what is the benefit of a term life policy?

Question

Maybe I just don’t understand what they’re doing. BUt it seems to me if I take out a 10 year policy that costs $100 per month, I’m betting that I’m going to die within that period of time and the company is betting that I won’t or that they won’t have to pay out. If I get to the end of that 10 year term, then I’m just out $12,000. What am I missing?

In: 116

Answer 1

You are exactly right! Term life insurance is a very simple product to understand.

1. You are betting that you’ll die within a specific time period.
2. The insurance company is betting that you won’t.

Unlike other insurance products, which might feel like a scam or a ripoff, you and the insurance company are well aligned on this product: neither of you want you to die during this window. You buy the product to mitigate the consequences if you do.

Generally, you should arrange this time period to cover years where someone is dependent upon your continued contributions, and the insurance should be sufficient to replace those contributions. So, for example, you probably don’t need term life insurance when you are a child or a young, single professional. Your or your parents’ emergency fund should be sufficient to cover funeral arrangements.

When you are married and have a mortgage and a couple kids, your family depends on your income and other contributions to family life (tending house, watching kids). That’s when you should have term life insurance, so that your family receives funds to replace your lost contributions. You might need a few million, to pay off one car and the mortgage, prefund your kids’ educations, partially fund your spouse’s retirement, and cover the increased costs for babysitters and a maid now that you aren’t around to do those things.

Once your kids are grown (and their education paid for), generally they wouldn’t need anything more from you financially, so you no longer need coverage for them and can reduce your coverage. Once your retirement is funded, your spouse doesn’t need further income from you, either, and you can drop the term insurance entirely.