Life Insurance and Its Costs
The subject of buying life insurance may not be one you want to discuss, but it could be one of the most important conversations you have with your spouse or partner.
The primary reason to buy life insurance is to ensure that your loved ones are protected financially if you're not there to support them. The good news is that one form of life insurance has become progressively cheaper over the past decade and you can get a lot more for your premium dollars. There are two basic forms of life insurance: term and whole life.
Term Life Insurance
Term insurance remains in effect for a fixed number of years. If the policyholder dies during that time, the beneficiaries collect the amount of the policy.
One of the best features of term insurance is that identical premiums can be structured throughout the term of the policy. This is known as having a "level load." Term insurance is the least expensive type of life insurance and has been purchased by roughly 70 percent of life insurance policyholders.
"Term life is needed by anyone with dependents who would suffer financially in the event of his death," including a spouse, a minor child or an aged parent, explains Steve Weisbart, vice president and chief economist of the Insurance Information Institute (www.iii.org).
"Even those without an income, like stay-at-home parents, should have coverage," Weisbart adds, noting that the cost of replacing the services provided by an at-home parent ranges anywhere from $50,000 to $100,000.
If you cancel a term life policy or decide not to renew it, you receive nothing back, unless you purchase a policy with a return-of-premium guarantee. A return-of-premium option will increase the cost of the annual policy slightly, but you’ll receive a substantial portion of the premiums you’ve paid throughout the years.
The subject of buying life insurance may not be one you want to discuss, but it could be one of the most important conversations you have with your spouse or partner.
The Falling Cost of Term Life Insurance
According to Weisbart, since 2000, the cost of term life policies has dropped about 5 percent per year. As a result, premiums are less than half of what they were over a decade ago, according to the Insurance Information Institute.
"People are living longer, which means insurers are paying fewer beneficiaries," explains Weisbart. "Death rates for the 25-to-44 age group—the primary age range for purchasing life insurance—have decreased significantly over the past 10 years."
Before choosing a life insurance policy, you need to figure out how much income you’re trying to replace and how much you have to pay for life insurance coverage. Knowing those two numbers will help you figure out whether term or whole life is the right choice.
Marcy Tolkoff, JD, has been a writer and an editor for almost 20 years. Tolkoff was a staff editor at Woman’s World magazine, where she edited articles in a broad spectrum of fields over a period of 13 years, the last 6 of which were exclusively centered on personal finance. She is a member of the Society of American Business Editors and Writers and the New York Financial Writers Association.