Term life insurance for many people is a way to tidy up the
loose ends of their lives. Term policy-owners see the policies as money in the
bank that is redeemable on the day they die. It is hard to argue with such
thinking.
Term life insurance is structured in such a way that it
lends itself to this very practical usage.
The insurance policy in itself has no intrinsic value regardless of the size of the death benefit; it only brings value to a policy owner upon his death. Premiums do not accumulate in any way, so the policies do not accrue cash value that can be tapped by a policy owner. Guarantees are fairly minimal; the premiums for the most popular term policies, for instance, only remain unchanged for the term of a policy, instead of for the lifetime of the policy owner, as with whole life policies.
So the appeal of term life insurance is in two features:
1. It is relatively inexpensive. Though guaranteed level premium term life is not life-long in scope—unless a life happens to end within the limits of the insured term—this weakness is offset by its lower cost, particularly when a policy is purchased during an adult’s younger years. Whereas permanent life policies can be quite a lot more expensive at the outset, but they do not increase in cost as the years go by.
The cost differential is the single biggest reason younger people opt for term instead of whole life. It fits their usually shorter perspective on life, as well as fits their usually tighter budget. Older purchasers of term life insurance do not benefit as much in the cost of their premiums, but the cost to them generally still is cheaper than a permanent policy.
2. It can substitute for a small bank account. Having a $100,000 payout to beneficiaries upon a policy-holders death can offset a meager balance in a checking account and an absence of any estate of real consequence. The deceased’s bills can be paid, children’s bills can be paid, donations can be made to designated charities, and so on, none of which would be possible in the absence of the insurance money. The catch is that this is an efficient way of leaving something behind only if a person expires before the insurance term does. Furthermore, the sooner death comes, the less the policy-holder will have paid in for his payout.
Term life insurance is not a perfect solution in many cases, but it is a practical approach for people wanting only to leave behind some residual benefits of their lives.
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