What is Term Life Insurance?

Insurance provides a payout in case of loss.  Car insurance pays you when you lose your car.  Health insurance pays you when you lose your health.  Life insurance is unique in that it pays someone else when you lose your life.  It is essentially designed to replace income that would be lost due to death.  It covers expenses on your behalf while your gone so that your children and/or spouse don’t struggle without you.  It is a great guarantee for your family’s financial security.  A firm will take your money and invest it over the years then pay your family an agreed upon amount when you die.  They will offer you a policy that should provide them a profit based on how long they expect you to live and how much money they’ll need to collect until that payout.

There are various kinds of life insurance policies. Term Life insurance is kinda like renting an apartment instead of buying a house.  It is cheaper than Whole Life Insurance, but the policy usually ends after a few years and you’ll need to renew at a slightly higher price next time around.  I’ve crunched the numbers and found Term Life insurance is the more cost-efficient option.  The money you save buying Term Life could be invested into ETFs at a higher rate of return and at a lower cost.  This combo arrangement provides more money through your investments, but also gives the guarantee of funds that only life insurance can provide.

Term Life Insurance is pretty cheap.  Here are some sample rates for monthly cost per $1,000 of coverage:

  • During your 20’s – $0.05
  • During your 30’s – $0.10
  • During your 40’s – $0.20
  • During your 50’s – $0.30
  • During your 60’s – $1.00
  • During your 70’s – $5.00

So, let’s say your get a $50k policy when you are 35 years old.  That would cost you $5 a month ($50,000 ÷ 1,000 x 0.1).

Keep an eye out for future posts, where I’ll discuss how much life insurance coverage you actually need.