From a pure income replacement point of view, perhaps basic term life insurance should be called death insurance. It isn’t because people do not like to think of their own mortality.
Like all insurance, you pay a monthly or annual premium for life insurance. In exchange, the insurance company pays you – or in the case of life insurance, your beneficiary – a more substantial financial benefit than the price you paid for the coverage.
Insurance, in general, is ideally used and designed to cover catastrophic losses – the significant financial losses that would financially hurt or even cripple you or your loved ones. Life insurance compesates for the loss of that person’s ability to earn an income because they are no longer with us. The loss of ability to earn an income because of a disability is different and should be covered by disability insurance.
Do you have a partner, children or other family member or business partners who rely on your financial support? Then having enough basic life insurance to cover off the unexpected loss of their source of financial support is often the best way to be prepared. Using standard term life insurance to cover these types of short-term needs can be much less expensive than most people think.
The best part about term life insurance is that you can purchase a significant amount of coverage for relatively very little money. The downside is that the insurance is going to cost more as you age and the term period expires. The premium increase might not be an issue if the need for protection declines over time because the obligation no longer exists, or if you have saved enough in your investments where you are now basically “self-insured.”
How much insurance you should have depends on your financial obligations. If a 30-year-old earns $60,000 a year, he or she has the ability to earn more than $2 million over 35 years, before accounting for inflation and raises. However, if they have a spouse and children to support, along with some debt obligations, they could easily either require more then $2 million worth of insurance to meet those financial obligations or less, depending on their economic situation. There are several easy-to-use online calculators to determine life insurance needs.
A $2 million, 10-year term policy on a 30-year-old could cost around $60 to $100 a month, and could ensure survivors are well looked after.
But as we age term insurance is going to get more expensive, and other types of insurance would be better used to cover a long-term income replacement need. A $2 million, 10-year term policy for a 50-year-old, at a cost of around $200 to $300 a month, is still very affordable.
Think of term insurance as the “if you die prematurely” option. It allows the most amount of coverage with the least amount of cost for a select period of time. Most term insurance plans give you some sort of option to convert to a permanent plan, should your needs change.
There are a lot of other uses for life insurance in a personal financial plan. Besides income replacement and debt repayment, insurance is good for items such as wealth accumulation; wealth preservation (tax planning; success tax coverage, charitable donations); retirement income; and many other uses which we will explore in upcoming columns.
Bill Green is an hourly financial and estate planner, public speaker and author of The Success Tax Shuffle. Bill has more than 26 years of experience in the financial services industry.
Bill is a Troy Media Thought Leader. Why aren’t you?
The views, opinions and positions expressed by columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.
