Term life insurance is among the devices that people should consider when they want to provide an immediate estate for loved ones 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 still be useful in many circumstances.
Since a term life insurance policy is not just one product, but rather many variations on a general theme, different types of term insurance are required 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).
Advantages of Term Life Insurance
- Greatest Death Benefit for Lowest Premium OutlayTerm 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.
- A Term Policy Is the Best Alternative for Temporary and Short Time Frame Needs:
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 15 or more years. If the duration of the needed protection is between 10 and 15 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 45, and worse at older issue ages if the length of the need for protection is between 10 and 15 years.
- Younger Clients May Acquire More Coverage at Lower Immediate Cost:
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 increase in the future, even if this means they become uninsurable.
- Conversion Features of Renewable or Convertible Policies Provide Higher Future Death Protection:
The conversion feature of renewable and convertible term policies allows those covered 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 Policies Can Be Combined to Serve the Specialized Needs of Individual Policyholders:
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.
- Proceeds Can Be Paid to the Beneficiary Without Delay:
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
- Preserves Confidentiality:
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). This helps to preserve confidentiality for the beneficiary of the policy.
- Beneficiary Proceeds Are Not Subject to Federal Income Taxes:
The death benefit proceeds are generally not subject to federal income taxes and are not counted as taxable income.
- Death Benefit Proceeds Are Exempt From Estate Taxes in Certain Situations:
In cases where the beneficiary is a surviving spouse, the money is exempt from estate tax. This scenario can help the widow or widower and keep them from having to shell out large sums of the proceeds to the federal government. However, if beneficiaries of the policy are children or siblings of the deceased, proceeds are not exempt from estate taxes.
See also: The 10 best & worst states to pay taxes
- Policies Can Be Used as Collateral for Loans:
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.
What Are Some of the Disadvantages of Term Life Insurance?
Term life policies are great in certain situations but not right for everyone. See these additional resources to help understand some of the risks of purchasing term life insurance.