Life Insurance – Part 3 – How Much Life Insurance Do I Need? (Part 3) Type Will Determine COST

• IRON100
• March 19th, 2010

Before we go to the final example of a life insurance tally with regard to amount, I think a short discussion of the types of term insurance that are available to the insured individual should be had.  For now, I am sticking only to term insurance and not drifting into whole life insurance at the moment.

There are basically three types of term life insurance:

1) Increasing Term Life Insurance.

2) Level Term Life Insurance

3) Decreasing Term Life Insurance

Increasing Term Life Insurance is a type of coverage that can be renewed each year at an increased premium as long as an individual has good health. Along with that increase in premium typically comes a 2% to 10% death benefit increase. Typically these policies are designed for cash strapped young couples who may not possess the assets to pay for a level term policy. The problem with this kind of policy is that because the death benefit is locked to a fixed percentage increase, one may not be able to keep up with one's required coverage should the need arise. This kind of insurance is also used by some insurers to shift individuals into whole life insurance policies, which, as I have discussed previously, may also not be the best deal in terms of total coverage from a cost perspective. I would consider increasing term life insurance.

Level Term Life Insurance is term insurance for which the premium remains the same for a specific period of time whether it be 5.10.15.20, 25, or 30 years. The primary benefit of level term insurance is the fact that, if one budgets needs properly, the cost becomes a FIXED expense as opposed to an expense that could increase from inflation. As it is an insurance contract, that term premium is level, no matter what happens. What most people never do (which is what my previous blog post discussed) is to plan out those expenses in great detail, including any reasonable overage via changes in life that might occur during the term. My advice to you is don't BE one of those people, and map out the proper insurance amount that you need up front.

Decreasing Term Life Insurance is a type of term insurance for which premiums and coverage both drop as time moves forward. It has often been called mortgage life insurance for that reason. Why is that, well obviously if one had a fixed rate mortgage, the obligation would diminish to zero over time, reducing the need for life insurance (at least for the home mortgage). What is really at stake here, however, is the question of whether there might be a period of under-coverage for all life insurance needs during that term. Once again, one would have to plan precisely over the term period to be certain that there was indeed enough coverage to protect one's assets and fulfill financial obligations in the case of one's death. For some, decreasing term life insurance can be a solution. It once again depends on precise planning to meet one's financial obligations after one's life is over.

Which is best for the individual insured person?I think clearly increasing term is the worst deal unless someone keeps that term for a very short period of time before converting to a level or decreasing term insurance policy. Of all the types of term insurance I mentioned in this post, this one can often the least insurance coverage for the greatest premium amount. The key thing to remember there is that if one can estimate the maximum total life insurance requirement over a specific term, one has a better chance of insuring it with either decreasing term or level term insurance. Beyond that, it simply comes down to how one measures one's need for insurance over a specific term.  With so much competition in term insurance these days, one can often comparison shop for term premiums and find an affordable solution for your life insurance coverage needs.

In the final analysis, total cost of a policy must be measured against benefits because the term life insurance policy offers no investment benefit only the death benefit. Remember, in my view, one can easily invest the difference between a term life insurance policy and a permanent or whole life insurance policy and get a higher return. In order to have the highest return possible, one has to find the policy that provides the proper amount of insurance for the lowest possible cost.

Next week, I will attempt to close out this series by pulling together the concepts of these previous posts to estimate one insured person's total life insurance needs over a given term. Stay tuned, more basic information is on the way to help you with basic financial needs.

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Tickers: death benefit versus investment, decreaing term life insurance, decreasing needs, increasing needs, increasing term life insurance, level term life insurance, life insurance

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