Term Life Coverage

Today very few people own their own individual life insurance policy. Most only have coverage through their work. The type of life policy that people normally get at work is term life coverage, but it since it covers everyone at work is known as group term insurance. Like anything that comes as a benefit from work there are good and bad points.

Disadvantage of Group Term
The main disadvantage of group term life coverage is the amount of coverage. Most work life insurance is only 1 or 2 times a person’s annual salary. Financial experts recommend a person should have at least 6 to 10 times their annual salary.
The amount of term life coverage you would need to properly protect your income would be between $300,000 and $500,000.

Life Insurance is Another Expense
Most people look at life insurance as just another monthly expense and something only old people should own. Since life insurance only benefits the ones you leave behind not you directly a lot of people ignore it. This is a mistake. Think of Life insurance as income protection insurance. When you purchase a life insurance policy you are protecting your income for a given period of time. The 6 to 10 times figure I discussed early is 6 to 10 YEARS of your income you want to protect.

If you pass away whoever you name in your will will get the agreed insured amount in one lump sum. So they will get 6-10 years worth of your income in one check.

You Protect Your Home & Car
Here is one way to look at term life coverage. You own home insurance to protect your home in case it burns down. Most homes are generally worth $100,000 to over $1,000,000. Even when a home is paid off people still own home insurance. Why? They don’t want to have to come up with $300,000 to rebuild a new house.

Shouldn’t you take the same philosophy when protecting your income? Is your home or car more important than your or your spouse?
How much of your income do you want to protect? A 30 year old, who earns $50,000 and works 30 years would earn over $1,500,000 over those 30 years without inflation or pay raises.

Once you die your income is gone, but your family still needs to live. A funeral is expensive and your spouse or partner will still have a mortgage or rent to pay, but you will not be there to provide your income.

Your House Burns Down
Term insurance works like your home insurance. For example, let’s say your home is worth $300,000 and is insured for $300,000. What would your insurance company pay if your home burned to the ground? $300,000.
A term life coverage policy pays the same. What would your life insurance company pay if you had $300,000 and you passed away? The life insurance company will pay your beneficiary $300,000. Another term for the coverage is called the “Face Amount of Coverage.”

How Long is Your Income Protected?
The other part of a term insurance policy is the “term” of the policy. The term means how long you locked in your premium and coverage. A 20-year term insurance policy means your rate and term life coverage is set for 20 years. At the end of the term you can decide to renew for another term or let it expire. The last part depends on the conditions set by the life insurance company.

Lock In The Longest Time Possible
A good rule of thumb is to lock in your rate and term life coverage for as long as possible. The reason is you do not want to have to renew your life insurance policy every 5 or 10 years at a higher premium. The healthiest most of us will be is today, no one knows what tomorrow will bring (which of course is the whole point of insurance), by signing your policy for 20 or 30 years you are hedging against any future health issues which may cause insurance companies to refuse you cover or increase rates on you.

A term life coverage policy is the best way to protect you and your family if something bad happens. After all the reason to have any type of insurance is to make sure bad situation from getting worse.

Bad Situation Need Not Get Worse
Most people do not have an extra $20,000 to buy a new car if their car is totaled in a car accident. We also do not have $300,000 sitting in the bank case our house burns to the ground. We also do not have an extra $300,000 to replace a spouses income for the next 6 years while we deal with grief and try to carry on with our lives.

Remember, whether it is car insurance, home insurance or term life coverage the insurance you bought is to prevent a bad situation from getting worse.