Term life insurance is a valuable tool to manage financial risks in the event that you or a spouse unexpectedly pass away. This type of life insurance will provide coverage for a set period of time, usually 10 or 20 years, for the lowest initial cost.
That means term life insurance is an excellent choice for young families, young adults, or people that have a specific need such as covering a particular debt.
We use term insurance in the following scenarios:
- To cover debt(s) – Covering off a debt or multiple debts helps relieve the financial pressure of the surviving spouse or children.
- To cover income loss – Sometimes there is a large income gap in relationships and/or the couple has child expenses to cover for a number of years yet. In this case the surviving spouse might need an income source, such as insurance proceeds, to help support child expenses until they become independent.
- To cover a business agreement- Businesses have unique shareholder agreements that require attention. Should a business partner die, in most cases there is a share transfer between the estate and surviving owners. We use term insurance to help offset the purchase price rather than using business cash or getting a loan.
Other uses for insurance are to pay funeral costs, estate taxes, and estate equalization strategies. For these scenarios, we would consider using whole life insurance. The reason is that these scenarios require long term coverage (for life) whereas term insurance is usually bought in time periods of 10 or 20 years.
Determining the Correct Amount of Insurance
When you are trying to figure out how much insurance you need, you must first determine the goal of the insurance. For most couples, it is to provide security for their family.
Insurance is not meant to make others rich. Insurance is used so that we don’t leave the people we care about in a worse position than if we were alive. Meaning, should you die, your spouse won’t have to sell the family house or get a second job to support your children.
Once you know your goal, you can start to determine your amount. Below is a list of all the situations to consider.
- Total Amount of Debt- Could your family get by if you had no debt?
- Future Income Needs- As a result of the loss of your annual income, does your family require additional income from insurance proceeds? For how long? This is common when one spouse makes more than the other.
- Education- Would you like money set aside for future post secondary education costs.
- Funeral Costs- Would you like your funeral expenses paid for from insurance?
- Taxes- Do you own property or assets that would need to be sold resulting in taxes to be paid?
Considering these 5 options should give you an understanding of how much insurance coverage you could require.
How does term insurance pricing work?
Term insurance is based on mortality rates. Simply put, your chances of dying.
Factors that are included are age, gender, health history, family history, driving history, and smoking history. Generally, the older we get, the greater chance of dying. The greater chance of death, the higher the insurance premiums.
Term insurance is typically bought in lengths of 10 or 20 years. Hence the names Term 10 and Term 20 insurance. After 10 years (or 20) your policy automatically renews for another 10 years and continues that cycle until you reach age 85.
At each renewal, your premiums will go up based on your current age. If you are in good health, it will often make sense to re-apply for a new policy for lower premiums rather than accept a renewal.
Term 20 insurance has higher premiums than Term 10 at the time of purchase. This is because the insurance company has to insure your health for a longer period of time.
However, Term 20 insurance can save money on premiums in the long run when compared to a Term 10 policy. This is because a Term 10 policy could renew at higher rates at the beginning of year 11.
If you think you will need your insurance for longer than 10 years, you should compare the cost difference between Term 10 and Term 20.
How do you get term insurance?
If you are looking to get term insurance, you typically need to deal with a life insurance agent. An insurance agent will and should:
- Use an insurance needs analysis tool to help you determine how much insurance you want and need.
- Provide insurance quotes from several insurance providers. Insurance companies all specialize in certain products so it does make sense to shop around.
- Take you through an insurance application.
- Make adjustments and final implementation. Sometimes insurance applications come back with ratings or exclusions which can affect the insurance premium.
If you would like to know if term life insurance is a good fit for your family situation, we can take you through an insurance needs analysis.
Book a call with us by clicking here.