What is likely the most affordable and least complicated kind of life insurance protection you can get?
The answer is term life insurance. This kind of life insurance provides a death benefit for a specific period of time. Term life insurance doesn’t offer the features various types of permanent insurance, such as whole life or universal life insurance, offer.
For that reason, term insurance tends to cost less, but is less versatile. Still, there are instances where it offers the right solution for the circumstances. These include:
1. Immediate family protection
Sometimes personal responsibilities and obligations aren’t in synch with school schedules or career paths. Perhaps you are starting a family while still in graduate school. Or you are looking after an aging parent while still at the entry-level stage of your career.
Whatever the particular circumstances, you are at a place where protecting your loved ones in case something happens to you is a priority, but the financial wherewithal to do so is limited. Term life insurance can offer an affordable solution.
“A term policy is a fantastic way to cover the major unfunded liabilities families have early in their financial life,” said Douglas Collins, a financial planner with Fortis Lux Financial in New York. “Well-structured term policies should help replace any lost income from any earning spouse, and also help create a source of money to pay for child care if a nonworking spouse were to pass away.”
In this capacity, a term policy can also act as a kind of “starter” policy. Term life insurance policies typically allow for conversion to a whole life policy or other types of permanent insurance, albeit under certain terms and at higher rates. Such conversions may be advantageous as family circumstances change over time.
“Convertible term can allow you to get started, then move on to whole life insurance later as your family grows,” said Jackie Dorsey, a financial professional with Coastal Wealth, a MassMutual firm in Tampa, Florida. “It may eventually become part of your retirement portfolio.” (Related: How whole life insurance can help in retirement)
Term life insurance can also come into play if you have a loved one with special needs or a disability.
“Perhaps term insurance is not the best fit here, but it may be the only affordable short-term solution,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri. “In the future, something may happen — perhaps a legal settlement or an inheritance — that affords you the ability to plan longer term and convert that term coverage to a permanent solution to provide for the person with a disability when you are no longer here to do so.”
Buying a home is a priority and a milestone for many people.
In fact, over five million homes are sold every year and roughly a quarter of those sales go to first-time buyers, according to statistics garnered by the National Association of Realtors®.1 Those first-time home buyers have a median age of 36. (Related: Buying your first home)
But the mortgage for buying a home is a big commitment. And for first-time home buyers, getting a mortgage usually involves co-borrowing — where spouses or partners both take responsibility for the loan. Sometimes, first-time buyers also need cosigners — typically relatives who will agree to also take responsibility to repay the mortgage.
How do you make sure your partner or cosigners aren’t saddled with unmanageable mortgage payments if you are no longer around?
“I always recommend term life insurance just for a mortgage,” said Dorsey. “In fact, when I’m talking to young couples, it’s the first thing I ask about. A term policy can be targeted right at that mortgage and help make sure it isn’t likely to become a burden.”
3. Debt obligations
Beyond mortgages, there are other types of debt that could negatively affect your loved ones should you pass away.
Take student loans. Many parents, and even grandparents, cosign for them to help children finance their college education. For example, about 93 percent of private undergraduate student loans had a cosigner for the 2018-2019 academic year, according to Consumer Reports , citing proprietary industry data.2 And, in many cases, those loans are still due even if the student for whom they were taken out has passed on. (Related: What happens to student loans when you die)
Or business loans, which are often taken out to get money to start a business or buy into an existing enterprise or partnership. Such loans also often involve co-borrowers or cosigners or are secured with personal assets for collateral. And other types of debt can have similar treatment. (Related: Do debts die with you?)
A term policy aimed at covering such obligations should you pass on unexpectedly could help ease burdens on those left behind.
“You need to consider term life insurance to protect the loan when you are starting a business,” explained Gentry. “It helps your business partners and your family.”
Life insurance is often made part of divorce settlements as a way of ensuring that alimony or child support continues even if something happens to a marriage’s main breadwinner. Term life insurance offers protection for the time period that the former partner may be relying on those payments.
“Those support payments, child and/or spousal, will stop if the paying ex-spouse passes away,” Gentry pointed out. “The divorce agreement may require the partner responsible for support payments to get a life insurance policy, at least for the time period of the support payments. That would be term insurance.”
Such protection may also have benefits for the support-paying partner.
“If you are the support-paying parent, recognize that if you are not here, your children may suffer,” Gentry added. “You are simply protecting the children you love.” (Discover more: 7 situations where a trust may help)
More benefits of term life insurance
These are only four situations where a term life insurance policy may be useful. Obviously, individual circumstances and needs will differ, as will the type of life insurance that may be appropriate for the situation.
Indeed, some people, over time, acquire a variety of term insurance policies aimed at specific debts (like a mortgage) or responsibilities (like a child’s college education) over varying time periods. This “laddering” strategy can be done in conjunction with permanent policies to develop a comprehensive protection strategy.
Term insurance may offer an affordable answer in many cases. Unfortunately, many people don’t realize that. According to one study, over half the population thinks a term policy costs three times more than it actually costs.3
And how much does it cost?
A healthy 35-year-old male who doesn’t use tobacco could purchase a $500,000, 20-year term policy from MassMutual for as little as $25 per month.4
Finally, a term insurance policy is also a way to protect your insurability early in life. For example, you may be a medical or law student and not have much in the way of an income or a family to protect. But when you graduate and start practicing, your future earning potential will spike. Having term life insurance early will help make sure you can get the coverage you may need in later years. And that could be especially useful if something happens that affects your health and insurability.
When shopping for life insurance, the most important thing is to get the coverage you need to fully protect your family. Some people find it useful to consult a financial professional who can help determine how much may be needed based on their obligations and long-term financial goals.
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This article was originally published August 2019. It has been updated.