Financial Literacy: Term Insurance

Earlier this week, I posted a "Did You Know?" to my social media accounts (@ScMcEachern on Instragram, link to Facebok page at the top right of this page).

The Tip: Term 10 insurance is cheap now, but watch out for the renewal rates.

The biggest differentiator in a life insurance policy is whether it is permanent coverage or only for a certain term. Think of it as renting vs buying. A permanent policy, as long as you pay, stays in force until you pass away, then it pays out. A term policy offers coverage for a certain amount of time: 10, 20, or 30 years and only pays out if you pass away in that timeframe. If you live, there’s nothing at the end of the rainbow – but you’re still alive – so that’s awesome, right?!?

I work with a lot of young families and with that comes really tight budgets. Diapers are not cheap, neither is daycare, and if mom or dad is still on parental leave, we’ve got a very limited budget to cover the much needed insurance premiums.

Young families need a lot of insurance protection. 

If a parent passes away, they need to replace that lost income, they likely want to pay off the mortgage and any other debts, potentially the children’s education and maybe cover other expenses as well. The solution is to get a life insurance policy that has a high payout amount, but since it may only be needed for 10-20 years until the kids grow up and move out, a term policy is probably best.

The cheapest insurance available is a Term 10 plan. Most 30 year olds can get $500,000 of insurance for under $30/month. Sometimes though, the cheapest isn’t always best! After the 10 years, if you still need insurance, you’ll be 10 years older, perhaps 10 years less healthy, and your new insurance premium will reflect that. If you know there’s a need for longer coverage, a 20 year term may make more sense (I say “may” and “might” a lot because it really depends on your specific situation and I hate the saying “as a rule of thumb”). To compare above, a 20 year term would cost $37/month instead of $30/month. But over the 20 year period,  it would be cheaper than a 10 year plan that renews for another 10 years.

I hope I haven’t lost you yet. At the end of the day, it’s best to line up the coverage with term that it will be needed for and the biggest reason to choose a shorter the term would be if you are a young family facing the financial crunch now, but see your situation improving (ie when both parents are back at work).