When to terminate a term life policy

Some people seem to think of term life insurance as a kind of a marriage, holding on to the policy in sickness and in health, till death do they part.

But financial advisers say that at some point, life circumstances may change so that it makes sense to split with the policy.

"Once you are out of debt with your house paid for, your kids grown and you have been investing in mutual funds and toward retirement for the past 20 years, you will be self-insured," says financial author and radio host Dave Ramsey.

By terminating term life coverage, you save extra money each month that can be used to help build your nest egg.

"If it has already served its purpose and is no longer needed, then there's no reason to make the monthly or yearly payment on it," Ramsey says.

Not quite self-insured yet? There are still certain points in life when you should re-evaluate your need for term coverage.

Death, with benefits

Financial advisers have long touted term life as a far more affordable alternative to traditional whole or universal life insurance (also known as permanent life insurance).

Instead of buying a whole life policy, you could get term for a fraction of the cost and then invest the difference, Ramsey says. "The rate of return is historically low on whole life and universal life policies. It makes more sense to invest the money in a good growth stock mutual fund."

As its name implies, term is designed to cover you for a specific period -- anywhere from 10 to 30 years -- against the risk your untimely death would place on major family expenses, including your home mortgage, children's college education costs, other loan obligations and lifestyle.

Term coverage and premiums usually vary by age, sex, lifestyle and insurability (typically determined by a medical exam). But with "level term," your coverage and premiums remain stable over the life of the policy. Most term policies are often only renewable to age 75, 80 or 85.

While term's premiums are low and policy features surprisingly uncomplicated, it does not accumulate any cash value the way permanent life policies do.

Your age may determine how you react to that fact. Young people just starting out tend to view the high face value of their term policy as a guaranteed lottery win for their spouse, while those looking to scale back spending in retirement may view a term premium as money down a rat hole.

Kathleen Hartman, a Certified Financial Planner with Greenleaf Financial Group in Indianapolis, says term is often the only way most 30- and even 40-year-olds can afford the level of coverage most families need. Usually, this is calculated as 10 to 15 times a person's income.

"Younger people use term to protect income," Hartman says. "One couple, the husband said to me, 'I've always heard that you can't afford to buy as much insurance as you need,' and I said 'Look, we just did a $2.5 million term policy quote and it's something like $100. I think that's pretty affordable."

Rick Epple, a Certified Financial Planner with Epple Financial Advisors in Wayzata, Minn., says many of his clients are couples who hold on to his-and-her term policies as a sort of "grief insurance" long after its necessary.

"I think it's a comfort level," he says. "It's not a huge multiple (of income) but it's going to give them a year to recover should something happen.

"When I look at it that way, the cost isn't very expensive, so to me it makes sense. It's not, 'Oh, you're making this horrible decision!'"


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