Should I Buy Term Life Insurance?

When I talk with clients about the differences in term and permanent life insurance I get a wide array of opinions. While most prefer term coverage because it is much cheaper, others would rather "lock in" on a price with some sort of permanent coverage. 

Actually, they can both do well if structured properly, while at the same time, stay in a budget. The biggest problem is that many people don't see the value of their coverage and will drop the policy when financial strains appear. Ironically, this is the worst time to drop a life insurance policy that may only be costing less than $50 month. (Same folks who will insure their phone but not themselves.)

According to Term Life Online, only about 1% of term policies actually pay a death claim. They say that this is because most people outlive their policy or they let it lapse before the term has expired. And many are unaware that there is a provision in most term policies that will allow a conversion to a permanent plan, which is what they will need as they get older. 

 

I once worked with an agent who had been selling life insurance for much longer than I, and he loved to explain that a 10-year term life insurance policy was a "sucker bet". In his estimation, the odds of someone dying in the first 5 years of a policy after a paramed exam were astronomically low, so the person purchasing this policy was really insuring the second 5 years only. Sucker bet.

Of course, there are people who need a 10-year policy. I can say that almost all of these were because they needed to secure a loan of some sort. In that case, it's a great fit. A better strategy for most of us is to find a term that will carry us out as far as possible, or to "ladder" policies. I touched on this concept previously and highly recommend you consider it when structuring your life insurance needs. 

Remember that term can be great for your needs during your working years, as you can buy a lot of coverage for not much money, but you may want to look into permanent coverage for those later years, and the sooner you buy it, the less expensive it can be in the long run.

If you have questions or comments, let us know.  And in the meantime, please stay healthy and safe!

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. And please subscribe to this blog!

What Is Life Insurance Laddering?

One of the most confusing issues about buying life insurance is knowing how much you will need at different points of your life. As your personal situation changes over time, so will your life insurance needs. Marriage, having children, buying a home or starting a business can mean incremental differences in your coverage. 

And as you get older, your life insurance needs typically decrease. The kids have gone off to college or are on their own, the mortgage is paid and other debt has hopefully been eliminated. With all of this change going on, it makes sense to know what your foreseeable needs will be and adjust accordingly.

Sure, you could just buy one very large term policy to cover the next 20 to 30 years, but what happens after that? Burial insurance sounds good, but what if you should have some health issues that could prevent you from buying an affordable policy? The non-medical policies are okay, but they can be expensive.

This is when you should consider a strategy known as "laddering". Laddering is the practice of purchasing several term policies for different lengths of time and different face amounts. Since the policies are set to expire at different times, you only pay for the amount of coverage you need throughout your different life stages.

As an example, let's say that "Bob" is 35 years old, in good health and a non-smoker. After a quick review, Bob discovers he needs $1 million over the next 30 years. If he were to purchase a policy for $1 million, if may cost him about $75 each month, or $900 each year. Over the course of 30 years, Bob would pay $27,000. 

However, if Bob decided to purchase three smaller policies that had different terms, it would look something like this:

• First policy - A 10-year term with a death benefit of $500,000 ($14 each month)
• Second policy - A 20-year term with a death benefit of $300,000 ($16 each month)
• Third policy - A 30-year term with a death benefit of $200,000 ($21 each month)

The total amount of coverage is $1 million, but the amount of premium Bob pays on a monthly basis is different throughout the years. And this saves Bob money. 

For the first 10 years, Bob pays $51 each month. At the end of the 10th year, the $500,000 will expire, which means Bob only pays $37 each month from year 11 through 20. At the end of the 20th year, the $300,000 policy will expire, which means Bob will only pay $21 each month from the 21st year until the end of the coverage period.

Bob's total premium over the 30 years is $13,080, which means he'll save $13,920! Not bad. And that difference could have been invested into a retirement plan or something else.

As you can see, Bob saved a ton of money plus he got the coverage he needed. During the first 10 years, Bob had $1 million dollars of coverage to pay off his mortgage and other financial obligates. In the second 10 years, with his mortgage principle decreasing, he still had $500,000 of coverage, which would have been sufficient at that point. Finally, in the last 10 years, his spouse could pay off the remaining bit of mortgage as well as take care of his funeral expenses and any other debts with the remaining $200,000.

Even though buying multiple policies may seem like more work, if they are all purchased at the same time through the same carrier, the bill can be consolidated and the savings will be well worth the time and effort. 

If you have questions about laddering your policies or anything else related to life insurance please drop us a note or book a short phone appointment with us. In the meantime, please stay healthy!

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life, disability, long term care, cancer, accident and other insurance coverages in North Carolina, South Carolina, Virginia, Tennessee and Georgia. 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. And please subscribe to this blog!