Term Life Insurance: Protect Your Family and Your Budget

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Perhaps you recognize the important role life insurance can play in protecting the people you love, but have struggled to find a policy that fits your finances. Fortunately, term life insurance offers a cost-effective solution. That’s especially important if you’re already struggling with student loans, credit card debt, rent or mortgage payments, child-care expenses or other budget busters.

By allowing you to choose your coverage amount and the length of the policy, term life insurance offers you protection at a surprisingly low cost, especially when compared to other forms of life insurance.

What’s the Difference?

Popular types of life insurance include term life, whole life, universal life and variable life. All of these policies pay a benefit to the beneficiary in the event of the insured person’s death. But with whole life, universal life and variable life insurance – or permanent insurance – part of the premiums go into an investment fund. Over time, the accumulation of this money, known as cash value, may be used or borrowed. However, these policies typically charge high fees that can reduce your return as much as 3% each year.* Premiums are generally much higher than with term insurance; however, premiums do not increase as you get older.

Insurance agents may emphasize the cash value of the whole life policy, but it's important to review exactly what you are paying for. Because of the higher fees and premiums of whole life policies, it may make sense to purchase a low-cost term life policy and earmark the money you save on premiums toward other savings and investments.

With term life insurance, the premiums generally start out at a much lower cost than with permanent insurance, and only death benefit protection is provided, not any cash or loan value. (Note that some policies, such as the CTA-endorsed life insurance policy, also offer an accidental death and dismemberment feature.)

Determining Premiums

Insurance companies use a process called underwriting to determine whether to offer insurance and how much to charge for it. Underwriting is a way for insurers to assess their risk and how likely it is that they would have to pay out an insurance benefit before collecting enough money in premiums to earn a profit.

If you purchase term insurance when you are young and healthy, the premiums are quite low. Premiums generally increase as you age, and you will also pay higher premiums if you have a health condition or if you smoke.

There are two types of term life insurance:

  • Level term – the death benefit stays the same throughout the term of the policy, although premiums rise as you get older.
  • Decreasing term – premiums stay the same, but the death benefit drops over the term, usually in one-year increments.

You can purchase an individual term policy or a group term policy through your employer or an association. Advantages to purchasing a group policy may include:

  • Lower premiums, either because the employer or other group is subsidizing the premiums or because the risk to the insurer is spread over a bigger pool of people.
  • No health qualifications (although this provision will be dictated by the insurer and may have limitations based on age, employment and amount of insurance coverage).
  • Convenient premium payments made by payroll deduction.

Is Term Life Insurance Appropriate for You?

Because of the initial low cost of term life insurance, it may be a better move for most people. You can purchase higher levels of coverage when needed, and the money you save on premiums can be used for other purposes, such as contributing to your 403(b) or 457 plan, building an emergency fund, paying down debt or saving for a down payment on a home.

Whole life insurance may be more appropriate if you want guaranteed lifelong insurance protection (provided you continue to pay the premiums) and want to accumulate cash value. But keep in mind that premiums for whole life insurance can be five to 10 times higher than the same amount of term life insurance.** If you already have a whole life insurance policy that you purchased years ago, you may still want to explore the low-cost, extra protection of a term insurance policy in addition to help pay off debts and protect your family in the event of your death.

To learn more about low-cost term life insurance available through The Standard, CTA's endorsed provider, visit CTA member benefits.

* Source: Smartmoney.com, "Term or Whole Life?" updated Sept. 10, 2008.
** Source: "Cash value in life insurance: What's it worth to you?" insure.com, updated May 7, 2008.