There are two basic categories of life insurance: term and various forms of cash value life insurance. Today, I am going to talk about term life insurance and ways to use it more creatively to not only obtain a more appropriate amount of long-term protection, but also to save money.
Term life insurance is simple. You pay a fixed annual premium in return for a promised amount of protection from the life insurance company during the term of the policy. The face value of the policy is paid to the named beneficiaries only if the insured person dies during the specified period. So, term life insurance is similar to homeowners insurance in that if nothing happens (during the term), you continue to pay the premium, and if something happens, the insurance company pays the claim. Term life insurance policies are generally quite affordable because most people buy and hold them during periods of youth (say under age 60). Therefore, since the risks are lower, the costs are lower.
Naturally, if you are 30 years old and buy a $1million 5-year term life insurance policy, the annual premium will be lower than if you were to buy a $1 million 10-year term life insurance policy since younger ages are covered during the period.
Another important aspect about life insurance need is that it declines as you age. This makes intuitive sense because insurance is designed to provide instant wealth needed to replace the lost future income, or to cover future expenses that the insured’s income won’t be able to cover. The younger you are, the more insurance you would need to replace future lost income. However, as you age and begin to build wealth, the less need there is for life insurance.
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