What is and how term life insurance policies work? Let me show in a very simple way the characteristics of this life insurance plans.
Let’s say that I am 40 years old, I’m married, I have two children and I’m the main income earner for my family, and we also have a mortgage.
I’m hoping that my kids go to college and that we’ll be able to pay for college. I also want to make sure that my spouse, if anything were to ever happen, can retire because maybe my spouse does not have the income-generating ability, or maybe even if he/she does, they would have to take care of the children if anything were to happen to me.
Because of all of these things that I want to make sure get paid off or get fundedin the event that I die, I think about getting life insurance.
I think most of us understand the general idea about life insurance. You pay a certain amount on a regular basis, and in the event that you were to die, your relations, whoever you put as the beneficiaries of your life insurance policy, or your estate, those people will get some money.
But life insurance isn’t quite that simple. One version of life insurance is the other one is less simple.
There’s two types of life insurance. One is term life insurance, and the other is whole life insurance,
I’ll talk about term because frankly, term life insurance is simpler. I go to the insurance agent, and the insurance agent says, “Look, if you pay a premium every year of $500, (the word “premium” literally just means the amount that you would pay every year). for 10 years, so the term here is 10 years,
“If you were to die at any point over those 10 years, we will give you $500,000”. We will give your family,or we will give the beneficiaries of your policy $500,000. “The beneficiaries are the people who would benefit from your policy, who would get the payout if, in the event that you were to die.
Over the next 10 years, you’ll pay about $5,000. If you were to die, your family will get $500,000. The reason why this works out for the insurance company is that the insurance company figures out, OK, if you don’t smoke, you have good health, it’s unlikely that you’re going to die in the next 10 years, and so if they average it over many, many thousands of people, they’re going to make money.
Some people are going to randomly die, but they’re going to get the premium from everyone else, and that’s going to more than offset the payoffs that they need to give for the people who just randomly are in accidents or who die for whatever reason.
The reason why this is called term life is that if you don’t die after those 10 years, you have to, then, get a new insurance policy. If you don’t get a new insurance policy, after those 10 years you didn’t die, nothing really happens. You just keep on living.
All of this money that you had put in goes away. It just goes to the insurance company. You gave it to them in the event that you might have died in those 10 years. You didn’t. All is fine now. What’s unfortunate, and this was probably good enough for you because 10 years was, from when you’re 40 to 50 years old, maybe that’s the time that your kids started to go to college.
That gave you enough time to save more money for retirement. It gave you time to pay off more the mortgage and maybe save up some more money for college, and so you say, “Hey, 10 years was perfect for me. “If you think when you’re 40 years old that,”Hey, I want more time. “I want more time to pay off the mortgage,”save money for college, save money for retirement,”then you could make this a 20-year policy.
Then you could make this a 20-year policy. If you make this a 20-year policy, then your premium is going to be a little bit higher. You’re going to pay it every year, but the reason why the premium is going to be a little bit higher is that you have a higher chance of dying from ages 50 to 60 than you did from ages 40 to 50, so the insurance company will figure out those probabilities and charge you a slightly more larger amount.
But regardless any way you look at it, in a term policy, you pay a fixed premium for a fixed term. If you pass away over that term, your family gets the payoff. If you don’t, then the policy just expires, and you have to get another term life policy.
At some point,maybe by the time that you’re 70 years old, if you haven’t passed away, and hopefully you haven’t, it’s actually very hard to get a term life policy when you’re 70 because the insurance company would say,”You have a high probability of passing away between the age of 70 and 80. “We don’t want to take that risk”.
This is actually what I have. I have a term life policy because I am right now34 years old, and I have a mortgage, and I have a young child, and I want to make sure that if anything were to happen to me over the next, I believe my policy term is 20 years, if anything were to happen over the next 20 years, that my family will get enough money that they can pay off the mortgage, have money for college, and then maybe some money for my wife’s retirement.
Term life insurance is the basic plan, cheapest plan you can buy to make certain that your plans and dreams about your loved ones, will come true.
Video: Term Life Insurance
Term life insurance or term assurance is life insurance which provides coverage at a fixed rate of payments for a limited period of time, the relevant term.
Bankrate.com provides free life insurance calculators and whole life quote and term insurance calculator for quotes.