Term Life Insurance: Not All Life Insurance Are Created Equal
For many Americans, the discussion of life insurance and the need for it is one of those necessary evil topics.
In fact, the best way to not talk to someone on a long transatlantic flight is to simply tell them that you sell life insurance for a living.
It is one of those non-tangible products that everyone needs, no one likes and someone has to sell or market.
For many American families, a properly placed life insurance policy can mean the difference between family security and family struggle in the event of the unexpected death of the main income earner.
However, life insurance is more than that.It is actually a wealth creation and preservation tool when properly understood.
A good friend who has been in the insurance business for many years, once said: “I have found that simply explaining what insurance is and what it does helps people overcome their concerns and to move forward doing the right thing for their lives”.
Life insurance is nothing more than a contract between an individual and an insurance carrier. It is a mortality risk agreement. In this contract, there are certain terms that need to be understood.
We will limit it only to Term Life Insurance. Permanent life insurance will be discussed in another article
Terminology is what we need to know first.
- Death Benefit – The amount of money that the insurance company agrees to pay upon the death of the insured during the term period to the beneficiary(s).
- Owner – The person who owns the insurance contract with the insurance company. Could be the same as the insured or not.
- Insured – The person whose life is being insured against in case of death. Could be the owner or not.
- Beneficiary – The person or persons who receive the proceeds from the death benefit, typically income tax-free. Could be the owner, but never the insured.
- Premiums – The amount of money paid by the owner to the insurance company on the life of the insured during the term period.
- Term – The length of time that the policy is in effect as long as the premiums are paid. After the term period, the insurance benefit is done, extended at a higher premium or may be converted to a permanent policy. The term period is typically 10, 15, 20, 25 or 30 years.
- Age – Important as to what the insurance company will allow for a death benefit based on mortality rates. Read this as the older a person is, the higher the premium is.
- The cost of Insurance – This is what the insurance company needs to charge to maintain their viability to keep their business running, pay their employees, cover death benefit claims and make a profit. In term policies, the premium is pure insurance cost or the actual cost of insurance to the insurance company.
- Table ratings – Creates higher cost of premiums based on health, lifestyle choices and activities.
- Cash Value – Amount of money that is built up in an insurance policy from interest or investment that is available to the policy owner for use during their lifetime. There is no cash build up in a term life insurance policy. It is pure insurance.
Okay, so that is the basic terminology. So let’s just use an example. A young person applies for insurance, exposes his health conditions and lifestyle choices.
The insurance company does what is known as underwriting and comes back to this young person with an offer. Once accepted by the young person, the policy is then in effect after the first premium is paid.
Here would be the conditions in this example. The young person who is let’s say 30 years old, non-smoker and in good health! He would pay $30 per month for a term of 10 years, and receive a death benefit for his family of $100,000. The spouse would be the beneficiary of the death benefit. The cost of insurance is close to the $30 per month.
After 10 years, the total amount paid was $3,600. After that, the insurance is either no longer in effect, or the young person can keep paying a much higher premium for another 10 years to maintain the policy.
Since most insurance policies never have to pay a death benefit (the insured keep living) the risk the company took was minimal when spread out across a lot of clients. The insured benefitted with peace of mind knowing his family was protected during the term life insurance period.
There are many uses for term life insurance that can be discussed in a separate article, however, for now, understanding the basics will help you make educated choices.
Please note- the example used here is for explanation purposes only and does not represent an offer by any insurance carrier to any individual.