Tips and Traps of Term Insurance
Term insurance is often the least expensive form of life insurance as you are buying it for a term of time. There are no cash savings with term insurance. You are buying it with the hope that it will never pay out, as most term insurance policies end at age 75.
And most term policies never do pay out the insurance benefit.
With term insurance you can purchase the largest amount of coverage for the least amount of money. It's ideal for young families.
How Much To Buy?
Every person's situation is different but a ballpark rule of thumb is:
|Under 40||15 to 20 times|
|41 to 50||10 to 15 times|
|50 to 70||4 to 8 times|
Be careful when you are shopping for the cheapest insurance, because things are not always what they appear to be.
Let's look at a person age 45, purchasing $750,000 of term insurance. For illustration purposes lets assume the cost of the two policies were the following:
Term 10 costs $85 per month
Term 20 costs $160 per month
So which policy is cheapest?
Assuming you kept the policy until age 65, the cost for Term 10 would total a whopping $59,160. That's because the cost skyrocketed on the 10th anniversary.
Cost for Term 20 would total $38,400.
Term 20 is significantly cheaper over the life of the policy!
You see, although Term 10's initially starts off a lot less, when it reaches it's tenth anniversary the premium jumps up to a whopping $493 per month! Whereas the Term 20's premium remains at $160 month.
With Term 10, if you are still healthy on the tenth anniversary, you can buy a new Term 10 policy for probably a lot less than $493 per month. In this example, lets assume you found a new policy that costs $211 per month. And your total cost over the entire 20 years would be $35,520. Yes, a few dollars less then Term 20 but you are running a huge risk.
The risk that you are still healthy and insurable ten years after you initially bought.
You may not be healthy ten years down the road, and qualify for a new insurance policy. Your existing policy still has to insure you, but they charge you a whopping $493 per month to do so. And you're stuck with it if you want to be insured.
And if your health is making you uninsurable...well you probably do need to keep the insurance. But can you afford it? It becomes quite the dilemma.
Insist at looking at the cost over the entire life of the policy - not just the initial price.
Tim's insurance agent sold him a 10 year term policy. Upon the renewal anniversary the premium tripled. Tim was battling leukemia and couldn't qualify for new insurance. The exorbitant premiums placed a hardship on his family - over and above dealing with the cancer.
Insist on having a full printout of the cost of the insurance over the entire life of the policy. Then make your decision. Remember what is initially the cheapest isn't always the least expensive!