The Pros and Cons of Term Life Insurance – Podcast Episode 37

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In this podcast, I’m going to be discussing the pros and cons of Term life insurance. The number one pro of Term Life insurance is affordability. Most people go with term life insurance, because you can get an awful lot of coverage for very little money. Now I know very little money is kind of a subjective term, right. But yeah, I mean, if you want millions of dollars of coverage, or even hundreds of $1,000 worth of coverage, term life insurance is going to be the way to go.

That’s how you’re going to get the most amount of insurance for the least amount of money, it’s going to be less expensive than whole life, less expensive than Universal Life, less expensive than Indexed Universal Life. So it works really terrifically for people who are on a limited budget, or who just want to get the most amount of insurance for the least amount of money. 

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The number two pro of Term Life insurance is flexibility. Now you can get policies that actually renew annually. So every year you can get the policy renewed, the price will go up every year, because you’re now a year older, or you can get policies that are going to lock in your youngest age for the next 10 years, or 20 years of 30 years. Now, you know, a 10 year policy is going to be less expensive than a 20. And a 20 is going to be less expensive than a 30.

So the longer the policy is, the more it will cost. Because there’s just a greater risk that you’ll die during that time the insurance companies know more about statistically when you’re going to die than anybody else on this earth. But what this does is it just allows you to tailor the coverage to a specific period when you’re going to have the greatest financial obligations or dependents. So see, you got 10 year old kids, a 15 year old policy might work terrifically that if you were to pass away, that the surviving spouse could pay off the house and make sure that the kids education is all paid for.

So if you’ve got children that are 10 years old, 10 year old twins, you could get some insurance, say a 15 year policy that would last all the way until the children are 25 years old. And that money could be used to pay off the mortgage. So that God forbid you died, they those kids would have a house to live in and a roof over the head the entire time. It could also provide enough money to pay for their their college education.

The you know, there’s all sorts of different ways to look at it, you know, maybe you’ve got a 30 year mortgage on your home, and you’ve got a $300,000 mortgage, well, you could get a $300,000 term life insurance policy that’s going to last 30 years. And that would just totally take care of your mortgage payment, God forbid, you died too soon. And your surviving spouse partner or a loved one wouldn’t have to worry about losing the house.

The interesting thing on that by the sidewalk by just a side note is, is that, you know, if the house you get paid down $250,000, you’ve still got a $300,000 policy on the house. So there’s an extra $150,000 that can be used for other things for replacement income, or you know, just kind of pay for any medical expenses or burial expenses or anything like that. So you got a lot of flexibility with the term life insurance policy. 

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The third pro of Term life insurance, is it simple and straightforward. What it is, is if you get a 15 year policy or 20 or 30 year policy, it’s going to pay out X amount. If you die during that time, it just can’t get more simple than that there is no complicated investment component or cash value accumulation or anything like that. All you’re doing is just transferring a large amount of risk to an insurance company for a small amount of money. 

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The fourth pro of Term Life insurance is protection for dependents. We’ve kind of talked about this a little bit but you know if you just want to make sure that your kids don’t have to live in poverty that they don’t lose the house that they live in, that they you know your your partner or spouse or loved one can live the same lifestyle that they’ve become accustomed to with your income, their insurance works terrific terrifically, to make sure that, you know even though everybody will be mourning your death, and just wondering how you could have died, so soon, they will also be celebrating the fact that you loved and cared for them enough to protect each and every one of them financially anyway, to make sure that they don’t lose even more. 

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And then the fifth pro of Term Life insurance is converted ability option, some term life insurance policies give you the ability at some point in the future to convert a certain amount of that to permanent life insurance without any need for a medical exam. So let’s say you got a PA 20 year policy at age 50. And five years into that policy, you had a heart attack, and they put three stents in. And now you’re on all sorts of medications and stuff like that, you’re not going to get any more insurance for quite a while, at least a couple years. And that would be final expense, Simplified Issue whole life underwriting insurance.

So what you could do, knowing that you had a term policy at that point, if you had the Convert ability option on your policy, you could convert a certain percentage of that over to whole life insurance. And that would be based off your current age when you took the policy out. And there’s no health questions at all it was it would be issued based off your health when you signed up to the policy. And boy, I tell you what, that can be a real saver sometimes. Because you know, when that existing term policy ends, you’re going to lose all the coverage. So that allows you to convert some of that over to whole life insurance. 

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Now, there are some cons of Term life insurance. Number one is it is temporary coverage. So permanent life insurance, whole life insurance is permanent. It’s very simple. It’s permanent. Term Life insurance is going to provide coverage for a specific period of time. And if you outlive that policy term, the coverage is going again, now, you need to be really careful with this one. There’s a lot of insurance companies that will say, Hey, your term life insurance policy can go all the way up to age 95.

And they just forget to tell you something that, yeah, if you had a 20 year insurance policy and you live 20 years, and you want to convert that it’s going to convert over. And the rates are going to be adjusted on the fact that you are now 20 years older. And in many cases, the premium is going to quintuple or just Quadrantid, it gets crazy, it’s almost like the insurance companies don’t want any kind of punish you, they don’t want you to keep using the policy, it’s just gonna get so expensive.

So technically, it’s true that they can go up some policies can go up to age 95. But the pricing is going to be punishing. And we man, it would be the rare person that could absorb that much of a financial impact, you know, say you were paying $500 a year. And now it’s going to be $7,000 a year. So and it’s going to go up every year thereafter. Yeah, crazy. So just understand, it’s best to use for temporary coverage. 

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The second con of Term Life insurance is no cash value accumulation. Now, cash value is kind of like thrown around, like invest in yourself, kind of be your own bank and stuff like that. It that doesn’t really enter into play for the average citizen, the average insurance shopper because they don’t have the amount of money to fund it adequately. It’s pretty much a heightened net worth, in my opinion, anyway, a high net worth move, where you’ve, if you’ve maxed out every other kind of tax program and tax write off and everything else. And you just want to kind of get one more last thing, then the cash value accumulation and banking on yourself and be your own bank. That can make a lot of sense. But from the average person who’s who’s living paycheck to paycheck, don’t really don’t really pay too much attention. 

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The third con of Term Life insurance is premium increases. So while the while the premiums are fixed for a specific period of time, they do go up when the policy and I already talked about that one. And there’s something called an annually renewable term. And what that means is that every year your prices going to go up. You can get some pretty decent short term low rates, depending on your health with an annual renewable term.

But yeah, just understand The price is going to go up every single year, kind of really a niche type product for people, you know, for that type of product for people to use. The fourth kind of term life insurance is no equity or ownership, you know, it’s not a whole life insurance plan, you don’t own it, the insurance company always owns it. And they’re always hoping that you don’t die within that term. And they know forever 100,000 people, they know how many people are going to die and how much they’re going to pay out. And they just price it accordingly.

So that they can make a profit and offer that insurance to you. But it’s like, it’s like car insurance, you know, you’d never get money back for the car insurance, you could have drove 50 years and never got involved in an accident, never make a claim. And you’re never gonna get that money back. Because you got no equity or ownership in the insurance, all you’re doing is paying a premium to transfer the risk over to an insurance company. So just just understand, that’s what it is, unless you get into like a whole life insurance or universal life or indexed universal life, something like that, then you start getting into some equity and ownership type issues. 

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And then the fifth con of Term Life insurance is limited customization. So there are some riders and some other living benefits that can be included in with term life insurance policies. But you got to read the fine print, right. So a lot of times an insurance company will say, hey, you’ve got living benefits with fits with your policy. But the policies are prorated, like one the policy has been enforced and stuff like that.

So just be just be aware that term life insurance, for the most part, if you can just think of it as, hey, I’m going to pay this amount, a month or a year. And if I die, when within a specific time period, 15 20 30 years, it’s going to pay this amount, and that money is going to go to my family. And that’s going to protect them.

God forbid, when the worst happens, that’s probably the best way to look at it. And if there are any extra benefits, then yeah, just be that’s just just gravy. There are some companies out there that you can get writers or even some of them included in the plan where like, if you’re diagnosed with cancer, you could get a certain amount of money out of the policy.

So say you had a million dollar policy, you can get a $50,000 out of the policy. Well, that’s pretty cool if that happens, right? Because you know what happens when you have cancer or a heart attack or something, you get medical bills, right? So, you know, if there’s some extra money out of the policy, that means you don’t have to come out of pocket to pay a bunch of medical bills. That’s a pretty cool deal. But it just depends on the plan. It depends. your age, your health, a whole number of different things. But that is the pros and cons of Term life insurance.

NOTE: Show notes are AI transcribed, so there may be some spelling or grammatical errors.