“Life insurance” is an interesting term. It may conjure up visions of a stodgy salesperson in a suit going door to door selling some product only your grandparents need. Or maybe a lab technician coming to your house to draw your parents’ blood so they could get life insurance. No? Maybe that’s just me. But in both of those cases, you may be thinking “life insurance” isn’t relevant to you.
There are different types of life insurance, but one of the most common (and the type we recommend) is term life insurance. Term life insurance is life insurance that covers you for a set period of time (“term”) in exchange for premium payments. If you die before the term is up, your beneficiary (spouse, children, etc.) will receive a death benefit, which is a sum of money for which you are insured.
Do I Need Term Life Insurance?
Anyone who has dependents should have life insurance. Usually this means a spouse and/or children, but if someone else would need money should you die, term life insurance could be a good option. Even if you don’t have financial dependents, life insurance would pay for your funeral expenses as well as any outstanding debts you might have. Common usages of death benefits include:
- Replace lost income and pay living expenses, like rent or a mortgage
- Pay outstanding debts
- Provide for your kids’ care if you are a stay-at-home parent
- Pay for burial, estate taxes and other final expenses
- Fund college costs
- Pay unpaid medical bills or taxes
- Create an inheritance
What Term Should I Choose?
Term life policies are commonly offered for 10, 15, 20 and 30 years. The term you choose depends upon your objective and stage of life. If you’re the main wage earner, you may want to choose the term that matches the amount of time your family will rely on your income, such as the number of years remaining on your mortgage or when your kids will be done with college. If you’re a stay at home parent, you may want a term to cover while your children need child care. Think about what expenses your family would have if you were gone.
Your financial needs may change over time. Some people purchase more than one term life policy, with a higher limit during the period where their financial needs would be the greatest, and a policy with a lower limit for later years. For example, say you are a new parent in your late 20’s. You could purchase a 20 year term life policy for $1m and a 30 year policy for $250,000. This way, if you were to die in the next 20 years, your family would have the death benefit to pay for the mortgage and college. If you were to die in the 10 years after the 20 year policy expired, your financial needs wouldn’t be as great because your child would be grown and your mortgage balance would be lower. This would also be cheaper than purchasing one 30 year policy for the sum of those policies.
How Much Insurance Do I Need?
Calculating the amount of term life insurance you need can be tricky. Traditionally, advisors have recommended 10-15 times your income, but it depends on your circumstances. Here are the things you should consider when choosing the amount*:
- Tally up your resources (after-tax income, liquid assets)
- Expected expenses + debt = financial obligation
- Financial obligation - liquid assets = coverage gap
- Coverage gap = how much life insurance you should get
There are also several online calculators that help more accurately calculate your needs by taking into account factors you might not have thought of. This one from NerdWallet is a good place to start.
How Much Does It Cost?
Term life insurance is relatively affordable. A healthy individual in their 20’s could get coverage for less than $20/month. The cost depends upon your age, health and gender, as well as the length of the term and the amount of coverage. Refer to the table below to get an idea of costs for a 20 year term.**
- What happens to your policy once the term is up? When the term is up, the policy expires. The nature of term life insurance is to cover you during the agreed term. Once the term is up, you do not receive any return premium. It may be possible to convert the policy into a whole life insurance policy without a medical examination.
- Tax implications: although the premiums for life insurance are not tax deductible, the death benefit for term life is usually tax free.
Contact your Origin planner to find out more about term life insurance or to get a quote.
*Eilssa Suh, “How much life insurance do I need?” Policygenius, Policygenius Inc. 16 January 2020, https://www.policygenius.com/life-insurance/how-much-life-insurance-do-i-need/#:~:text=How%20much%20life%20insurance%20do%20I%20need%3F,on%20your%20individual%20financial%20circumstances.
**Nicole Dieker, “Is Term Life Insurance Worth it?” Haven Life, Haven Life Insurance Agency, LLC, 5 December 2019, https://havenlife.com/blog/is-term-life-insurance-worth-it/#