A popular type of life insurance coverage is term life insurance. Unlike whole life insurance, Term life insurance isn’t intended to provide coverage permanently. Instead, it intends to shield the policyholder’s beneficiaries from financial loss for a certain period. If term insurance lasts 30 years, the death benefit is paid only if the covered individual dies within that time. If they didn’t, the coverage would terminate, and there would be no death benefit.

It isn’t easy to picture paying premiums for decades only to have nothing to show for it. As a result, many individuals ask if term life insurance is a waste if the insured person outlives their term and the life insurance policy terminates with no payout.

In reality, though, that’s a desirable end that most individuals should strive towards.

Even if the death benefit doesn’t pay out, term life insurance is not a waste.

When people purchase term life insurance, they aren’t paying premiums to ensure a death benefit. The funds aren’t transferred to the insurer in exchange for a future commitment (a lump-sum amount that would always be distributed to family members).

Instead, insurers use the premiums to purchase insurance if anything unexpected occurs. The money is paid out to the insurance company rather than to loved ones or family members to transfer the risk of an unexpected death to the insurance company.

Insurers examine the policyholder’s health data and the actuarial forecasts for life expectancy. Then they establish costs depending on the policyholder’s chance of dying within the covered term. If the insurer believes it may have to pay out the death benefit, the prospective policyholder may be denied coverage or requested to pay higher premiums, making the policy unaffordable.

Many individuals who qualify for inexpensive coverage assume that no death benefit will ever be paid out. The coverage is in place just in case anything wrong happens. Still, neither the insurer nor the policyholder should anticipate the death benefit to be paid. That doesn’t render the coverage useless when the policy expires; any more than having automobile insurance but not being involved in an accident is a waste of money.

In contrast, the payout of the death benefit is a ‘given’ with whole life insurance. The policy is meant to stay in existence indefinitely as long as it’s not canceled and the premiums are paid. On the other hand, whole life insurance is substantially more expensive since insurers know they’ll ultimately need to pay a large lump-sum payment to beneficiaries. Ironically, for most individuals, indefinitely paying these exorbitant rates is a waste because there comes a moment when no insurance coverage is genuinely required.

Who should get term life insurance?

Term life insurance is a wise investment for most people, even if the policy never pays out. Anyone who has loved ones relying on them should probably pay the low amount required to safeguard their family from financial ruin in the case of an untimely death. The cost of having peace of mind is certainly worth it.

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Kathy Hollingsworth
Licensed Agent Federal Educators of America