September is Life Insurance Awareness Month, so it’s the perfect time to consider how term life insurance can help you reach your financial goals. While we all plan to be around for our families, no one knows what tomorrow will bring. That’s why life insurance is a critical safety net to have in place.
Having the right amount of life insurance isn’t about you. It’s about protecting those who depend on you financially — partner, spouse or children — after you’re gone. The benefit can help ensure your loved ones could pay the bills and enjoy a similar lifestyle without you.
Here are five facts about term life insurance everyone should know:
1. Term life insurance is a contract.
Term life insurance is a contract between you and an insurance company and is designed to pay your beneficiaries a set amount if you die during the term, as long as you continue paying the monthly premium.
You can have multiple life policies, such as a plan offered at work and one purchased on your own. Employer-provided life insurance may only be one or two times your annual salary, which typically isn’t enough for workers who have a family. And if you leave your job, your coverage ends.
Getting an additional life policy is a smart way to make sure you have enough total coverage. A good rule of thumb for calculating the minimum amount of life insurance you need is to multiply your annual income by 10. Also, check out the life insurance calculator at lifehappens.org.
2. Term life insurance is for a limited period of time.
It’s called term life because it only provides protection for a set period, such as 10, 20 or 30 years. If you die during the term, your beneficiaries can receive the death benefit. But if you outlive the term, the insurance ends.
To figure out which term length you need, review factors such as your assets, debts, financial needs of your dependents and future expenses, such as college. Consider when major debts would be paid off and the ages when dependents would become financially independent.
The main benefit of term life is that it’s more affordable than permanent life, which lasts for your entire life. A term life premium is based on factors such as your age, health and life expectancy, so the cost to buy a new policy goes up as you get older.
3. There are different types of term life insurance.
There are several different kinds of term life you should be familiar with, including:
• Level premium — charges the same premium and provides the same death benefit during the policy’s term.
• Return of premium — can pay back premiums if you don’t die during the policy’s term (but charges higher premiums).
• Guaranteed issue — provides coverage without a medical exam, which allows you get insurance more easily, but sometimes at a higher price.
• Final expense — covers only the cost of a funeral, with a relatively small death benefit.
Since an insurance policy is a legal document, make sure you understand the cost and benefits before signing up.
4. Life insurance can be used as a planning tool.
A term life policy gives you confidence that if you die during a period, your family could handle expenses, from everyday living costs to a mortgage or college. But you can also use a policy as a planning tool to cover your estate’s liability, such as taxes, legal costs and administrative fees.
Additionally, if you have multiple heirs, leaving them cash from a life insurance payout can be an easy way to distribute your estate in the proportion you specify.
5. Life insurance isn’t just for breadwinners.
If you think life insurance is only for single parents or wealthy families, think again. If you’re the only person earning money to support loved ones, you should strongly consider life insurance. But it’s also critical to cover nonworking parents who maintain a household.
Not only is being a stay-at-home parent a demanding and time-consuming job, the cost of outsourcing child care can be significant. Getting life insurance for a partner or spouse who isn’t a breadwinner can help make sure your family could meet day-to-day needs if he or she weren’t around.
If you already have life insurance, review your coverage and beneficiaries at least every few years, or whenever you have a major change in income, expenses or family status.
Remember that life insurance isn’t a luxury — it’s an added layer of protection and a smart choice for you and those you love.