Term Life Insurance
What is term life insurance?
Term insurance is an insurance policy that pays your beneficiaries a lump sum amount of money if you die during the term of the policy. In exchange for this insurance protection, the policy owner pays a monthly or annual premium payment to the insurance company.
There is no cash value or investment component with a term insurance policy.
It is often referred to as pure insurance because there is nothing else to it except the insurance coverage. It is not a savings plan, it is not a retirement plan. It is a protect the people that I love if I die prematurely plan.
Most term policies end with no benefit ever being paid, but that does not mean you don't need to own one.
For Example :
If you purchase a $1 Million 20 year term policy and you die during the next 20 years it will pay out the entire amount in one big fat tax-free check. The premium (cost) and terms of the policy are guaranteed and cannot change during the 20-year term. If you outlive the 20 years then the guaranteed rate(cost) period is done and the cost will increase dramatically year after year if you decide to keep the policy going. Most people will just cancel the policy at the end of the term or convert it to a smaller permanent policy.
Who needs term insurance?
Here is the question to ask yourself: If you were to die is there anyone that would be financially screwed? If the answer is yes then you need to have life insurance.
Another way to look at it is would YOU be financially screwed if someone else were to die? If so, then you need to make them get life insurance.
Even if you are not bringing home a paycheck you might very well still need to have an insurance policy. For example, if you are a stay at home parent and passed away prematurely then your significant other would need to hire someone to help out or would need to have money so they can take off from work for a while.
How much life insurance do I need?
There are different rules of thumb, but it is better to spend 20 minutes and determine what is best for your situation.
It is not a fun topic, but the first thing to do is imagine what life would be like financially if your significant other passed away. Would you want to pay off the mortgage, quit your job, change your living situation, pay for your kid's college tuitions, hire a nanny? How much of their lost income would you have to replace? Start listing it all out so you can come to a number that makes you feel secure. Watch this video and I will walk you through a simple example.
Where can I buy life insurance
This one is tricky. You have to be very careful when buying life insurance. Why is that you might be asking yourself...well I'm going to tell you :)
Life Insurance salespeople get paid on commission. The amount of that commission is dependant upon the type of policy they sell you and how much they get you to spend on that policy. This creates a direct conflict of interest between you and the agent. You need to understand that relationship.
My advice is to educate yourself, hire a fiduciary fee-only CFP® to figure out which type and how much insurance you need. Then go to an independent insurance agent that can shop many different providers to perform the transaction. Do not take advice from the person that only eats if you buy.