insurance Policy might be a good idea (see: Top 6 Reasons Why Some People Should Buy a Whole Life Insurance Policy).
That said, here in this article, we just want to focus on why most financial advisors will recommend a Term Life Insurance Policy over a Whole Life Insurance Policy.
Top 3 Reasons Why Term May Be Considered Better than Whole Life.
On average, a term life insurance policy is going to be about 1/3 the cost of a whole life insurance policy.
So, if you’re looking for the most affordable way of protecting your family’s financial future for the next 10, 20, or 30 years, a term life insurance policy will probably be your best bet!
2. Insurance needs change.
Over time, chances are your life insurance needs will “tend” to decline.
- Children will grow older and no longer be depending on you,
- Mortgages will get paid off,
- One day you’ll retire, and you won’t receive a “working wage”,
For this reason, many financial advisors will argue that since you may not need to own a large life insurance policy 30 or 40 years from now, why choose to purchase a more expensive whole life insurance policy that will provide coverage in those later years?
Wouldn’t a less expensive term life insurance policy provide the same coverage for your family when they really need it, for much less?
3. Opportunity costs.
Financial advisors also love to talk about “opportunity costs” as well. You see, each month that you pay for your more expensive whole life insurance policy is one more month you could have used that extra money to do something else with. And by something else with, we referring to investing.
Now we here at IBUSA…
Aren’t financial advisors and we certainly don’t know much about investing, all we’re doing here is providing you with “their” argument that the money spent on purchasing a Whole Life Insurance Policy would be better spent elsewhere.
What can I do to improve my chances at purchasing the “right” life insurance policy for me?
In our experiences here at IBUSA, we’ve found that the best approach in helping someone find the “best” life insurance policy for them is to first:
- Fully understand what an individual is trying to achieve by purchasing their life insurance policy.
- Are you looking to:
- Cover the cost of a mortgage?
- Replace lost wages?
- Protect a child or spouse?
- Or just cover one’s final expenses?
- Are you looking to:
- Then provide one with plenty of options to choose from so that you’re not limited to just one or two different options.
This is why…
We here at IBUSA choose to work with so many different life insurance companies so that when it comes time to help you decide “which” life insurance company is going to be the best for you, we don’t have to apply a…
“One Size Fits All” Approach
Instead, we can make dozens of different life insurance companies compete for your business.
So, what are you waiting for? Give us a call today and experience the IBUSA difference.