Financial security is a top concern among young families or those just starting out. Generally speaking, saving up for a down payment on a house, car or college tuition takes precedent over life insurance.
However, this is precisely the kind of financial instrument that can provide families with financial security in case of an untimely death – through a tax-free payout from the insurance company.
Designed with younger individuals and families in mind, term life insurance is intended to serve those with a shorter-term policy needs, generally 10 to 30 years. It is also ideal for those who have dependents, debts and a limited budget.
Term life insurance will cover the critical years of their lives when debts are high and budgets are tight.
“Term life insurance, at least initially, provides the largest death benefit for the smallest premium,” said Brian Ashe, treasurer of the Life and Health Insurance Foundation for Education. “It’s the perfect way for people who have little in terms of discretionary income to immediately create a substantial estate.”
According to Ashe, a 35-year-old could probably purchase $500,000 in term coverage for around $30 to $35 per month.
One way to consider the benefit of term life insurance would be to imagine if a family’s main breadwinner lost their job and the financial impact it would have. If that income were lost because of death, the financial impact would be ameliorated with a sufficient level of term life insurance.
Ashe said the level of insurance needed depends on each case, but a general rule of thumb is to have a policy with a dividend of 10 times a family’s annual income. During times of national economic instability, it is advised to have a policy up to 15 times a family’s annual income.
While an estimated 60 percent of employers provide life insurance, Ashe says it’s usually not enough to fully meet a family’s needs as the average level of employee-provided policies is just three years of the employee’s annual income.
“Three times income, for those who own it, is woefully inadequate because when people die, they’re dead a lot longer than three years,” said Ashe.
When shopping for a term life insurance policy, Ashe says it’s important to make sure it has a conversion clause that would allow the term policy to be converted into a permanent or whole life insurance policy or a universal life insurance policy, which can often be done without the need for a physical.
This not only guarantees continued coverage in spite of an illness, it also allows the policyholder to avoid a two-year contestability period that would be attached to a new policy.
Riders can also be attached to any policy to insure a spouse or kids, each with their own conversion clauses. Ashe does not recommend accidental death and dismemberment clauses, which typically doubles a policy’s dividend under certain circumstances, as the odds of that happening are low. In fact, it would be a better idea to just increase one’s overall coverage.