Few people like to think of the inevitable. Everyone will die, and someone will need to take care of their final arrangements and expenses. This is where life insurance should come into play. However, only about 60% of Americans have any form of life insurance. The best time to purchase insurance is when you’re young and healthy. As you get older and your health starts to decline, you’ll find that the cost of life insurance will increase. Additionally, no company may want to ensure your life and provide you with a death benefit.
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Types of Life Insurance
There are two major types of life insurance. The first is whole life, and the second is term life. The whole life is intended to last for the entirety of the insured’s life. The premiums are set, and they will not change as long as the policy remains in effect. The cost of whole life is generally higher than the cost of a term policy. A whole life policy will usually build cash value over time. Part of the insured’s premiums goes toward providing a death benefit. The rest will go into a forced savings vehicle that builds value over time.
The second option is term life insurance. This option makes up about 40% of the new policies written. Term life insurance, as its name might indicate, remains in effect for a limited term. Once the term ends, a person would need to purchase another policy to maintain life insurance.
How Long Is Term Insurance In Effect?
There are several different terms attached to term life insurance. Some policies will last five years. Others will run for 30. Most other policies come with terms in multiples of five years. The policy will remain in effect for as long as a policyholder continues to pay the premium. If you purchase a policy and then miss paying the premium for 60 days, you’ll lose the death benefit.
How Much Insurance?
The biggest benefit of a term insurance policy is the death benefit. If you’re looking at simply providing for your burial or cremation and any final medical expenses, you can take out a small policy of $25,000 or $50,000. If you’re young, the policy will likely cost pennies a day, and you’ll provide some peace of mind for your extended family.
On the other hand, you’ll want to purchase more insurance if you have dependents that need support should you pass away. Some financial planners recommend having enough insurance to replace 10 times your annual income to take care of your family. This would give your spouse time to grieve without working and still provide some income to take care of your children. With a salary of $50,000, you’d need to buy $500,000 of term insurance if you decide to follow this general rule.
It can make sense to analyze your financial situation every few years to see what your needs are. For example, if your children have moved out and become independent, you’ll likely need less insurance. On the other hand, your family might have grown. In that instance, you’d want to buy more insurance. In the best-case scenario, you’d have a net worth of a million or more. At that point, life insurance might not be a necessity at all.
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Relative Cost
Because term insurance expires at the end of the term, you’re less likely to collect on the death benefit. Insurance companies charge less as a result. The cost of a term policy will usually be much less than the cost of a whole life policy with an equivalent death benefit. This means that you can buy more insurance with the same financial outlay. A term policy would pay a death benefit only. No cash value will accumulate over time, and this contributes to the lower cost of term insurance.
Overall, the cost of term insurance is tied to your age and health when you apply for the policy. As you get older and health issues like high cholesterol or high blood pressure start to pop up, insurance costs will grow. Additionally, policies with a longer-term will have higher premiums. If you’re 25 years old, the likelihood that you’ll die in the next five years is very low. On the other hand, the likelihood that you’ll die in the next 30 years is much higher. Therefore, the longer policy will cost more in premiums. If you hold the 30-year policy until you’re 55, the cost of a similar policy will go up. You’d either have to drop the value of the death benefit or increase your budget for insurance. Actuarial tables give the insurance company a good idea of how much to charge policyholders while still making a profit.
What Happens After A Policy Ends?
Before the policy ends, the insurance company will present you with options. You might be able to transfer your term insurance policy into a whole life policy. This will come with much higher fees. The insurance company might also let you know what a similar policy will cost. It’s probably a good idea to shop around at this point. You might be able to save some money in the process. It might seem like a small amount, but compounded over a 10-year or a 20-year period, the savings will add up.
Purchasing life insurance is a good choice for most people. This becomes even more important for those who have a family to support. Term insurance costs much less than whole life, but it comes with the risk of losing your ability to get a new policy before taking out a new one. However, if you price both options and invest the difference in the premiums, you could build up a substantial amount of wealth over time.