What is term life insurance?

Term life insurance is a type of life policy that guarantees a specified death benefit amount during a defined period. It's easiest to think about term life as a "rental policy"; you essentially "rent" life insurance for a period, say 20 years, and if you die within that 20 years, a beneficiary will receive the death benefit. Unlike whole and universal life, term life does not accrue cash value. At the expiration of the policy, the insured may let it expire, or potentially extend the term or convert the policy to permanent coverage.

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Young and healthy, life insurance may not seem like a top priority. However, both are carrying a lot of student debt from their advanced degrees. Plus, they recently moved out of their apartment and into their first home. If something were to happen to either one of them, the other would be left with debt and half the income to pay for it.

The Solution

Both Mark and Charlotte have a $250,000, 20-year term life policy. This means that if one were to go within that 20-year time frame, the other would receive $250,000 of tax-free income to help lessen the impact of lost income, and to help pay for remaining debts. The best part is it costs them each less than $20 per month.

Life insurance is sometimes viewed as a luxury item; an instrument of the ultra-wealthy to pass down enormous sums of money and avoid paying taxes. In reality, an extremely small percent of all life insurance policies are structured this way. Most Americans use life insurance for three primary purposes; to cover funeral and burial costs, replace lost income, and pass money to a beneficiary. But, we aren't talking about millions of dollars here. The average American has approximately $163k of coverage, and many pay less than the cost of their auto insurance per month for life insurance.

Most Americans also overestimate the cost of life insurance, often by 3x the actual cost. A survey by LIMRA highlights this. When people were asked what they thought the annual premium for a $250,000 term policy for a healthy 30 year old would be, the majority guessed $400. Individuals under 25 guessed $600 per year, and 25% said it would cost over $1,000.

In reality, the cost of this policy is normally $160 per year. Put in other terms, this equals about $13 per month, or a little over 40¢ per day. How much did you spend on that latte the other day?

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