Is Term Life Insurance a Waste of Money?

By: EW Content Team   Date: 13 November 2010

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In this article, we wanted to address the question of term life insurance being valuable or a waste of money.  For starters, the purpose of term life insurance makes it possible for people to purchase a life insurance policy needed at a time when permanent insurance does not fit within the budget or when life insurance protection is needed but only for a specified amount of time.  Although there is no cash value, term life insurance does provide a guaranteed death benefit.

For premiums, these are designed to increase at set intervals, usually one, five, ten, and twenty years, based on the exact policy chosen.  In addition, a policy of this kind is often used when life insurance protection is greater but only for a certain amount of time, followed by decreasing years down the road.  For instance, this type of movement would be seen with the addition of new family members, followed by children growing up and moving away from home.

When needing supplemental insurance coverage to go with permanent insurance during the years when needs are greatest, term life insurance would make a great choice.  When used for at a time such as this, you would have the opportunity to purchase death benefit protection while keeping the amount of premium low.  Then, if you choose a convertible type of term life insurance policy, you would have immediately coverage but also have the option of buying permanent insurance in the future.

In response to the question of whether term life insurance is a waste of money, in most situations the answer would be no.  Because this type of coverage is designed for a very specific purpose, people who take out a policy typically benefit from the coverage.  Although there are many situations in which term life insurance would prove highly beneficial, you should also understand that some drawbacks exist as well.

As mentioned, term life insurance provides a death benefit but only for a predetermined about of time.  Therefore, if you were to outlive the time for this benefit, then the beneficiaries on the policy would end up with nothing, meaning you invested time in a policy that provided no benefit.  Another thing you should know is that at the time the term life insurance policy ends, all protection is also gone.  The same would be true if you were to stop making the premiums for the life insurance policy.

One of the best ways to think of term life insurance would be when renting a home.  By being a renter, you would be granted access to the property, as well as the rooms inside and any amenities on the outside.  However, this access would only be made available for the term of the contract and if you are making the payments as agreed.  However, once the rental contract ends and you move on, you take with you no cash value, even if you had lived in that home for five years.

When shopping around for a term life insurance policy, it would be worthwhile to choose one that converts automatically to permanent insurance.  However, you want to pay close attention to the details since not all policies will convert.  Even if you have a term life insurance policy that converts, make sure you understand any applicable restrictions.  For instance, at the time of the term life insurance policy ending, whether it converts to a permanent policy or not, you may be required to go through another medical examination to prove you are insurable.

Remember, premiums for a term life insurance policy increase at set intervals and over many years, these premiums become expensive.  In fact, it is common for a person to buy this type of insurance around age 25 while holding onto the policy until around age 65.  At that time, premiums have become too high for most people to afford.  Because of this, choosing a term life insurance policy that converts to permanent insurance is so important.  Once you have locked into a permanent policy at a fixed premium, the policy cannot be cancelled ever if you continue making the scheduled payments according to the contract.

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