Potential Income Replacement With Term Life Insurance
When this occurs, it can be difficult for the surviving family members to earn enough money to maintain the lifestyle to which they had become accustomed; for example, to live in the same home, drive the same automobiles, attend the same schools, or enjoy the same activities. This can be particularly challenging if the surviving spouse was a stay-at-home parent earning little or no income him or herself.
The Role of Life Insurance
To help guard against this scenario, many families purchase life insurance in order to help provide financial protection for surviving family members in the event of the death of a family income-earner. Life insurance may be helpful regardless of whether the insured was the primary or secondary income-earner—either way, this is income that’s no longer available to the surviving family members.
There are many different types of life insurance, but they all fall into one of two broad categories: term life insurance and whole life insurance (also referred to as permanent life insurance). This article will take a closer look at term life insurance, and we’ll examine whole life insurance in more detail in the next article.
Term insurance is relatively simple: An individual buys a specific amount of insurance coverage (which is referred to as the death benefit) for a specific period of time (or term, hence the name) at a pre-determined price (or premium). Premiums can usually be paid in a lump sum or on an annual, semi-annual or monthly basis. At the end of the term, the insured may have the option of renewing the policy, but the premium amount may rise at this time.
For example, suppose Bob purchases a 10-year level, $500,000 term insurance policy. If he dies at any time during the 10 years following the policy issue date, his beneficiaries will receive $500,000, assuming all the premiums have been paid and the terms of the insurance contract have been met.
How Much Does It Cost?
The cost of term insurance is based on many different variables, including the insured’s age, the condition of his or her health, whether or not the insured smokes, and where the insured lives. Generally speaking, the older the insured, the more expensive the policy will be. Less-healthy individuals and smokers may also pay higher insurance premiums than healthy non-smokers.
Two common questions when it comes to term life insurance are: 1) How much insurance is enough, and 2) What is the appropriate term? The answers to these questions will be different for every individual, but one strategy is to consider buying enough insurance to replace the income of the insured for a set number of years.
For example, if Bob earns $50,000 a year and wants to replace his income for his family until his 12-year-old daughter graduates college, he might buy a $500,000 policy (10 years until college graduation x $50,000 = $500,000). Such an income replacement term life insurance strategy may enable Bob’s surviving family members to maintain their current lifestyle after Bob’s death.
Some people question the value of term life insurance, thinking that if they die before the term is up, they have wasted their money. For these people, whole life insurance might be a better option, since some of the premium paid can be returned to the insured in the form of what’s known as cash value. We’ll discuss whole life insurance in more detail in our next article.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates,Inc