Why Choose Term Life Insurance?
It may seem that you have dozens of choices for a life insurance, but there are essentially two: whole, sometimes called permanent, life insurance and term life insurance. In addition to a death benefit, whole life insurance builds value throughout the life of the policy---value that you can potentially tap before your death. Term life insurance has value only for your beneficiaries when you die. However, that doesn't mean it's not the right choice for you.
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Definition
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Term life insurance really is simple to understand. You pay a premium---monthly, quarterly, semi-annual or annual---based on the "term," or length, of the policy and the amount of the death benefit. If you die, your beneficiaries receive the death benefit. If you don't, the policy eventually expires. You also can cancel the policy at any time.
Variations
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Besides a straight term life policy, there are a couple of prominent variations. Renewable term life policies guarantee you coverage for a prescribed amount over a specific term, say 20 years, but the premium rises annually throughout the term. Decreasing term insurance begins with a face amount for the policy. The premium remains the same for the length of the policy, but the death benefit decreases each year.
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Advantages
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Term life insurance carries a much lower premium than whole life. Because of the many variations on whole life policies, a direct comparison is difficult, but consider this example from one large insurance company. A 27-year-old, non-smoking male can buy a $500,000 term life policy for $317 a year. Converting only $100,000 of the policy to whole life would raise the premium to $1,300 a year. Typically, the younger you are, the lower your premium. Various lifestyle factors also can affect the premium amount.
Purposes
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Term life insurance is to protect your family from extreme difficulties if you die. Fit the terms to your needs. For example, you might use it strictly for short-term needs---to cover your kids' college expenses or to allow your family to pay off your house and car. This would be the primary use for a decreasing term policy. But if you're a younger person with small children, you might choose to buy a term life policy to replace lost income, including providing for your children's college expenses. A renewable policy works better here. It would allow you to buy a larger policy for a smaller premium when you're beginning your career. Assuming your income grows as you get older, you would be able to handle the gradual premium increases.
Tip: Invest The Savings
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You will have nothing to show for your term life premiums at the end of the term---similar to the results of car or home insurance, by the way. However, you can mitigate the loss of building cash value through your life insurance by using financial discipline. Invest a portion of the annual premium savings yourself. Even if you don't consider yourself to be a savvy investor, you can arrange for automatic investments into a market index fund. Even investing $500 a year, less than a quarter of what you would save in premium savings on a 20-year, $500,000 term policy, would leave you with more than $17,000 at the end of the term, assuming a modest 5 percent annual return.
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