Term life insurance is among the devices that people should consider when they want to provide an immediate estate for loved onces after their death.
Although term insurance is not always the most effective type of life insurance for all of a client’s death benefit needs, it can be useful in many circumstances.
Since term insurance is not just one product, but rather many variations on a general theme, different types of term insurance are indicated for different client needs.
Keep in mind, term insurance, more than any other type of insurance, is pure death protection with little or no ancillary or lifetime benefits. Therefore, the two overriding considerations in the use of term insurance, regardless of the specific application, are:
- Will death protection alone meet the need?
- Will the coverage last as long as the need?
In short, with term life insurance — as with any other decision about appropriate coverage — the product must match the problem.
Although some agents and advisors believe that whole life insurance is always a superior product, term life insurance does have an important roll to play in a client’s financial plans. Keep reading 10 reasons why a client may want to consider a term life insurance policy, from the 6th Edition of “The Tools & Techniques of Life Insurance Planning” (2015, The National Underwriter Company).
Term Life Insurance Advantage No. 1
Term insurance allows a person to acquire the greatest death benefit for the lowest premium outlay when the policy is first issued. However, this does not mean that term insurance is necessarily the least expensive form of insurance over the full duration of needed coverage. Because term premiums increase at each renewal, at the later ages the premium cost will far exceed the level premium that would have been charged for an ordinary whole life policy issued at the same age as the original term policy.
Term Life Insurance Advantage No. 2
Term insurance is the best alternative for temporary life insurance needs. Usually term insurance is the best alternative if protection is needed for less than ten years. Conversely, some form of cash value life insurance will generally be the best alternative if protection must continue for fifteen or more years. If the duration of the needed protection is between ten and fifteen years, the best alternative depends upon the facts and circumstances of the case. As a general rule of thumb, term insurance will tend to be better than cash value insurance at issue ages below age forty-five, and worse at older issue ages if the length of the need for protection is between ten and fifteen years.
Term Life Insurance Advantage No. 3
Younger persons may acquire substantial face amounts of coverage at relatively low immediate cost, perhaps more than their immediate needs, and thereby guarantee that they will have the necessary level of coverage when their needs and family obligations later increase, even if they are then uninsurable.
Term Life Insurance Advantage No. 4
The conversion feature of renewable and convertible term allows policyholders to enjoy higher death protection than they could otherwise afford and later allows them to lock-in their premiums and build cash values when their ability to pay premiums increases.
Term Life Insurance Advantage No. 5
Various types of term insurance — level, decreasing, and increasing — can be combined as riders with other types of permanent insurance to create a package that meets a person’s special death protection, savings, and affordability needs.
Term Life Insurance Advantage No. 6
Life insurance proceeds are not part of the probate estate, unless the estate is named as the beneficiary of the policy. Therefore, the proceeds can be paid to the beneficiary without any delay caused by administration of the estate.
See also: 6 reasons why probate isn’t that bad
Term Life Insurance Advantage No. 7
There is no public record of the death benefit amount or to whom the death benefit is payable (if paid to someone other than the deceased’s estate).
Term Life Insurance Advantage No. 8
The death benefit proceeds are generally not subject to federal income taxes.
Term Life Insurance Advantage No. 9
The death benefit proceeds are often exempt from state inheritance taxes.
See also: The 10 best & worst states to pay taxes
Term Life Insurance Advantage No. 10
Life insurance policies can be used as collateral or security for personal loans. Although lenders generally prefer permanent types of policies because of the cash values, a term policy is often sufficient if the borrower is a good credit risk and the loan is very likely to be repaid unless he or she dies.
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