Term Life Insurance Works in Tough Times
Sunday, October 24th, 2010We’re in one of the steepest recessions of the last 50 years. Families are making tough decision on what to trim from their budgets and life insurance eventually comes up on the radar. People start to look at the premium they pay for health, life insurance, etc. The whole point of life insurance is that you’re protecting against a future risk. Cancelling the coverage early defeats the purpose. Let’s look at why term life insurance works so well during tough times.
First, let’s take a quick refresher course on why life insurance is so important. It’s easy to look at that monthly premium and say, “Well, I’ve been fine till now…do I really need to keep paying for life insurance?” It’s human nature and especially American nature to put off the future for the now (look at our credit cards and savings rate) but the risk of not having life insurance is too great in relationship to the cost of having affordable term life in place.
At it’s core, life insurance is about replacing income over a long period of time in the event of someone passing away. For a new family, we’re potentially talking about 100′s of thousands of dollars if not millions. In our “without life insurance” article, we address the difficult decisions surviving family members would have to make without this type of protection. It really can throw a family into a tailspin at quite possibly the worst time in their life! It’s bad timing and it’s bad planning. Many of the people we helped sign up for term life insurance recently did so after witnessing the unexpected passing of a friend, co-worker, or family member and the result it had on the family. Nothing drives people to action quicker than seeing what ACTUALLY happens in such a situation. Unfortunately, people need this visceral experience to understand the impact of not having life.
So back to our original intent. We now have established the reason life insurance is so important. What about the economy’s current downturn and potential future financial issues that might hit any given family? That’s why term makes so much sense over options such as whole life insurance. Term’s greatest advantage in a bad economy (or good one for that matter) is the fact that it’s so affordable. A $300 monthly premium for whole life is probably going to hit the chopping block. A $35 term life premium is much more manageable. Whole life insurance is always more expensive than term life and this is exactly what’s at risk when the economy takes a downturn or you are between jobs. The alternative is to buy much less whole life coverage but then this defeats the purpose of the core reason for life insurance to begin with. $50K probably is not going to help much with two young children and a spouse.
Life insurance companies offer many bells and whistles to whole life policies to try and address the issue of cost in tough times through various life insurance riders and cash values. These tend to additional costs or provide a false sense of security since the the underlying cost structure of whole life makes it expensive. A strategy to mirror the effects of these various constructs is to purchase term life and invest the difference in premium. Cover the big risk (loss income from passing away early) and self-insure the add-on’s. You can either have cash value in a life insurance policy for a fee or cash value in your bank/investment account.
If a policy is lapsed during extremely difficult times, you would rather have paid the lower life insurance rates than the much higher whole premium amount. The very advantage of term life insurance…a low rate…makes it extremely well-suited for times in a person’s life when financial health is on life support.