How Term Life Insurance Can Save Your Family

January 21, 2019

 

About 7 years ago, my son was born in an Albuquerque hospital, a city that never crossed my mind but landed me a terrific job working for an investment firm.  The excitement and nervousness of my son’s arrival that day delivered a new burden on my shoulders. At this moment, it became very clear that my responsibilities exceeded just my wife’s and mine.  

 

“How do I take care of this little guy?” It’s a natural question to ask but I wasn’t referring to Maslow’s hierarchy of needs.  

 

Food?

 

Shelter?

 

Clothing?

These needs were easily cared for, but I was thinking more along the lines of other responsibilities such as college, medical care, and life insurance.  The first two are easy to plan for, but no one likes to discuss the loss of life and what to do in the event of such drastic situations.

 

Discussing life insurance with clients always brings up negative emotions and sadly, many dismiss its purpose and need.  Life insurance can be very confusing when we listen to the different messages from so-called “experts” claiming which product you must purchase. 

 

It is no wonder why "life insurance sales have been on a steady decline for years", according to Patrick Lyons and Brian Demaster in their Harvard Business Review Article "How Life Insurers Can Bring Their Business into the 21st Century".

In this blog, we will explore the many different aspects of term life insurance and its importance.  

You will learn about:

  • Definition & Terms of Life Insurance

  • 4 Types of Term Life Insurance

  • Risk Factors

  • Characteristics of Term Life Insurance

  • Calculating Life Insurance Needs

  • Taxes

  • Do You Need Life Insurance?

  • Set Your Family Up for Success

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Definition & Terms of Life Insurance

 

Because we are only discussing Term Life Insurance in this blog article, it is important to understand that life insurance is either permanent or temporary.  

 

Term Life is considered temporary insurance, hence the name “term”, because it provides coverage for a designated period of time.  For example, term life insurance may provide coverage for 10 years, 20 years, or 30 years.

 

The death benefit is the amount paid as a result of an untimely death.  For example, if you purchased a $250,000 life insurance policy, the death benefit is $250,000.

 

Insured is a term describing who the policy covers.

 

 

4 Types of Term Life Insurance

 

There are 4 types of term insurance and each one should be reviewed carefully to determine which policy best fits your financial circumstance and household needs.

 

1.  Level Term - This type of term life means the coverage/death benefit will not change over the period of time you have this policy.  For instance, if you purchased a $100,000 policy for ten years, paying $30 a month, the $100,000 and $30 premium payment will not change during the ten-year period.

 

2.  Annual Renewable Term - The death benefit and coverage remain the same over the period of time; however, each year the premium gradually increases. For this example, we are assuming the same $100,000 death benefit for year 1 is $30 per month.  Next year, the premium increases to $35 per month and is based on the insured’s age.

 

This type of insurance isn’t recommended for long periods of time but rather a customer may be interested because according to Amy Danise of Nerdwallet.com, “he or she wants to cover only very short-term debts, or is between jobs and anticipates buying group life insurance through a future employer”.   

 

3.  Decreasing Term - The protection or coverage will decline each year.  For example, if you purchased the $100,000 coverage, the following year, the coverage may decline to $95,000.  

 

You might be thinking to yourself, “Why would anyone get this coverage?”.  It is a great question and the answer is simple. If you are financially secure, you probably don’t need a life insurance policy.  So if a family was completely debt-free, had their retirement and children’s tuition take care of, but may just $100,000 left on a mortgage with it being paid off in ten years, then a decreasing term is appropriate.  This insurance provides protection for the family until the mortgage is paid off.

 

4.  Increasing Policy - This policy has an increasing annual coverage. This is most common among Group Life Insurance and businesses because as business hire employers, their employers will earn more income over time.  This allows the policy to keep pace with the employees’ pay. It is protection for the company if you will.

 

 

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Risk Factors

 

Some companies will allow you to get a quick quote based on some health questions.  For instance, State Farm has an Instant Answer Term Insurance feature, that provides you a quote within a few minutes of answering some basic questions.  You will notice that most of their Sample Rates are based on young females. This is because rates are significantly lower for young females compared to males so just recognize your rate is likely to be higher than what is presented.

 

I recommend you steer away from quick quotes and have the insurance company pay for the lab testing because you can get a more appropriate and accurate quote and the insurance company won’t have any leeway to decline paying coverage in the future in the event of a death and some unknown loopholes.

 

Because you may need to undergo a basic medical examination such as blood lab draw and answer important health questions, there is a risk of your health information being stolen by online hackers misplaced files.

 

The public saw this come to fruition in 2007 when celebrity George Clooney’s medical records weren’t kept private leading to “the hospital suspending 27 employees for a month without pay for violating Health Insurance Portability and Accountability Act (HIPAA)"

 

You are protected by the Healthcare Insurance Portability and Accountability Act of 1996, also known as HIPAA, which is designed to protect the health information of clients but ask your insurance agent what measures do the company take to secure your protection of information.

 

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Agents usually try to collect only what is necessary to complete the policy but most are required by their company’s policy to have a password protected folder (encrypted) to secure the information.  This will help to reduce the exposure of your health information.

 

Ask your agent how he or she protects your information.  Is it company policy to lock the files in a storage room or a desk?   If he or she emails you with information pertaining to your health records or medical information, the email must be encrypted.  

 

Should your information be disclosed by the agent to another party, he or she cannot disclose unless you have signed a Non-Disclosure Agreement.   

 

 

Characteristics of Term Life Insurance

 

One of the great benefits of having term life insurance is this type is this type of insurance is considered to be “pure protection” meaning there is no savings account or cash value built into its coverage.  It is a benefit because you are getting true insurance coverage and the death benefit will be paid upon an untimely death.

 

A key characteristic of Term is its Death Benefit.  This is the payable portion to a beneficiary upon the insured passing away.  “Most life insurance policies pay out the death benefit as a lump sum”. 

 

There is no cash value in Term Life Insurance, unlike Whole Life Insurance.

 

You must determine how long you will need the policy.  This is called the designated period or length. We discuss how to calculate how much need below but in the mean time, let’s discuss what happens when the policy expires.

 

While a policy with term contract expires, you have two options.  A policyholder can “renew” or “convert”.

 

A Renewable policy allows the policyholder to add more time to the term contract.  For instance, if you purchased a 20-year Term Life, in 20 years, you can renew it.

 

With a Convertible policy, at the end of the 20 year period, you can convert it to a permanent policy, also referred to as Whole Life Insurance.  

 

Both of these renewals will be based on your age at the time of renewal or conversion.  This could possibly lead you to paying higher premiums down the road when it is time to convert or renew a term policy.  That is the disadvantage; however, you will not be required to provide proof of insurability which is an advantage because you cannot be denied for having health issues.

 

 

Calculating Life Insurance Needs

 

There is a misconception that you should only buy enough life insurance to cover the funeral expenses and some medical bills.  There are some majors concerns with this proposal. The first is the amount of additional financial stress one puts on a family as they already have to battle the grieving period and arrangements of the funeral.  

 

Next, this leaves the family in a terrible financial situation.  Not only must they fear having to move out of their home if the passing loved one was the primary income earner, but now the income has drastically reduced and the other spouse is expected to pick up the tab.

 

To properly calculate how much insurance you will need, you must consider the following factors:

  1. Estimate funeral costs

  2. Amount of debt to pay off (mortgage, loans, credit cards)

  3. Do you want to have your children’s tuition paid for?

  4. Do you want to leave retirement money for your spouse?

Total these numbers up and this is the coverage or death benefit you should strive to purchase.

 

If you are single and young with no debt, then locking in a low monthly premium for 20-to-30 years will greatly benefit you and your future spouse.  As you know, the older you get, the higher the premiums will be so locking in a lower rate today is highly beneficial.

 

There are tools and resources available on the internet to help you navigate how much you should buy.  I recommend you visiting InsuranceScored.com

 

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Taxes

 

When it comes to owning a term life policy, should the insured pass away, the death benefit paid to the beneficiary is not taxable.  Therefore, it is exempt from federal taxation.  In some cases, this benefit can be included in the estate but ask your insurance agent what local state laws may apply.  

 

Do I Need Life Insurance?

 

Having life insurance built into your financial planning is vital to the protection of your household. Let us think of an unfortunate circumstance occurring in the family like we did above. The primary income earner passes and now the remaining family members will be forced to adjust their standard of living.  This usually means the family will be required to sell their home moving into a smaller house and the widow having to get a job or in some instances a new job.

 

Life insurance delivers a benefit to reduce such stressors.  If the family had a $750,000 death benefit in our scenario above, the widow could use that money to pay off the mortgage and any remaining debt, put aside money for the children’s college tuition, and have money to put away for his or her future retirement.  

 

You can quickly see the importance of having insurance in place because not only does it drastically reduce the stressors and life-altering changes a family must make, but it allows the family a better chance for financial success.

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Do I Need Life Insurance if I Am Single?

 

Depending on who you ask, you may receive the answer to this question as "Yes" or "No".  The true answer boils down to who is relying on your income after your passing?  While we mentioned Life Insurance is more affordable at a younger age, it is one reason to consider getting it.

 

If you desire getting married or having children one day, then locking in a low rate is beneficial.  "If you died, who would pay for your funeral?  Even a simple ceremony could be costly.  If you don't have life insurance, someone else may have to foot these bills.", claims AXA

 

Set your family up for success

 

Putting your family’s interest with proper financial planning is the primary role of any household leader.  Life insurance is at a 50-year low according to LIMRA, and much of this is because of lack in planning for their future.  Set your family up to financially succeed so in the event you or your loved one passes, money will be the last thing to worry and stress about.

 

 

 

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