Why Term Life Insurance?

On occasion I meet someone who says something like "I don't want term life insurance, I only want whole life." When I ask why they say something along the lines of "That's what my mother (or father) bought." In other words, they don't really know why they avoid term except that their parents probably wouldn't approve.

On the other hand, I run into the same issue with whole or universal life. "I heard a guy on the radio say I shouldn't buy it." There's nothing better than taking generic advice from someone who doesn't know about you, your situation or your budget. Instead of not wanting one or the other, let's take a minute to discuss term life insurance. We can cover permanent coverage later.

What do you get when you purchase term life coverage? You get a death benefit that goes to your beneficiary. That's pretty much all there is, unless you happen to find a policy with a few "living benefits", like an accelerated death benefit. So what are the pros and cons of term coverage?

The first "pro" is that it's a lot less expensive. As mentioned earlier, you're really only paying for a death benefit. No cash value or borrowing against it. 

One "con" is that only about 1-2% of term policies actually pay a death claim. Most people outlive their coverage. That number can be skewed by the fact that there are all kinds of term policies out there, ranging from 1 to 45 years, so don't get too distraught.

Another pro is that most term policies can be converted to something permanent down the road. Say you have a 20-year term policy and you have a financial windfall. With that money you manage to pay off your house early and put money aside for retirement or kids' education costs. Now you need much less coverage, so you can convert the policy to something permanent without medical testing again. That's nice.

The key is to understand that term life is great if you can identify a specific need and time frame. If you know that your house will be paid off and the kids will be out of the house in 20 years, then it makes sense to get a 20-year term.

Something else to consider is the "mix and match" of term and permanent. Given that you're probably going to outlive your term policy, you may as well invest a little into something permanent while you're young and healthy. A small whole life or guaranteed universal life policy can be put in place that will take of your final expense needs down the road.

If you have questions about term and permanent insurance, drop us a note or look us up on the web.

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. Please subscribe to this blog!