Should You Purchase Term Insurance?

October 16, 2018

Risk is a natural part of life. Unexpected events that threaten your financial stability happen all the time. Some are small, like a car repair. Others may be more serious. For example, you could suffer a serious injury or illness that limits your ability to earn income. The market could take a downturn and threaten your savings. Risk management is a core component of any financial plan.

One of the biggest risks your family faces is the possibility of an unexpected death. While it may not be a likely scenario, it is possible. If you’re the primary financial provider for your spouse or children, your death could be catastrophic. It could leave them with debt, a lack of income and other financial challenges.

Life insurance is an effective tool to manage this risk. Unfortunately, many people avoid coverage because they believe it’s too expensive. That’s not always the case, though. A recent study by InsuranceQuotes found that nearly 40 percent of Americans don’t have life insurance.1

If you’re on a tight budget or want to minimize your premiums, term insurance could be the right strategy for you.

How does term insurance work?

Term insurance is a type of life insurance that provides coverage for a limited period of time, such as 10 or 20 years. Generally, the longer the period, the higher the premium. Term is often an affordable alternative because its premiums are usually lower than those for permanent insurance.

Term also differs from permanent insurance in that it doesn’t have a cash value component. All of your premiums go toward the cost of insurance. That helps keep your costs down, but it also means your funds don’t accumulate inside the policy as they do with permanent insurance.

What are your options at the end of the term?

Ideally, your term insurance won’t ever be put to use. That means you’ll outlive the duration of the policy. At that time, you have a few options. One is simply to let the policy lapse and stop paying premiums.

Another option is to renew your policy and establish a new term. Of course, your premium won’t stay the same. Your insurer will likely recalculate your premium based on your older age. You also may have the opportunity to convert your term policy to a permanent policy. Again, though, you’ll likely have a higher premium based on the fact that the policy is permanent and that you’re older.

Is term insurance right for your needs?

Term insurance could be appropriate for you if you have a finite need. For example, many people will use term insurance to provide coverage while they have minor children in the home. Or they may keep a term policy while they’re paying down a mortgage. However, term insurance may not be appropriate for permanent needs, such as paying estate costs or providing a legacy for grandchildren.

You also may want to consider term if you have no coverage and a tight budget. Even if term isn’t exactly right for your needs, it’s better than having no coverage at all. If you can only afford a limited amount of premiums, term could help you get the right amount of protection.

Ready to develop your insurance strategy? Let’s talk about it. Contact us today at Grand Canyon Planning Associates. We can help you analyze your needs and create a plan. Let’s connect soon and start the conversation.