Term Is Practical and Economical

Being the safest and most effective way to provide an income for your family in the case of an early death, life insurance is crucial to the financial security of most families.

The process of buying life insurance is equivalent to a large number of people pooling their resources (paying premiums), with any who die early receiving a large percentage of the pool for their estate and families.

The simplest form of life insurance is “term.” Term insurance is exactly what it sounds like: you pay premiums for simple life coverage for a period of time, and then the coverage expires. The policy can be renewed under different situations. Most commonly, term policies are sold at a fixed premium for a number of years (10 year “level” term is one example) during which the premium doesn’t change.

At the end of the term, the policy cost increases significantly. As there is no savings program (see below) or significant commissions, term policies are the least expensive way to provide life insurance and are the usual choice early in life.

“Cash Value” life insurance comes in a variety of forms, including universal life, variable life and whole life. However, all cash value insurance involves a term policy combined with a savings side fund. The initial premiums are always much more than a term policy for the same death benefit. The extra money is invested in stocks or a fixed-income portfolio and is used at least partially to offset the yearly increasing premiums for the term policy. This insurance is usually designed to be permanent.

Now the costs of buying the term insurance for, say, a 90-year-old can be quite significant, so the calculations of how much premium needs to be paid to insure coverage can be precarious. However, the savings component of whole life insurance benefits from a quirk in the tax law, in that the earnings are not taxed as long as the policy is kept in force.

Until your family has saved enough assets to ensure retirement security, the primary concern in buying life insurance is the amount of the death benefit. Term insurance is usually the best choice, as it allows enough of a death benefit at an affordable price.