Some people may assume that insurance agents like me despise term insurance. Look at it and wince with a large degree of disgust.
In fact, not even close. I love term insurance. Though die-hard termites might take issue with my favorite use for term insurance (to increase MEC limits for largely over-funded whole life contracts, which we won't be discussing in detail today, sorry that's a topic for later) today we're going to praise the purest, simplest, and extremely integral tool to any life agents tool belt.
It may not have all of the incredible wealth creating benefits of permanent insurance, but term insurance creates immediate quality death benefit at an incredible discount. And there's not trade off in quality when it comes to term insurance death benefit. Sure the product is designed to expire before you do (that's where they–as they say–get you), but in the face of eliminating the woes of what happens to the family if you die is immediately rendered powerless in the face of a newly put in-force term contract. For most younger families this product makes securing much needed coverage possible.
For level term insurance (which makes up the lions share of term insurance sales) the premium is guaranteed for the level period meaning the insured knows exactly what the premium will cost for that entire period if time. And even after that most insurance companies will provide a schedule of what the increasing term costs look like.
For convertible products (those that can be converted to permanent coverage guaranteed) the insured can ensure favorable underwriting for a future permanent life insurance purchase and ensure that they can keep their coverage even after the level period has ended. So, those who aren't in a financial position to own permanent coverage can ensure that when their finances catch up with the aspirations, they can have solid insurance coverage no matter their health situation.
I remember one day when I was sitting at a car dealership, I overheard a wife ask her husband, “and how do I make the truck payment if you pass away?” Perhaps she wasn't really worried and this what sales professionals call a “fake objection,” but truth is term insurance is a great tool for eliminating default worries for debt obligations if one party of the borrower group comes to an untimely demise. Since I got the impression that she didn't really want to buy the truck, I decided to say in my seat and keep quiet, besides they probably would have found it rude to discover I was eavesdropping if I walked over and slide them my card.
Still, this is a very effective and useful application of life insurance. In fact, a lot of young couples purchase life insurance immediately after purchasing their first house. This ensures that the mortgage is paid off if a spouse dies. If I can offer up a good nugget of financial and insurance advice ,though, stay away from reducing term insurance, it's the kind of stuff that mortgage brokers and F&I managers at car dealerships will pitch to you.
Reducing term insurance is a form of term insurance that has a declining death benefit despite a constant premium. Why is this so bad? An example will likely explain best:
Say you are about to purchase a home for $250,000 and the mortgage broker pitches you a plan to ensure that your mortgage is paid off if either you or your wife dies. It'll only add 150 bucks to your mortgage payment. So, if at anytime during the 30 years of your mortgage repayment you die, the wife doesn't have to worry about handling the payment on her own. Sounds nice and comforting, but here's the truth. A 30 year old male at standard plus rates can get a $250,000 30 year term insurance policy for around 30 bucks a month. And after 10 years if that male dies, his wife gets $250,000 not the current payoff balance of their mortgage.
In some business loan situations the lender will require the borrow to secure life insurance to cover the loan if the borrower dies. This is how they ensure that death won't leave them up the creek. Term insurance is a great choice for a startup to secure the coverage it needs to ensure debts are handled and they can even stipulate what portion of the death benefit goes to the lender and name a secondary beneficiary who can receive whatever amount is paid beyond the loan payoff.
A buy-sell agreement is a legal document that the family of a deceased partner can hold a remaining partner to. Term insurance is a great way to fund the obligations of a buy-sell agreement. If you and your partner don't have one, you really need to looking into putting something in place, and if you do have one that isn't funded well, you really need to fix this immediately.
I know most hold marriage as a sacred bond, but reality tells us not all Americans hold onto this sacred bond forever and always, and sometimes a separation can be a little messy. When husband and wife have kids and such, there's always a worry over how to care for the children financially. Most divorce decrees require the ex-husband and wife to secure and hold life insurance coverage for a certain period of time. Because divorce can frequently be a very financial ruinous event, term insurance is a great way to meet the decree obligations with the the lowest impact on your monthly outlay.
Made you look.
No, this would not be a recommended approach to personal finance and insurance planning. We already know that Buy Term and Invest the Difference is simply a ploy used by one product peddlers to either convince you that you don't want what they don't have.
You should always keep in mind that term insurance is temporary insurance. What you paid last month means nothing this month. That premium bought you the security and peace of mind in knowing that if you died your beneficiary got a check, and that premiums affords little more than that. Term insurance is not in and of itself a permanent plan.
So term insurance is a great tool for covering debt obligations, providing younger/less financially achieved families secure coverage they desperately need, and it has several great business applications. The death benefit it provides is just as quality as any other type of insurance contract out there, and it's guaranteed for a certain period. It is temporary though, so it should never be part of a permanent plan.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.