Life insurance is an important part of your financial plan. The death benefit associated with your policy can be used to pay final expenses or provide your family with a financial cushion to meet their day to day needs or take care of other expenses. Term life insurance is an affordable way to help create stability for your family, no matter what life sends your way.
While you may not like to think of what might happen when you pass away, considering your life insurance needs isn’t something to put off until later. In fact, the best time to buy a life insurance policy is when you’re young and healthy since that’s when your premiums will likely be the lowest.
Term life is one option for getting covered. It’s an investment in peace of mind. As you consider a term life insurance policy, you may be wondering how much benefit you and your beneficiaries may see in exchange for those premium payments. Understanding the cost as well as the coverage can help you estimate the return on investment you’re likely to see from being insured with a term life policy.
What is term life insurance?
Since you can choose from several types of life insurance, it’s helpful to know how term life insurance works before buying a policy.
With this type of life insurance, you’re covered for a set term or time frame, which is typically 10, 15, 20 or 30 years. Your policy has a specific death benefit that’s paid to your beneficiary if you pass away during the coverage term. This death benefit is a lump sum amount; it can be a few thousand dollars to over $1 million, depending on your needs.
Term life insurance coverage lasts for the year term you choose. Your beneficiary would be eligible for the death benefit if you pass away before the term expires. To keep your coverage past the end of the term, you’d either have to buy a new term life insurance policy or renew your existing one.
Choosing a beneficiary
When it comes to choosing a beneficiary, you can name your spouse or another family member, a trust, a charity or any other entity to be the beneficiary. And, you can choose more than one. For example, you might name your spouse and a sibling to share in the proceeds of the policy. Or you can name a contingent or secondary beneficiary to collect the full death benefit if the primary beneficiary isn’t able to for some reason, such as because your primary beneficiary has died.
Many people name their child as a beneficiary, which is a loving way to help meet the child’s financial needs if the worst were to happen to you. But a child can’t receive a life insurance payout prior to the age of majority in the state where he/she lives (usually 18), so you may want to take the extra step of naming a custodian to receive and manage the money until your child reaches that age.
Why choose term life insurance?
If you’re researching different types of life insurance, one question you might have is why choose term life over another life insurance product. After all, why not pick something like whole life insurance, which is a permanent policy that covers you for your entire life span?
Term life insurance might be more appealing than whole life or another permanent life insurance policy.
Getting insured with term life coverage is simple. You choose the term and death benefit amount you want. The insurance company assigns your premiums based on your rate class. You pay the monthly premium as scheduled. If you pass away during the term, your beneficiary can claim the policy’s death benefit. Other types of life insurance can be highly complicated, requiring an expert financial planner’s or life insurance agent’s help to fully understand.
Perhaps the most important benefit of term life is that it tends to be a more cost-friendly choice than other life insurance policy options. The younger and healthier you are when you buy, the lower the premiums. You can use an online life insurance calculator to see how much life insurance might be recommended for your situation, and an online rate quote tool to run different scenarios for terms and death benefit amounts to see how your monthly premiums add up.
If you want coverage for when you still have debt, still support your family by working, still need to put your kids through college, and so on, term life insurance makes sense because you only pay for only the coverage you need during the time you need it.
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Are there downsides to a term life insurance policy?
A term life insurance policy might not be perfect for everyone. You’ll need to evaluate the role you want life insurance to play in your overall financial plan.
Since a term policy only covers you for a set term, that may leave you with a life insurance gap if you need coverage after the term ends. You could buy a new policy, but you may face higher premiums if you’re getting term life coverage in your 50s or 60s. Remember, you might have to complete a medical exam to get covered. If the exam turns up a pre-existing medical condition, like diabetes, high blood pressure, high cholesterol or another issue, you may be placed in a higher rate class and pay higher premiums.
Term life insurance doesn’t let you build up cash value in the policy. That may not matter to you if you expect to pay off your debt, have retirement income, or lessen your need for a financial cushion in other ways over time. But you might see that as a drawback if you’re looking for a life insurance policy that also has a savings component.
Also, with most term life insurance policies, if you outlive the term, your insurer keeps your premiums. With a return of premium life insurance policy, you can get your life insurance premiums returned to you if you complete the entire term. Return of premium policies are significantly more expensive than the term life insurance policies sold by Haven Life.
What does term life insurance cover?
Now that you know how life insurance works and what’s good (and potentially bad) about it, let’s dig into what it actually covers. Technically, a term life death benefit can be used any way your policy beneficiary sees fit. With that in mind, here are seven common expenses people buy life insurance to help cover:
1. End-of-life expenses
An obvious use for a term policy is to pay for end-of-life costs, including funeral and burial expenses. If you’ve never given much thought to what that costs, it might surprise you to know that the average funeral can have a $10,000 price tag.
If you’re single, covering those expenses might fall to your parents, siblings or other family members. If you’re married, your spouse may be left to foot the bill. Grieving is hard enough. No one wants to stick their loved ones with a $10,000 bill at the same time. Fortunately, end-of-life expenses are exactly the sort of thing life insurance policies can be used to cover.
Most life insurance policies offer an accelerated death benefit rider that allows the policy owner to access a portion of your death benefit before you die if you are diagnosed with a terminal illness. That could help you pay medical or other expenses during a time that you can’t work.
2. Day-to-day bills
Think about what it costs to run your household, day in and day out. You may pay rent or a mortgage payment. Then you have to add in food, utilities, health insurance, car payments, car insurance, clothes, school supplies, extracurricular activity fees for the kids — it seems like the list never ends.
Now, consider how your spouse or partner would handle those costs if something were to happen to you. Hopefully, you’ve built an emergency savings cushion that could help with those costs in the short-term. A term life insurance policy, however, could help your beneficiaries bridge a larger gap. This is especially true if you were the sole breadwinner for the family. A term life policy lets you lift some of the financial burden off their shoulders so they can focus on getting themselves and your kids, if you have them, through the grieving process.
3. The mortgage
For many people, a house is one of their most significant assets and a key to their family’s financial stability for years to come. If you died and your partner faced the payments without your income, a life insurance policy could help protect your partner’s ability to pay the mortgage.
Knowing that life insurance proceeds can be put toward paying the mortgage can offer your spouse the freedom to make decisions that are best for your family during a trying time. For example, should they stay in the house? Should they pay off the mortgage entirely? Does it make sense to downsize? Should they move closer to family? The ability to afford the monthly mortgage payment buys an immense amount of flexibility, time and peace of mind for your family.
4. Cosigned debts
Your mortgage is likely your biggest debt, but it may not be your only one. Credit cards, car loans, personal loans or student loans may also be lingering.
Thankfully, federal student loans are forgiven when the borrower (or the parent, in the case of Parent PLUS loans) dies. When you have other cosigned debts, either with a spouse, family member or someone else, their responsibility for repaying those debts doesn’t end when you pass away. Cosigners are jointly responsible for the debts and having to make the payments alone could put a strain on their finances.
A life insurance policy could allow them to pay off those debts so they’re no longer carrying the weight of those payments after you’re gone. Additionally, being able to pay off cosigned debts could protect their credit scores from damage caused by late payments or delinquencies if they wouldn’t be able to cover the debts otherwise.
5. Child care and other dependent expenses
Raising kids isn’t cheap; the federal government estimates that a middle-income family spends $12,980 each year per child. And that doesn’t include the additional cost of eventually putting them through college, which can add thousands more to the total.
Having kids is one of the best reasons to consider being insured. The lump sum payout associated with your policy can be used to help pay for anything from daycare costs to summer camps to college expenses. That’s important for helping protect your growing family — and all the hopes and dreams they have for the future.
A life insurance policy can also help with paying costs associated with raising a special needs child. For example, they may require nursing care or special equipment, such as a wheelchair or feeding tube. Term life insurance could help pick up where health insurance falls short in paying for those expenses.
6. Stay-at-home parents
After 50 years of decline, the number of stay-at-home mothers has been increasing in recent years, according to the Pew Research Center. The center also reports that the number of fathers who stay home with the kids is on the rise too.
You may think that the chief earner for the family is the only one who needs life insurance coverage. In reality, it’s just as important for stay-at-home parents to have a life insurance policy, considering all that they may do day-to-day to keep the household running. It’s estimated that the typical stay-at-home parent does tasks that are equal to around $160,000 a year worth of work.
Getting life insurance coverage for a stay-at-home-parent can give the working parent some peace of mind. If, for example, they need to add day care expenses into the family budget or hire a housekeeper because the stay-at-home-parent has passed away, a term life policy could be used to cover the cost.
7. Leaving a legacy
There’s more to life than being sure the bills are paid. Many people also want to leave money to make things easier for their partners and children. Things like college tuition or a down payment on a child’s first home. Or, you might want to set aside money to support your favorite charitable causes after you’re gone.
Life insurance proceeds could be used to provide the funds needed to create those types of legacies if you’re not around to do it yourself. You can get a policy large enough to cover your family’s immediate needs, while also providing for longer-term financial goals.
It’s worth noting that in addition to life insurance, it’s important to speak with your attorney about establishing a living will to help direct your survivors’ financial actions after your death. You may also want to talk your financial planner about other insurance products that can round out your financial plan.
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Buying the right life insurance for your needs
Even though there’s a lot to consider when choosing the right life insurance, the process of selecting an appropriate coverage amount and buying your policy is actually simple. Term life insurance quotes are easy to get online. Our life insurance calculator will take into consideration things like your age, overall health profile, financial needs and desired year term to give you a personalized recommendation for coverage.
Once you know how much coverage fits into your long-term financial plan, you can get your real rate and move ahead with purchasing a policy online. One thing you may need to prepare for is the medical exam. This health exam can be completed at your home, your place of work or in a doctor’s office. The exam itself is fairly straightforward; you’ll fill out a health questionnaire, be measured for height and weight and give blood and urine samples.
The insurance company uses your medical exam results to determine which rate class you’re eligible for. That determines your monthly premiums. Once your policy has been approved, you’ll sign off on the necessary paperwork, choose your payment method for your premiums and you’re all set. From there, you can get back to enjoying all the things that are so worth protecting and celebrating: your home, your kids, your partner and your future.
Term life insurance is a cost-friendly way to get the coverage you need, for the time frame that you need. The sooner you apply for a policy and get approved, the sooner you can feel confident about creating financial security for yourself and your loved ones.
If you already know how much coverage you need, then there’s no better time than the present to get a high quality, affordable term life insurance policy.
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Rebecca Lake is a freelance writer specializing in personal finance and small business. She lives on the North Carolina coast with her two children.