Term life insurance a short term solution
The first discussion into the many forms of life insurance should naturally focus on the most well-known version. Term. This type of insurance is exactly as it sounds and is good for a specified term. Most commonly 10 to 20 years and more recently, 30 year policies are being offered, depending upon age at issue. Term is insurance in its purest form. Actuarial tables are compiled using data on life expectancy to determine the price based upon your age and health when you apply for a policy.
The good news about term is that it is quite affordable as competition among the major carriers is very stiff and is actually getting cheaper as medical science continues to extend our life expectancies. If you are enjoying the same level of health when you took out a policy several years ago, it would be wise to consult an independent agent to shop new coverage, as you can most likely save a few dollars or buy more face amount for the same expenditure and years of coverage.
Now for the caveat. As it good as this sounds, term is not the best buy if you are seeking coverage for the long term as if you don’t pass away during the initial term of your policy, continuing the policy will become very cost prohibitive. And your options for obtaining a new policy can be severely limited or even eliminated due to age and or health conditions. Let’s face it folks, we are all aging and with that comes the natural progression of health concerns. Some of the better term policies have conversion options to a permanent plan at your original underwriting classification and this is a valuable feature. If you originally received say a preferred rating, you would be able to convert to a permanent plan at that same preferred rating. The drawbacks to this is that you are just that much older and at the issuing company’s mercy to dictate which permanent plan you will be allowed to convert to. This can be — and often is — their most expensive permanent plan.
I personally view term insurance as a short term fix to cover real and immediate needs. A common scenario may be a young couple with children who are just starting out and have many financial obligations and somewhat meager incomes. A good quality term policy will fit their needs nicely as if the unforeseen should happen, the insurance company will provide the money needed to satisfy debts and obligations and guarantee that the family can continue on without the added burden of struggling financially.
Another use would be to cover debt. But this is a bit of a fallacy as with most folks; we take on debt, pay it off, and do it all over again…often at continually higher levels. Therefore a term policy often resembles a small and temporary patch for growing needs in this situation.
If there is sufficient cash flow to support a more permanent plan of insurance, that is always the best course of action. It is also the most cost efficient use of your premium dollars as you will end up spending less over the years with a permanent plan, and set up properly, you can be assured your beneficiaries (heirs) will receive the highly leveraged and tax free dollars from your policy. With a term policy, for reasons previously mentioned, this far too often is not the case. Then the only beneficiary is the insurance company as they have kept all of your premiums and paid out nothing. Definitely something to consider when choosing the best plan for your family.
Dennis Foster has been helping families with financial and estate planning needs for over 20 years. He welcomes comments and questions and can be reached at 605-887-7069 or firstname.lastname@example.org.