Term life insurance (life insurance that is in effect for a limited period of time instead of your entire life) can sometimes be the right answer.
Before covering the why, let’s review how term life insurance works.
Let’s say you have a term life policy for $500,000 with a “term” of 15 years. If you were to die on the last day of the fourteenth year, your beneficiary would receive the policy amount of $500,000. If you were to die two days later, your beneficiary would receive nothing.
Why would anyone want a life insurance policy like that?
There are some good reasons. Two top the list: it covers your needs, and it’s affordable.
It Covers Your Needs
Sometimes, when you buy life insurance, you’re protecting your loved ones from the many unknowns that could negatively affect them if you die prematurely. The policy payout may replace your income, pay off the mortgage and the auto loan, and fund your children’s college education, for example.
Other times, you don’t have such generalized needs. If your spouse works, and your children are in high school, your spouse’s salary may cover the daily expenses if you die. You simply need to ensure that if you die within the next 10 years, there will be enough money to see your children through college.
In that case, a 10-year term life insurance policy might be all you need.
In other words, term life insurance is a simple solution for a specified risk.
The other reason people choose term life insurance is that it’s affordable.
Because the insurance company is taking on less risk, it can afford to offer you lower premiums. You get the most amount of coverage for the least amount of money up front. And there’s nothing wrong with choosing term insurance because it’s cost-effective. After all, why pay for more than you need?