Is Term Life Insurance Worth It?
Term life insurance is usually affordable and straightforward. That's why it can be the right choice for most life insurance shoppers, according to Policygenius.
Term life insurance lasts for a set number of years (the “term”) before it expires and you’re no longer covered. Why might you consider a life insurance policy that runs out? Because you may not need that financial protection anymore, and you don’t want to pay for an unnecessary insurance policy. That’s why term life insurance can be worth it for a majority of shoppers. Learn more about why you should consider a term life policy and who it’s right for.
In this article from Policygenius, you’ll find out the major reasons why you might consider term life insurance as part of your financial plan. This article was originally published on Policygenius.com. We’ve republished it for Betterment customers because we believe Policygenius offers balanced insights on life insurance.
What exactly is term life insurance?
Life insurance can be a good idea when you have a lot of financial obligations—i.e. kids, a mortgage, and other debt. Policygenius helps makes it easy to compare term life insurance policies to find one that covers your various needs. Term life insurance can be particularly worth it because it’s usually the most affordable type of life insurance available that provides a tax-free lump sum of money for a financial safety net.
It’s called “term” because the policy lasts a set amount of time and then expires, after which you will no longer be covered by it. You’ll have to buy a new policy or renew the old one before it expires if you want to remain covered after the initial term.
There are two components of any life insurance policy that you should also know—or rather, you already know what these are, so this is just about sharing the professional lingo with you.
The death benefit is a lump sum of cash paid out by the life insurance company when you die. If you’ve ever heard someone say, “I took out a one million dollar life insurance policy,” that one million dollars is the death benefit.
The beneficiary is the person or organization that will receive the death benefit. The beneficiary does not need to be a family member or even a human being—it can be a trust fund, or a non-profit organization, or a business partner.
The other thing to know about the beneficiary is you don’t have to name only one. You can list several on your policy, and either distribute the death benefit among them as you see fit or order them like pageant contestants, with one “winner” and then a first runner up, second runner up, etc., so that if the first beneficiary is unable to receive the death benefit, there’s someone else on the list.
At minimum, you should always choose a backup beneficiary. If the primary beneficiary isn’t able to accept the death benefit for some reason and you haven’t named any alternative beneficiaries, then the state will step in to help determine who should receive it. And nobody wants that.
A rider is an add-on feature that extends the usefulness of the coverage in some way. Sometimes riders are included as part of the price, and sometimes they cost extra. Some riders can be better than others. Check out Policygenius’ guide to the most common life insurance riders.
What’s good about term life insurance?
First, what’s good about any type of life insurance is that it provides a lump sum of cash that can be used for pretty much anything: burial expenses, college tuition for your children, living expenses for your spouse, mortgage payments, other outstanding debt, a donation to a favorite charity, and so on. That lump sum will be tax-free if you buy the life insurance policy on your own and pay the premiums with after-tax dollars. (If your employer pays for it, the death benefit will still be taxed.)
Here’s what’s good about term life in particular:
- It’s an easy-to-understand insurance product. This might not sound like that big of a deal, but once you take a look at all the varieties of permanent life insurance (see table), you’ll appreciate how straightforward term life can be.
- It’s usually much cheaper than any type of permanent life insurance. Realistically, the older you get the more any insurance is going to cost. But if you buy term life when you’re young and healthy, the monthly premium can cost as little as $30-40.
- You can further reduce the cost by only buying enough coverage for your specific needs, instead of for the rest of your life.
- Because the premiums are typically much lower than permanent, if you decide to abandon the policy at some point before the term ends, you won’t lose as much money as you would with a permanent policy.
What’s bad about term life insurance?
The strengths of term life are also its weaknesses, at least for some people.
- It ends at a predetermined point in the future. Let’s imagine you buy a 20-year term policy when you’re 30. When you turn 50 and it ends you will no longer be covered. You can of course buy a new one (and sometimes you can roll over your old one to get more years of coverage) but it will likely be more expensive because of your age and health.
- Although you can just stop paying for the policy and let it lapse at any time, you can’t cash in the policy early to get some money back, nor will you get any of your premiums back when the term ends. This is how it’s both cheaper and less complicated than permanent insurance.
If you want to guarantee that you’re covered until you die no matter when you die, permanent is probably the way to go. If you want to be covered until your golden years, and then cash in the policy to get some of the value of it back, you might want to consider permanent. We think the drawbacks to permanent are too significant to offset these benefits most of the time, but every situation is different.
What alternatives are there to term life insurance?
Term life insurance is generally considered the simple, straightforward flavor of life insurance. There are typically no complicated rules or investment components — which is good, because life insurance isn’t normally a good investment.
The main alternative to term is permanent life insurance, which can cover you for your entire lifespan so long as you keep paying the premiums. But there are two things to keep in mind with permanent life insurance:
- It’s usually more complicated, partly because there’s usually an investment component mixed in with the death benefit, and partly because it can come in a variety of forms; there’s whole life, variable life, universal life, and variable universal life (yes, seriously). Permanent insurance is the Silly Putty of the life insurance industry, because it can be stretched and distorted into all sorts of shapes. This doesn’t necessarily make it bad, but it can make it complicated, and therefore easy to misunderstand, which in turn means it can be easy to buy the wrong policy or to spend more than you need to for adequate coverage.
- It’s typically much more expensive than term. All of that complication and longevity comes at a price, so you’ll likely spend far more on a permanent policy to get the same amount of death benefit as you would on a term policy. (This guide explains more about the difference between term and whole life insurance.)
The other alternative is to self-insure, which means you’ve accumulated enough wealth to personally provide financial support to your dependents (or spouse, siblings, etc.) after your death. In an ideal world, self-insurance is the best because there’s no insurance to buy at all, but for most people it’s not a realistic alternative before your mid-50s at least—after you’ve built up some savings, sent the kids off to school, paid off your mortgage, hit your peak salary, etc.
|BASIC TERM LIFE||BASIC WHOLE LIFE||UNIVERSAL LIFE||VARIABLE LIFE||VARIABLE UNIVERSAL|
|Guaranteed Death Benefit?||Yes||Yes||Yes||Yes||Yes|
|Guaranteed Cash Value*||No||Yes||Protected from risk, but can be depleted to pay premiums||No||No|
|How Cash Value Grows (or Shrinks)||N/A||Earns interest at a predetermined fixed rate||Variable rate determined by the insurer||Subaccounts – pool of investor funds offered by the insurer||Subaccounts – pool of investor funds offered by the insurer|
|Premiums||Can increase periodically OR be guaranteed level for the duration of the policy||Level||Varies, up to the customer (subject to federal tax laws)||Level||Varies, up to the customer (subject to federal tax laws)|
|Notes||No risk of losing coverage unless the insurer goes out of business, but no cash value when term ends||No risk compared to other permanent types, but you can probably find better investment options elsewhere||N/A||Risk of ending up with expensive insurance policy with little to no cash value||Risk of ending up with expensive insurance policy with little to no cash value|
*All permanent policies can be surrendered for their current cash value after a certain number of years, at which point the insurer will pay the accumulated cash value minus any loans and fees.
Learn more about the different types of life insurance.
Is term life insurance worth it?
If you have anyone who is financially dependent upon you, and you don’t have enough money set aside to provide for their financial needs should you die tomorrow, then life insurance is absolutely worth it. It should likely be your top insurance priority. And since term is usually cheaper and simpler than permanent, it can be easier to fit it into both your present-day budget and your long-term financial strategy.
This article originally appeared on Policygenius, a licensed insurance broker. Betterment is not an insurance broker and this article is not insurance advice nor an offer for particular insurance products or services.
The content was not written by an insurance agent, and it is intended for informational purposes only, and it should not be considered legal or financial advice.
Betterment makes no warranties or representations with respect to specific insurance offerings.
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