According to financial guru Dave Ramsey, term life insurance is one of the five kinds of insurance essential to the financial security of most modern families. According to Ramsey, term insurance provides good dollar value while paying out enough in death benefits to adequately protect the family that carries it.
What Is Life Insurance?
Life insurance is an agreement between a policyholder and an insurance company. The policyholder agrees to pay the insurance company a certain amount of money each year, usually split into monthly partial payments. The insurance company, in return, agrees to pay out money if somebody named on the insurance policy dies. Its primary purposes are to cover burial expenses and to replace income lost when a working family member dies.
Limited Time Frame
Term life insurance covers an individual for a set period of time. If that individual dies during that time, the insurance company pays out the value of the policy. In this way, term life insurance is similar to other common forms of insurance, such as your auto policy or a homeowner's policy. Whole life, the other prevalent form of life insurance, pays out a benefit no matter when the insured person dies.
No Cash Value
Term life insurance is a kind of "pure insurance." The entirety of policy payments go to service the policy and accumulate no cash value. By comparison, some other life insurance products accumulate cash value with each payment. Policyholders on such policies can cash in or borrow against that cash value at any time.
Renewability
A policyholder can usually renew a term life policy at the end of the term, continuing coverage further into life. However, the new policy will be at a rate that reflects the insured's current age and health status. Some policies can include a "guarantee of insurability rider," which guarantees that a term policy can be renewed even if the insured has a health issue that would normally disqualify him. Some such riders even guarantee that the policy can be renewed at the original rate. Both riders raise the price of the policy.
Why Term Life?
Because whole life insurance has a longer term of coverage and an investment value, it is significantly more expensive than term life insurance, often more than ten times as expensive. Ramsey points out that, because of the fees attached to whole life insurance, most families are better off buying term life insurance and investing the difference between term and whole life in a more cost-effective investment vehicle.
References
- "Exam Cram: Life and Health"; BiSys Education; 2008
- "Life Insurance and Its Applications"; Irena Kerr; 2001
- Courtney Rogers, Insurance Executive, American Income Life, Richmond, VA
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