I love talking about term life insurance
because it is the point of so many debates. Actually, the debates come from the
life insurance companies and not from the independent experts working with life
insurance. It’s sad to say but when talking about building a financial
protection in case of a death, the only way to go for the very vast majority of
families is to use the term life insurance. Here’s why!
Let’s take a look at how it works first. Maybe
you have already read What Is Life
Insurance For Middle Income Families? That means you sure know that you need
life insurance if you are living with someone you share financial responsibilities
together, having kids at home and paying debts and a mortgage. That’s the starting point.
Knowing that, you must have already realized
that your responsibilities have a limited time frame: your mortgage goes down
as years go by, your kids are slowly but surely growing and will be getting out
of your house anytime soon and you are getting closer to retirement (meaning
you make an effort to put money aside, right?). So, generally speaking, from 25-30
you should have your biggest protection (exception made if you have more babies
to come or you buy a bigger house later on) and it slowly reduces to get to a
low point between 60 to 70.
Keep this in mind:
25-30 years-old: no money accumulated but big
financial responsibilities — you need life insurance in case of a disaster
60-70 years-old: financial responsibilities are
low and want to retire — you need money to live from (no one pays for grocery
bags with life insurance!)
Term life insurance is the perfect tools to
match this need throughout the years without having to renegotiate or
constantly modify your current policy.
You can build your policy with as many riders
as you want, starting from 10 year term to 15-20-25-30-35 year term.
Basically you begin this way. Pick up a term long
enough to bring you at retirement. For example, if you are 35 years-old, pick a
30 or 35 year term, making sure that regardless of what happens throughout the
years, you won’t have to pay a higher premium on your policy because you won’t
have to go through any renewal.
Whole life agents are
constantly stressing the point that with term life insurance you will always
pay a bigger premium at your renewal year. This is because they are used to
know term life as being a 10 year term! Using a 35 year term, you won’t have to
go through the frustration of a higher premium.
So now that you have a base plan, you look at
your remaining financial responsibilities:
old are your children
long will I have to pay for education
is the balance on the mortgage and how long it remains to pay it off
long will I take to pay off the other debts (personal loans, lines of credit, credit
cards, student loans, car loans, furniture bought on the spot that you now regret,
most importantly, what monthly amount would your spouse need to maintain the
quality of life as it is right now and
for how many years (knowing that you won’t be there to bring money at the table
You now match let’s say, your child’s
education, with the appropriate term rider. If your child is 10 years-old and
you know that you will probably pay education costs until he is 23 years-old,
you use a 15 year term to cover this liability. You do this with each and every
debt you have and at the end you sum up each term rider to know what would be
your perfect protection.
For our example, you are 35, you are married
and have one 10 year-old child, 143,000$ remaining on the 15 year mortgage and 25,000$
of other debts that will be paid off in the next 10 years. You also want to
leave about 1500$/month to your wife for the next 15 years.
35 year term… 50,000$ (income replacement)
20 year term… 153,000$ (income replacement)
15 year term… 203,000$ (mortgage and education
10 year term… 25,000$ (short term debts)
For a grand total of 431,000$. For a 35 year-old
man, you should pay between 55$ and 65$ a month for this protection! You may want
to add a child rider for 5,000$ or 10,000$ and combine your policy with the one
of your spouse, you’ll pay even less.
As the years go by and your responsibilities
goes down, instead of renewing your term rider, you are actually cancelling
them. So you are still correctly protected and guess what happens when you take
off a rider? Your monthly premium goes down as well! IT COSTS LESS! Isn’t that
great for life insurance?
Okay, let’s challenge that now… If you were to
die at any age, would your family be properly protected? In 10 years? 17 years?
31 years? The answer is yes! Try it, you’ll see.
An important point has to come with term life
insurance. In the short term, in case you die, your family will financially survive
to that. But in the long run, you still have to replace your insurance with
money to retire with! That’s why, if you take a look at your current policy and
you found out that you have a whole life policy with cash surrender values in
it, you may want to consider cancelling the whole life thing to submit a term
life policy. First, by taking your cash values out of the policy, you will now
be able to manage it according to your needs, and you will also notice that you
drastically pay lower for term life than whole life. So what would be the next
intelligent thing to do?!? Invest the monthly amount you now save into a tax differed
annuity. By saving let’s say 40$ on your policy and 40$ on your spouse’s, this
80$ could sum up to 98,000$ at 65 years-old, using a 7% rate of return. Not bad
for a life insurance, hein?