February 23, 2008

The Truth about Term Life Insurance

First we must understand what Term Insurance "is and is not". Term life is the simplest type of life insurance. Term gets its name from the limited length or "term" of the contract. Term insurance usually has no cash value, generally lasts for 1, 5, 10, 15, 20 or 30 years, or to some specified age such as age 65 or age 100. If you die during the term, the insurance company will pay the death benefit if all premium obligations are met. If you do not die during the term, no benefits will be paid. You may be able to renew the contract at the end of the term, or you will need to buy another policy (if you qualify medically and can afford the increased cost).

For term insurance, the premiums for each one thousand dollar of face amount death benefit roughly follows a curve reflecting the chances of dying - obviously getting very steep as one gets into his or her age 70's, 80's, and 90's when the chance of death is close to 100%. In contrast, the idea behind permanent life insurance is that the person "over-pays" (over and above what the cost of term insurance would be to cover the probability of dying in those early years) in order to keep the premium payments level during the older ages when the cost of term insurance would become prohibitively expensive. And because providing "life insurance" security for a family was deemed to be in society's best interests, a special tax break was given to the internal buildup of cash values within the life insurance policy - so they could build up more efficiently - free of income tax.

But is Term Life Insurance a Deal or No Deal? Term insurance has it's place in situations that require life insurance for a short or "temporary" period of time, or if you need large amounts of insurance until you can afford permanent insurance.

The truth is that Life Insurance companies love selling you this product. In an industry actuarial study, it was estimated that only 1 - 1.5% of all policies sold would result in a death claim.

Will you be the exception to the rule?
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