Term life insurance is an option for providing financial security to your family and dependents upon your death. A sufficiently sized death benefit payout will be required to ensure that your beneficiaries are not burdened by any ongoing financial obligations such as a mortgage or other debt, while also making certain they will not be forced to experience undue financial burden or reduction in their quality of life.
In addition, life insurance can be used as a valuable estate planning and tax planning tool. For instance, later in life your family may not require your ongoing financial support, but if you have accumulated significant assets, upon your death your family could be served a substantial inheritance tax bill. Insurance benefits can be used to settle these debts with the government so your family is not forced to sell assets at a potentially unfortunate time in the market, nor will they be forced to sell these assets in a speedy manner to pay the tax man in time, which could place excessive burden on their daily lives (especially if most of the value is tied up in the family home and it needs to be sold to meet the tax bill). In selecting which type of insurance is best, people often find themselves in the middle of the road between choosing term life insurance or whole of life, also known as permanent insurance.
What is Term Life Insurance?
Term life insurance, as the name implies, ensures that your beneficiaries receive a benefit or payout in the event that something happens to you during the designated period of time, or term. For example, should you take out a 30 year term life policy with 1,000,000 USD death benefit; if the worst were to happen to you within those 30 years, your family receives a lump sum payout of 1,000,000 USD. One of the primary benefits to term life insurance policies is that it will likely be among the lowest costing options when electing to protect your family against the risk of your untimely death. The downside to term insurance, however, is that in the above example if something happens to you after precisely 30 years and 1 day, your family receives nothing.
How long should my term insurance be? And for how much?
This is where it very much becomes a case by case basis best discussed with an experienced professional. A good rule of thumb is to first ask yourself: Why am I seeking out the coverage to begin with? If you just started a family, and are looking to protect their financial wellbeing, it should be noted that children are financial liabilities for at least 20 to 25 years. If your spouse is a homemaker and does not work, it may be worth considering if they would require insurance coverage even after the children are no longer financial liabilities. This could be a good starting point in determining at least how long to provide coverage. In order to decide how much life insurance you need as an actual death benefit, we would recommend reading running through scenarios with your advisor. Sometimes it is not always about providing money for family, but to insure against the transfer of debt to those family members.
For example, even if you have no children or their financial needs are already sufficiently provided for, but you have significant debts such as a large education loan or a mortgage on a property. If the mortgage is scheduled to last 15 more years, that would mean you have a 15 year liability to account for, and as such should sort out a 15 year term insurance policy to negate that risk.
How do I pay for term insurance?
Term insurance premiums can be paid in several different ways. For example, you could elect to pay your premiums on a regular basis, usually monthly, quarterly, bi-annually, or annually. You can also in a sense pre-pay your insurance. For example, say an expat living here in Japan plans to work in a higher paying but demanding job for about 10 more years. After that, he plans to transition to something less stressful and requiring less working hours, but providing substantially less disposable income. The challenge is he has 2 children under the age of seven and a wife that has not worked in many years, and so his family requires more than 10 years coverage. In this case, it may make good sense to structure the plan so that it provides 20 or 25 years of coverage, but he can fully pay off the policy within the next 10 years when he plans to be working the most.
In some situations, usually those involving insurance for estate planning purposes, it may make sense to establish the insurance policy with one lump sum payment up front, with that one payment providing coverage for the entire selected term. Although, it is worth noting that this form of payment and life insurance structuring is most often used with whole of life policies; as term insurance is not the most effective tool for planning for inheritance tax.
Of growing popularity are a kind of hybrid policy which, after the life insurance term is up, the policy matures and returns a small but reasonable encashment value, usually equal to around the amount of money paid into the policy throughout the term. Another form of hybrid policy is one which also includes a term critical illness benefit. For example, you can set up a term life insurance policy to protect the financial security of your family, and then also include an extra benefit which pays out a smaller lump sum in the event you develop a critical illness.
How much does term life insurance cost?
Receiving a quote for term life insurance can be both easy and hard. It is easy in that there are no shortage of companies providing online quotes. However, it should be noted that a quote is just a quote, and is not an official offer. Often, these online quotes are drastically reduced from actual average monthly prices, and the online quote is subject to stringent medical prerequisites that in practice almost no one actually qualifies. These quotes are simply used as an marketing tool to get people in the door where they are then shown the actual prices. In addition, most English speaking online quotation systems are in reference to insurance companies which will not issue new insurance contracts with Japan residents, rendering the entire exercise unfruitful.
Term insurance premiums are primarily a derivative of your country of residence, country of birth, age, gender, tobacco use status, and overall health. After meeting with an experienced insurance professional to help determine the proper type of insurance, amount of death benefit, length of term, and any other potential factors, he or she can later return to you with personalized quotes on a few different options specific to your situation. It should be noted that these quotes are then subject to standard medical testing (cholesterol, blood sugar, liver function, etc.) , and if your genetic or behavioral health condition is outside the normal limits, the monthly cost could go up a small amount, or your insurance could be denied.
This is another primary reason that insurance veterans often recommend that if you have an insurance need and plan to get insured, do it sooner rather than later. Each year you get older, premiums tend to increase by around 5 to 10%, and each year you could develop a health condition which further increases the premium or leads you to be outright denied coverage.
– Price elasticity of demand for term life insurance and adverse selection, Mark V. Pauly, Kate H. Withers, National Bureau of Economic Research Working Paper No. 9925
– Determinants of Young Marrieds’ Life Insurance Purchasing Behavior: An Empirical Investigation, Dan R. Anderson and John R. Nevin, The Journal of Risk and Insurance, Vol. 42, No. 3
– Gender-Based Differences in Life Insurance Ownership, Anna Sachko Gandolfi and Laurence Miners,The Journal of Risk and Insurance, Vol. 63, No. 4, Symposium on Catastrophic Risk