A few years ago I signed up for a 13-week financial class with the goal of getting myself out of debt. Not only did I not know what term life insurance was, the only insurance I was carrying was auto and that was only because it was legally required! During the 13 weeks, I not only got out of debt, I learned a lot about insurance and what I should and shouldn’t be carrying.
Life insurance is life insurance, right? There are several different types of life insurance, like whole, cash value and term but what this class recommended was term. The idea behind purchasing a term life insurance policy is that the money you save by not buying a whole or cash value policy can be invested at a much higher rate of return. By the time your term life insurance policy expires, you should have enough money invested that life insurance become unnecessary. A whole life insurance policy will cover you for your whole life, but the premiums are high and the rate of return is extremely low. A cash value plan also carries a heftier premium, and no matter what the return on your money, you will never make more than the face value of the plan you paid for.
Term life insurance is purchased for a term – 10, 20, 30 years. The monthly premium on term life insurance will be much lower than other types, because it does have an expiration date. Typically the younger you are when you purchase a policy, the lower your monthly premium will be. Thats why it is important to buy a policy with a long enough term to cover the amount of time that your family will be dependent on your income.
Term life insurance should be purchased right away if you are the main breadwinner for your family. The longer you wait to purchase a policy, the higher the monthly premium will be. You also run the risk of developing a health condition that will either raise your rates or make you ineligible to purchase life insurance.
They key to purchasing a term life insurance policy is that you save the difference and build up your investments so eventually you become self-insured. Life insurance is just another example of how the financial decisions we make today can have a huge implication on our financial future.