What Is Term Insurance—And Do You Need It?

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Courtesy of David Lerner Associates

Many families purchase life insurance in order to help provide financial protection for surviving family members if a spouse dies. When one family income-earner dies, it can be difficult for the surviving family members to earn enough money to maintain the lifestyle to which they had become accustomed.

This may be especially true if it’s the primary income-earner who dies. But life insurance may be helpful regardless of whether the insured was the primary or secondary income-earner, says David Lerner Associates Vice President of Insurance Sales, Daniel Gardella. “Either way, this is income that’s no longer available to the surviving family members.”

There are many different types of life insurance, but Gardella says they all fall into one of two broad categories: term life insurance and whole life insurance (also referred to as permanent life insurance). Term insurance is relatively simple: An individual buys a specific amount of insurance coverage (which is referred to as the death benefit) for a specific period of time (or term, hence the name) at a pre-determined price (or premium). Premiums can usually be paid in a lump sum or on an annual, semi-annual or monthly basis.

For example, suppose Bob purchases a 10-year level, $500,000 term insurance policy. If he dies at any time during the 10 years following the policy issue date, his beneficiaries will receive $500,000, assuming all the premiums have been paid and the terms of the insurance contract have been met.

According to Gardella, the cost of term insurance is based on many different variables, including the insured’s age, the condition of his or her health, whether or not the insured smokes, and where the insured lives. “Generally speaking, the older the insured, the more expensive the policy will be. Less-healthy individuals and smokers may also pay higher insurance premiums than healthy non-smokers.”

Many life insurance companies require those applying for insurance to complete a detailed health questionnaire, as well as submit to a health examination (including blood work) as part of the application process. They may perform a detailed health background check as part of the underwriting process in order to help them decide whether or not to offer a policy and how much to charge for it.

Two common questions Gardella gets when it comes to term life insurance are: 1) How much insurance is enough, and 2) What is the appropriate term? The answers to these questions will be different for every individual, but one strategy Gardella suggests is to consider buying enough insurance to replace the income of the insured for a set number of years.

For example, if Bob earns $50,000 a year and wants to replace his income for his family until his 12-year-old daughter graduates college, he might buy a $500,000 policy (10 years until college graduation x $50,000 = $500,000). Such an income replacement term life insurance strategy may enable Bob’s surviving family members to maintain their current lifestyle after Bob’s death.

Some people question the value of term life insurance, thinking that if they die before the term is up, they have wasted their money. “However, a better way of thinking may be that having the insurance in place and paying the premiums provides invaluable peace of mind for the insured and his or her family,” says Gardella.

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Peter Ottaviano
Zimmerman/Edelson Inc
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