In the monetary dimension of our economic world, term insurance is an instrument used to replace earning power when an individual generating that earning dies short of reaching a monetary goal.
For example, a young couple purchases a home under a plan to have it paid for over a 30 year time span. They recognize several events may prevent them from attaining that goal with one of them being dying sometime during that 30 year payment duration. Knowing this is just a possibility and not an irrefutable event; they don’t want to pay any more than they have to in order to meet that possible event, so they purchase a life insurance policy which will pay the remaining portion of the mortgage anytime they lose their ability to do so by dying.
If they are so fortunate to have lived to the end of that 30 years living in the same house, they will have the privilege of a mortgage burning ceremony in the back yard where they can burn the life insurance policy along with the mortgage papers. The policy did exactly what it was called upon to do: be available for the event which would trigger the action required, or terminate without being used.
What are my options?
- The concept of term life insurance revolves around how long the policy is to be in effect and for what purpose. Thus, policies are written for one year, 10- 15- 20- or 30 years, age 65, or age 100 being common periods of duration.
- Term insurance can be called mortgage insurance, buy-sell insurance, executive bonus, supplemental income, credit life, funeral expenses, death benefit, etc. to cover the purpose.
- Generally, when term insurance is bought it is purchased because an individual is planning on reaching a point when he/she will no longer need life insurance.
Flexibility of Use
Even though a term policy may have originally been purchased to cover a specific need or event, when it is activated it can be used for any purpose the beneficiary may desire to use it for. The policy written to cover a specific amount on a mortgage can be used to pay off the mortgage with the remaining amount being used for paying credit cards balances, buying a new car, investing in whatever, or being set aside for educational purposes. The beginning objective simply acted as the motivation to do something.
According to www.policygenius.com/life-insurance/life-insurance statistics LIMRA (formerly Life Insurance and Market Research Association) reports use of life insurance funds by individuals purchasing the insurance:
- 84% for burial expenses
- 66% for wealth transfer
- 62% for income replacement
- 57% for supplemental retirement income, and 50% to pay off mortgages
Summing it Up
Even though term insurance remains a very popular instrument in financial planning, it has a dismal record regarding death benefits. Only 2% of death benefits come from term insurance policies according to https://www.moneyunder30.com/whole-life-insurance-good-investment.
Word to the wise–have it clearly in mind what you want your life insurance policies to do in your overall financial planning. If you have temporary problems to solve, i.e., mortgage, credit card debt, installments loans, then term insurance is worth considering; but if you have permanent problems, i.e. retirement funds, executive bonuses, buy/sell agreements, charitable gifts, etc., then whole life (permanent) insurance definitely is worth serious consideration. Your decision as to what to buy will only be as good as the information you have gleaned in an effort to educate yourself on what is available.