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?
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I have about $750,000 in term life for the next 8 years. (started about 7 years ago) got a term that would have insurance up to the time my youngest kid should be in college. If I die in that time expenses for my kids are handled and they will have more than enough to pay for college and get started in life.
If I don’t die I am out only a fraction of that $750,000 which is about $36,000. I am paying to cover expenses for my children if I die. For me that money brings peace of mind. Between my retirement investments and life insurance my kids will not need to worry about finances i I die.
If you don’t have a wife or kids or other dependents to worry about then term life is not for you.
You’re exactly right that you’re betting you’ll die. You aren’t going to get any benefit out of that term life insurance policy yourself, but you might have other people who depend on you that could benefit. If you are married and you and your spouse own a house but neither of you could manage the mortgage on your own, a term life policy means your spouse can stay in the house even if you die and your income is gone. Same idea for people who have kids at home – those kids depend on your salary to support them, so a term life insurance policy could benefit them if you die.
Every insurance is a bet that something bad will happen to you. “I bet I’ll get sick” – health insurance. “I bet I’ll get sued” – malpractice insurance. “I bet I’ll get laid off” – unemployment insurance. In the case of life insurance, you aren’t the person who gets paid if you “win” the bet, but someone you are supporting financially will.
(Note: if you are married, there’s a good chance you/your spouse will be financially FUCKED if one of you dies. Term life insurance doesn’t bring you back, but it does make the practical challenges of getting on with your/your spouse’s life easier. If you are both working, it’s probably a good idea to get at least some term life insurance.)
(Additional note: whole life insurance is different from term life insurance. Don’t buy whole life insurance. It’s an appropriate purchase for the right person, but if you’re one of the people who should buy whole life insurance then you already know that you’re in that category. It’s a terrible deal for 95%+ of us.)
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.
Insurance is not a way to make money. It’s a way to take care of things if something catastrophic happens. In the case of life insurance, the purpose is to take care of your family if you die. If you don’t die, that’s good news. If you do die, that’s bad news, but fortunately for your family you paid a monthly fee to maintain a contract with a company who will give your survivors a lump sum of money to help them survive in your absence.
When you’re young, whole life insurance is *significantly* more expensive than term life insurance for the same amount. And of course it is… there’s a good chance you’ll never use the term life insurance policy, and a 100% chance you’ll (eventually) use the whole life insurance policy.
So, that $100 per month can buy your family a $100,000 whole life policy, or a $1 million term life policy that expires after 20 years.
Of course if you don’t die in those 20 years, the $100,000 policy is better. But if you do die during those 20 years, your family will get an extra $900,000 to pay off your mortgage, to feed and clothe your kids and send them to college.
In terms of “insurance,” that term life insurance sure makes a lot more sense, no? Or, perhaps you should do both. Spend $50/mo on $50,000 whole life and $50/mo on a 20 year plan for $500,000. That’s probably the best option.
My example for my 10 year term may help make sense. Two years ago I bought a business I have a vendor takeback loan to pay for and had 21 years left on my mortgage. All in all I owe about $600,000. My coverage is for $600,000 which my partner can use for whatever. Pay off house, pay off business, go back to school, move, whatever. I also have critical illness, disability, in case I can no longer run my business, but I’m alive and need that income.
At the end of 10 years I will not owe 600k and will no longer need that coverage. It was cheap to get 600k because I’m young. If I got whole life for 600k it would not have been cheap and I’d be over-insured in year 11 and beyond. In year 11 I may want that money for something else or we may be in a place where we can pay off our mortgage early.
You may not qualify in 10 years. Term life buys that guarantee… FOR LIFE, at a fixed cost (the age you buy). Sooner the better.
Because the alternative would be a whole life policy. However, the return for whole life is so low that you are usually bettered off by buying a term-life and invest the rest.
Great answers above already. Just to add: if you’re planning on living forever, consider an annuity – in a way, it’s the opposite wager of life insurance.
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