When buying life insurance there are two points that customers focus on: best coverage and affordability. Unfortunately, many people have misconceptions about the affordability part. A study done by the Insurance Barometer in 2015 found that “80 percent of consumers misjudge the price for term life insurance, with Millennials overestimating the cost by 213%, and Gen Xers overestimating the cost by 119%.”
But not all life insurance plans are the same. In fact, with a little research, you’ll find there are multiple types of plans available. One common product is term life insurance, which is often a very affordable option. Here’s why:
It’s for a Set Period
With term life insurance, you are only purchasing coverage for a specified period of time, typically 10, 20 or 30 years. Once it reaches the end of the term, you must either renew it or let it expire.
When you purchase life insurance, your health, lifestyle, and age play a factor in the price of your premiums. Often, a medical exam is involved to determine your level of risk. An older person with poor health is riskier to insure, which would result in higher monthly premiums than a younger, healthier person.
Let’s say you bought a term policy at 20 years old. Your premiums would be relatively cheap because you are young, and therefore the risk for the insurer to pay out your policy (i.e. you passing away unexpectedly) to your beneficiary is quite low. This is why it can be a good idea to purchase life insurance even at a younger age.
No Cash Value
Unlike permanent life insurance, term life policies do not have cash value component. Permanent life insurance, on the other hand, does have has a cash value component. Part of your premiums go toward this cash value. Since this is also lifetime coverage, your premiums will be more expensive compared to term at the beginning of the policy.
Renewing Term Insurance
Once your term policy expires and you decide to renew or purchase a new one, your premiums will change based on your age and lifestyle at the time of the renewal. To minimize the change in cost, you can buy your first policy for a long period of time. Also, explore convertible term insurance, which allows you to move to a permanent policy.
Talk to a trusted insurer before you purchase a policy, and they will provide the information you need to make the right decision for you and your family. Ask about the different policies available, and the possibility of changing your plan if needed. Be prepared to openly discuss your budget, and an insurance professional will help you determine the right policy for you.