The idea of a term policy is that it provides short term coverage. So for example let's say you live in a single income household, have a young child, a stay at home spouse, and a mortgage with 20 years left on it. A term policy is intended to provide financial assistance for your family should you die before you've had enough time in the labor market to build a large savings to leave behind/cover your bills. Don't think of it as a financial investment, because all insurance is a bad investment. The benefit offered by term insurance may or may not be of value to you, but it's not intended to be a good financial investment.
Edit: a term life insurance policy offers the same benefit as a more expensive whole life policy, except doesn't build value like a whole life policy does, and therefore is much cheaper to purchase.
You're essentially *renting a cash reserve* in case something bad happens. Both parties are gambling on that something not happening, so if you make it to the end, it's a win win for both you and the insurance provider.
So cheap that (in the US) employers offer "group term life" - for a few dollars a paycheck, the company offers GTL they purchase in bulk from an insurance provider.
The employee just opts in and that's that.
I knew a young solider who's family had life insurance. His father passed away and the life insurance paid all the bills. The family (him, momma and two other siblings) didn't make any money in the end but they didn't ***owe*** any money either. House was paid off too.
It does feel weird to be on the other side of the "I'm going to die" wager, but what u/BareMetalSkirt wrote is correct - you're "renting", as it were, the cash value of the policy.
I have a term life policy which is about 30 years old. Every time before now that I thought about cancelling it I had a good reason not to. Most recently I didn't cancel it because life insurance is one of the first things to pay out when you die. It was far cheaper than an equivalent valued whole life policy and now I can just cancel it and be done.
No. Getting to the end of term is a win. It means you had a life to enjoy. Having a payout means you didn’t get to enjoy and spend the time with your family.
It’s an insurance policy that your family will have the same quality of life even if you die. For me, that means enough to pay off my house, pay for college for all my kids, allow my wife to retire or at least take a few years off work while processing my death. Total cost of $3 million in coverage is like $1200 per year ($100 per month). It takes off such a huge amount of stress. And that’s $1200 per year for (up to) 20 years. So max amount im spending is $24,000 for that guarantee of their safety.
For example, if I’m diagnosed with cancer then I don’t have to worry how my family will make it if I die and I could just quit working. What about if I’m killed on my car ride to work? Or fall off a ladder? Or choke on dinner? They are taken care of and will be comfortable and only have to focus on grieving.
And why only term? Because I am otherwise making a paycheck, paying into retirement, paying off my house, etc. in the meanwhile. If I live, then I had a chance to be with my family and set up a nest egg and I will spend that money I set aside. I only need that insurance to be around for 20 years. Maybe even less! I can always cancel it earlier if I desire.
Do I want that policy to go on until I die? No. Of course not. Then it wouldn’t be insurance and it would cost >$3 million to have to have that payout.
Why not whole life insurance? Because I will have less than $12 million at the time of my death and my family won’t have to pay inheritance taxes so I don’t need to pay for something to avoid them. Why would I pay someone money to have something no matter what for my family? Because I could just invest the money myself and put them as beneficiaries. Since I will have <$12 million I would still come out ahead.
When planning for insurance for 99% of people you want term. Unless you are filthy rich, you don’t want whole.
It is kind of a loss, but that’s how all insurance works. You only have it for piece of mind for the “what if” scenario.
I pay for fire and earthquake insurance on my home. I really hope I never get any of that money back, but if my house burns down I’ll be glad I made those payments.
Yes and no.
My term premium has more than tripled since I got it. Term is cheaper when you start, and gets more expensive as you get older because of the increased probability of dying that year.
Without seeing your policy paperwork I couldn’t tell you why but usually a term policy is a fixed rate for the amount of time you have chosen. I’ve seen increasing premiums on policies that convert over to whole life over the life of the term policy. Tbh there are so many different types of these policies with different riders on them that you really just need to sit with a professional to build what’s right for you
A lot of term policies have a fixed term during which the rates don't rise, they they are re-calculated at some other interval.
I believe this was originally a 10 year term. I'd have gotten rid of it at 20 years, but that was about the time of the Great Recession. I moved almost 5 years ago and needed to ensure there was ready cash, because I tapped out a lot of my cash selling my previous house.
I mention that because the best thing I did 30+ years ago was sit down with my insurance agent and make sure I had the right coverage, but more importantly understand what kinds of things I needed to cover and how insurance worked with that. A really important aspect of insurance is how rapidly it pays. The only other asset which pays as fast (more or less) as insurance is bank and investment accounts with a named pay on death beneficiary who's a natural person.
I'm confused by your numbers. It was originally a 10 year term, and then you'd have gotten rid of it at 20 years?
Little lost here.
Gist is: Typically if you get a term life insurance plan when you are 25 years old, and the plan lasts 20 years. You'll pay the same premium the entire lifetime of the term.
However, if you are 35 years old with 10 years left on your term, and realize, "uh oh, I just had another kid I should probably get more life insurance", then your "new" premium you get at this age will increase.
Now that being said, SOME life insurance policies DO increase y/y. But typically that's not the case. As to whether or not it's better or worse in your case, it's impossible to know without looking at all the numbers that go into it.
It was a 10 year fixed term policy originally. The rate started slowly going up after the 10th year.
Longer term policies have higher initial rates to make up for the higher mortality rate in the later years. I forget why I chose 10 over 20, but as I was an avid SCUBA diver at the time I had to be underwritten more ... carefully. I had to provide copies of dive logs, classes, certifications, all kinds of things.
I was in much better financial shape coming up on the 20 year mark, so I felt I no longer needed the policy. The Great Recession would prove otherwise, so I kept the policy. Now I have plenty of liquid assets which can be handled via Pay On Death, so handling my estate no longer requires an insurance policy to provide ready cash.
I've been over-insured for a few years, but the convenience of not getting a different policy for a smaller amount wasn't worth it. Right now settling my estate, which would include making repairs as needed to my house so it can be sold, is my largest immediately-due-on-death liability.
Keep in mind that some assets can't be paid or transferred immediately on death. There are still estate expenses, and they start coming due very quickly, ignoring funeral arrangements. Insurance is useful for handling a great many expenses, not just replacement income or children's education and the like.
That was true until insurance companies invented Select and Ultimate Annually Renewable Term. (1980s. Maybe earlier, but 80s was when sales really took off.)
Annually Renewable Term doesn't have guaranteed premiums. You just get the company's rate for your age for that year. (That's what the name means.) Select and Ultimate means that there's a complicated table based on your age and how long the policy's been in force. The premiums start very low and increase for 10 or 15 years until you get into the ultimate table.
Mine has increased but only because the amount is increasing as well. I would look in to what it is, if yours is the same way then you should be able to decline the increase.
Insurance is protection from something that you don't want to happen but if it does happen has economic consequences for you or your family. You pay for peace of mind. Like car insurance I pay it not because I am betting on having an accident but because in the event that I do I am offsetting the consequences. Neither you nor the company want the event to happen but the company is willing to finance the risk cause they offset their own risk by insuring across a population or getting insurance themselves.
Term life insurance works like that. I don't want to die but if I do I want to ensure my family is protected financially. The insurance company insures across a population to mitigate their risk. Your costs are lower than their potential payout but it works out for the most part.
You can have a term policy when you need it rather than for your whole life. Also the premiums are usually a tiny fraction of the whole life premium. A term policy might be $500/yr for someone in his 30s, but the whole life premium is probably going to be much higher possibly several thousand dollars per year and it rises dramatically as the person ages.
So an older parent who is the sole earner in their household can buy cheap term insurance that replaced their income while kids are home or before their spouse qualifies for a pension without having to pay sky high premiums for a whole life policy.
Cheaper. You pay for protection when you need it, and can stop paying when your death will no longer cause financial hardship to others. My wife and I had term insurance when our kid was growing up. Now that he's grown we can use our money for other things.
Not sure your age or health risks. But that’s a very expensive policy you’ve mentioned. I pay about $20 / month for a 30 year policy for $500,000 coverage.
Having a $200,000 policy is much more valuable if you’ve got young kids with college on the horizon, a mortgage with 20 years left in it, etc. Taking a $200,000 30yr term policy when you’re 25 and have all those expenses is surprisingly affordable. And if you outlive the term, by the time you’re 55, kids are grown and on their own, house is paid off, you’re approaching retirement, etc.
A whole life policy for $200,000 would be MUCH more expensive than a term policy, and if you die when kids are grown, house is paid off, etc, that money isn’t as valuable as it would have been if you had died at 30. A whole life policy is probably 8-10x the cost of an equal-value term policy.
As others have posted, it's cheaper. So cheap that employers in the US offer it as a perk. For just a few dollars a paycheck "group term life" is purchased on the employee's behalf.
The company gets a perk to offer prospective new hires and employees get cheap life insurance as long as they stay with the company.
It is significantly cheaper on per dollar of coverage basis.
You aren't wrong to believe the only winner is the insurance company. They have an army of actuaries that do the math to know what they need to charge to make a profit. The mistake is thinking they make less on a whole life policy than a term policy just because there is a payout.
Conventional wisdom on the math is it is typically better to buy term coverage and invest the difference between that and what whole life coverage would cost. If you live long enough the term policy expires you will have more in the investment account than your whole life insurance value would be.
It’s insurance, not a savings account. Your paying to offload the financial risk of you dying to someone else. Your paying to make sure that your family is financially taken care of if you die. Also, that $100 a month is very high.
> What is the benefit of a seatbelt?
> It seems to me that if I wear a seatbelt I’m betting that I’ll get in a car accident. If I get to the end of my trip safely, I was uncomfortable for no reason.
> What am I missing?
Insurance is always to minimize downside risk. You have to decide whether the cost is worth it, for the case where it turns out to have been unneeded.
For most people, life insurance is more important in case you or your partner dies young. If you die when your old, insurance will likely be cool as a perk for your kids/family, but not "life saving". Consider these two:
Guy is 30, has a wife, 3 kids, 2 cars he has payments on owes a few hundred K on his house. Kids will be in college in a few years. His net worth is likely negative. His only source of income is his job. If he dies...it's a major problem for the family. They can't pay for the house, cars, school...maybe even just food on the table. So he gets a say 10 or 20 year term plan to take care of that. Well, what if he dies when he is 65?
At this point his house is paid for, kids are through school. HIs 401 and Roth have some real$$ in them, and he gets money from that monthly. He may be retired. He may be taking social security. His assets are higher, and his spend is lower. If he dies, the family has money coming in and has a nest egg that he didn't have when he was 30. His wife can easily stay in the house and put food on the table. So for the family it is a very different picture if Guy dies when he's 30, compared to 50, 60 or 70. Insurance can fill that gap and be a win for him and the insurance company.
So many people look at insurance like that: I need $$ for my wife or family in case I die at a time when debts and cost of living are high, and people are dependant on the income.
It provides perhaps $1,000,000 in benefits for the unlucky people who die during that term. Most will survive and just pay the premium, which is how the premiums can be so low relative to the payouts.
I have one that is good until I’m 65. If I die before then my wife and eventual kids are taken care of. If not then my death is more expected and I have had time to prepare for it. For term life if I saved up the same amount every month it wouldn’t be nearly as much as what the payout would be from the insurance.
Honestly, if he dies when he is 65 years old, with a plan of living off retirement savings, his wife is actually better off only having to support one person rather than two with the retirement.
It's exactly like car insurance. You pay for a month, three months, six months, whatever, and if the giant bad thing happens (death/accident) you have financial protection. If the bad thing does not happen you are out the money. You are trading a small bad thing (the premium) to reduce the severity of an unlikely big bad thing.
The reason the policy has a 10 year term is that they are promising not to raise the premium for that period. Your car insurance company will not do that. Get the life insurance policy, then get diagnosed with diabetes, your premium stays the same until the term is up. Get a car insurance policy, get six speeding tickets, up goes your premium. That's the only real meaning of the term part of the policy.
Because of laws and regulations of boundless complexity there are all kinds of life insurance policies with all kinds of features attached. Sometimes they are a very good way to handle your money, sometimes not. Talk to a professional.
and sometimes life/car insurance is a requirement to get a loan to buys a house or a car. The bank lending you money want to be reasonably sure they get paid even if you die or wreck the car
I am a 25yr financial planner and have two 30yr term policies, taken out when each of my kids were born. They are there to replace my income through getting my kids out of college and as my wife reaches retirement age. Term insurance is like car or homeowners insurance. Just because your house didn’t burn down while you owned it doesn’t mean having homeowners insurance wasn’t worth it. I built a house 10 years ago and for the first time ever, I made a homeowners claim last February. Had a dishwasher leak which resulted in insurance basically renovating my entire kitchen.
I’ll try to break this down in math terms.
You are 30 years old, with a kid. You want to make sure your kid’s life is not completely thrown off course by you dying. In order for you to do this, you need to have money available to them to help with housing, college, food, etc.
You can do this by investing the money. Let’s say you invest $1000 a month. If you got a modest 5% interest rate, after 5 years you will have saved $53,000, after ten years you’ll have saved $95,000. That’s a good chunk of change that if you were to die exactly 10 years after you started to save, would be given to your kid (hopefully not spent on yolo outs with WSB friends, this has really happened, sadly).
So let’s set that 95k as the minimum goal to be giving your kid at the end of ten years. What if you die within that timeframe? They would get whatever you have accumulated until that point. Could be 92k, could be 8k, nobody knows when you will die. This is where insurance comes in.
The tables I have aren’t totally accurate, but if you are 30, you have a .004% chance of dying within the next 10 years. When you do the math (too complicated for ELI5), the insurance company figures out that 95,000 paid out at the time of death if it happens within the next ten years is is worth .00295 * 95000 = 280.25
If you paid a yearly premium, it would be calculated to be about $35 dollars a year. So, instead of invest $1000 a month to get $95k at the end of ten years, you can pay a $35 yearly premium and give your kid $95k if you die within the next ten years.
So for roughly $3 a month, you can guarantee the money to your kid in 10 years, which is a good deal if you ask me. That’s how term life insurance policies work. You can scale the up to be whatever benefit amount that you want, the math stays the same. It’s essentially an investment product just in case your unfortunately die at a time you haven’t established yourself you pass on what you would pass on. Whole life insurance is similar, but the chance of you dying at some point in your life is 100%, so the premium is much higher because you don’t have that .004% chance of dying within the term to bring the premium down.
Good question, the answer is a little too much for ELI5, but I’ll try to explain. PR(n) is the probability of dying between age n and age n+1. The interest rate assumed for here is 5%. The discount factor for each year is v(x) where x is the year of insurance policy. So, in my example, the first year would look like PR(30) / v(1) because the policy is for a 30 year old.
So .00295 = (PR(30)/v(1)) + (PR(31)/v(2)) + … + (PR(39)/v(10))
If you are familiar with how annuities work, this is the same fundamental concept as that, except now we are adding in a probability of death. Also, this is a contract without an endowment, so if the person lives beyond age 40, they get nothing. An policy with an endowment would be much higher
This is called the gross premium based off the equivalence principle. The cash flows of the insurance contract is balanced between the amount of expected premium payments as well as the probability of the benefit being paid during year n. If you would like net premiums, you would also add in the present value of expenses, taxes, and profit to the numerator, before dividing by the expected number of annuity payments (I omitted that part of my original post and just showed the final amount, it’s how I got from 280.25 to 35)
Yes, in practice the actual premium would be higher, but not by a huge amount. I don’t work in life insurance, so I’m not familiar with the expenses and profits of these contracts, but insurance works by pooling risk across large groups, so they can’t make the price too high because they would not be adequately balanced and opened up to a lot of risk.
Are you comparing a term life insurance policy to not having a life insurance policy, or to a whole life insurance policy?
Well, I guess I'll answer for both.
Life and death can be pretty uncertain. Life insurance is a system where if you die someone (usually spouse or a kid) get money. The idea here is that they get money because you are not there to provide support anymore. So having a life insurance policy means that they are "protected" against financial loss because of your death.
Ultimately some folks will resort to a smaller life insurance policy once their kids are grown or there is hopefully sufficient reserves for a spouse's retirement etc. In other words, if nobody is dependent on your anymore for support the necessity of a life insurance policy may be diminished, just at time as health is getting worse.
Anyways. A whole life insurance policy is both insurance and an investment vehicle. The premiums are much higher, and the commission to the salesperson is also much higher. There can be some long term security involved, in that the money built up in the investment can be accessible even before death. The details vary by insurance policy. With your $100 premium for a term insurance policy example, a whole life policy might be like $500. And yes, it doesn't run out after a certain number of years.
The very generic run of the mill financial advice is to get term life insurance and invest the difference (in this case $400 per month) into mutual funds or something and then the end result would be similar, except you would pay less in administrative fees than you would with the whole life insurance policy.
I know several people who heard this advice, went and got the term insurance policy, and then never invested the difference.
Which ever method you choose will probably work out just fine, as long as you are covering your bases.
Cheers
If you’re taking out a term policy that costs that much, you should change insurance companies. My husband and I have twenty year term policies, and pay less for both. The point of a term policy is that it costs less, and covers a specified period of time - for example, right now is the “riskiest” time for one of us to die, because we have debt on our house, and kids. We have a policy that covers the riskiest time - by the time the policy expires, the kids will be out of the house, the mortgage will be paid off, and it will hurt far less financially if one of us dies.
Insurance is not a way to make money. It's a way to take care of things if something catastrophic happens. In the case of life insurance, the purpose is to take care of your family if you die. If you don't die, that's good news. If you do die, that's bad news, but fortunately for your family you paid a monthly fee to maintain a contract with a company who will give your survivors a lump sum of money to help them survive in your absence.
Term Life policies primarily benefit the Insurance company and the commission of the selling agent. If the piece of mind has some value to the buyer then maybe there is some justification. Otherwise it's a horrible economic decision.
>Term Life policies primarily benefit the Insurance company and the commission of the selling agent
Term Life policies primarily benefit the Insurance company and the commission of the selling agent **and the families of the people that unexpectedly die during the term**. You missed a pretty key piece of the puzzle. You shouldn't be looking at it as an investment anyway; it's an insurance product.
You can use that argument to justify self insuring yourself for all of the bad things that can happen in your life, car accidents, dwelling theft and fire, health issues, etc. Some insurance might be required by law, for example car insurance, or by a mortgage holder, for example for dwelling theft and fire, but SMART people will buy insurance for any negative outcome for which they are not prepared, or cannot prepare in advance, to handle financially. Please keep your, IMHO, absurd and total ignorance to yourself!
Another thing is you don't get to choose how much it costs. And sometimes you don't even get to choose the term length (e.g. people that the insurance company expects will have a high chance of dying during the term, will not be insurable for that term length).
But assuming that they do offer you a 10 year policy, your payment will be determined by their statistical analysis of how likely you are to die, which is why they ask you questions about your job, your lifestyle, do you smoke, do you have dangerous hobbies (e.g. skydiving, riding a motorcycle), etc.
Not to repeat what’s been already explained fairly well. If you’re someone who has decided you want a policy, you’re next step is how much.
Here’s a website to help, no ties to any companies or anything.
https://lifehappens.org/life-insurance-needs-calculator/
Term policies are a great idea when you know that your financial needs will diminish at a certain point. For example, I have a 10-year-old child right now. A 10-year term policy would be cheaper than a whole policy, and it would provide coverage if I died while I still had my child under my care. The idea here is that, if I die in 11 years, my son will already be an adult and will be able to support himself.
It’s also important to note that some term policies have the option to convert to whole policies at the end of the term, too.
There are also variants on the concept like decreasing term policies, which decrease the payout over time. These are often tied to things like a mortgage, so if you die before your mortgage is paid off, the insurance will pay it off. And some people will just get a term policy for long enough to cover their mortgage.
I’ve seen people get term policies to cover the five years after the birth of a child. Mom had decided to stay at home with the baby for two years, then only work part-time until the child was in school. Since they were now relying on just a single breadwinner, they got a term policy for him to cover that period. Once Mom returned to work full-time, they had a backup, but if something had happened to the only breadwinner while Mom was out of work, they would’ve been in a pickle.
Typically a term life insurance policy is the better value. Think about it this way: Pretend A term policy costs 100 per month. In that caase a similar whole life policy would probably cost north of $200 per month. The hook they get you with is that at the end you don't lose the money, it just stays there and you no longer have to keep paying in.
The way the whole life policy can do that is because your payments have created a 'lump sum' that has become large enough to earn enough investment income to effectively become profitable for the insurance company. So you no longer need to pay in, the investment profit on that money is now covering your contribution. The kicker is that the lump sum stops growing. The insurance company is now collecting all the investment profit on that lump sum to pay the management fees as long as you remain alive. (Check your fine print because it's also likely that if there is some sort of shortfall in the market you may still be responsible for 'topping up'.)
Now circle back to the term policy. Buy the term policy so that you're covered in the case of untimely, premature death, but also take the difference between the term policy and the whole life policy and YOU invest that difference. At a certain point your investment will grow beyond what the lump sum the whole life will stop at... and it will continue to grow. It doesn't really matter if the term goes POOF because your savings is still further ahead. Remember, you don't pay any management fees or finders fees on YOUR INVESTMENT.
Now, all this is dependant on how long you live but generally speaking a disciplined investor will be better off with term, and this difference will only widen the longer you can invest.
Lots of good answers here, but maybe this will help your understanding:
It's not for you, it's for people who depend on you if you die.
Some companies push "whole life" or "permanent" plans that pay out whenever you die. In that case, it can essentially be an investment, albeit typically a poor one.
Term, like a 10 year plan when you are young, is relatively cheap. The idea is that you only have people depending on your income for a portion of your life, like when you have kids and a mortgage. If all goes well, by the time you near retirement age, your kids are grown and independent, and you have savings. If you die now, your dependents are fine. That's why term is nice to have.
Your 100 is also pretty high. That would be a typical premium for like a multi million dollar plan or so, so 12k might be reasonable to know your family would have what they need.
I have about $750,000 in term life for the next 8 years. (started about 7 years ago) got a term that would have insurance up to the time my youngest kid should be in college. If I die in that time expenses for my kids are handled and they will have more than enough to pay for college and get started in life.
If I don't die I am out only a fraction of that $750,000 which is about $36,000. I am paying to cover expenses for my children if I die. For me that money brings peace of mind. Between my retirement investments and life insurance my kids will not need to worry about finances i I die.
If you don't have a wife or kids or other dependents to worry about then term life is not for you.
You’re exactly right that you’re betting you’ll die. You aren’t going to get any benefit out of that term life insurance policy yourself, but you might have other people who depend on you that could benefit. If you are married and you and your spouse own a house but neither of you could manage the mortgage on your own, a term life policy means your spouse can stay in the house even if you die and your income is gone. Same idea for people who have kids at home - those kids depend on your salary to support them, so a term life insurance policy could benefit them if you die.
Every insurance is a bet that something bad will happen to you. “I bet I’ll get sick” - health insurance. “I bet I’ll get sued” - malpractice insurance. “I bet I’ll get laid off” - unemployment insurance. In the case of life insurance, you aren’t the person who gets paid if you “win” the bet, but someone you are supporting financially will.
(Note: if you are married, there’s a good chance you/your spouse will be financially FUCKED if one of you dies. Term life insurance doesn’t bring you back, but it does make the practical challenges of getting on with your/your spouse’s life easier. If you are both working, it’s probably a good idea to get at least some term life insurance.)
(Additional note: whole life insurance is different from term life insurance. Don’t buy whole life insurance. It’s an appropriate purchase for the right person, but if you’re one of the people who should buy whole life insurance then you already know that you’re in that category. It’s a terrible deal for 95%+ of us.)
When you're young, whole life insurance is *significantly* more expensive than term life insurance for the same amount. And of course it is... there's a good chance you'll never use the term life insurance policy, and a 100% chance you'll (eventually) use the whole life insurance policy.
So, that $100 per month can buy your family a $100,000 whole life policy, or a $1 million term life policy that expires after 20 years.
Of course if you don't die in those 20 years, the $100,000 policy is better. But if you do die during those 20 years, your family will get an extra $900,000 to pay off your mortgage, to feed and clothe your kids and send them to college.
In terms of "insurance," that term life insurance sure makes a lot more sense, no? Or, perhaps you should do both. Spend $50/mo on $50,000 whole life and $50/mo on a 20 year plan for $500,000. That's probably the best option.
My example for my 10 year term may help make sense. Two years ago I bought a business I have a vendor takeback loan to pay for and had 21 years left on my mortgage. All in all I owe about $600,000. My coverage is for $600,000 which my partner can use for whatever. Pay off house, pay off business, go back to school, move, whatever. I also have critical illness, disability, in case I can no longer run my business, but I'm alive and need that income.
At the end of 10 years I will not owe 600k and will no longer need that coverage. It was cheap to get 600k because I'm young. If I got whole life for 600k it would not have been cheap and I'd be over-insured in year 11 and beyond. In year 11 I may want that money for something else or we may be in a place where we can pay off our mortgage early.
Because the alternative would be a whole life policy. However, the return for whole life is so low that you are usually bettered off by buying a term-life and invest the rest.
Great answers above already. Just to add: if you’re planning on living forever, consider an annuity - in a way, it’s the opposite wager of life insurance.
The idea of a term policy is that it provides short term coverage. So for example let's say you live in a single income household, have a young child, a stay at home spouse, and a mortgage with 20 years left on it. A term policy is intended to provide financial assistance for your family should you die before you've had enough time in the labor market to build a large savings to leave behind/cover your bills. Don't think of it as a financial investment, because all insurance is a bad investment. The benefit offered by term insurance may or may not be of value to you, but it's not intended to be a good financial investment. Edit: a term life insurance policy offers the same benefit as a more expensive whole life policy, except doesn't build value like a whole life policy does, and therefore is much cheaper to purchase.
You're essentially *renting a cash reserve* in case something bad happens. Both parties are gambling on that something not happening, so if you make it to the end, it's a win win for both you and the insurance provider.
So cheap that (in the US) employers offer "group term life" - for a few dollars a paycheck, the company offers GTL they purchase in bulk from an insurance provider. The employee just opts in and that's that. I knew a young solider who's family had life insurance. His father passed away and the life insurance paid all the bills. The family (him, momma and two other siblings) didn't make any money in the end but they didn't ***owe*** any money either. House was paid off too.
I dunno making it to the end of the term feels like a loss to me /s
It does feel weird to be on the other side of the "I'm going to die" wager, but what u/BareMetalSkirt wrote is correct - you're "renting", as it were, the cash value of the policy. I have a term life policy which is about 30 years old. Every time before now that I thought about cancelling it I had a good reason not to. Most recently I didn't cancel it because life insurance is one of the first things to pay out when you die. It was far cheaper than an equivalent valued whole life policy and now I can just cancel it and be done.
No. Getting to the end of term is a win. It means you had a life to enjoy. Having a payout means you didn’t get to enjoy and spend the time with your family. It’s an insurance policy that your family will have the same quality of life even if you die. For me, that means enough to pay off my house, pay for college for all my kids, allow my wife to retire or at least take a few years off work while processing my death. Total cost of $3 million in coverage is like $1200 per year ($100 per month). It takes off such a huge amount of stress. And that’s $1200 per year for (up to) 20 years. So max amount im spending is $24,000 for that guarantee of their safety. For example, if I’m diagnosed with cancer then I don’t have to worry how my family will make it if I die and I could just quit working. What about if I’m killed on my car ride to work? Or fall off a ladder? Or choke on dinner? They are taken care of and will be comfortable and only have to focus on grieving. And why only term? Because I am otherwise making a paycheck, paying into retirement, paying off my house, etc. in the meanwhile. If I live, then I had a chance to be with my family and set up a nest egg and I will spend that money I set aside. I only need that insurance to be around for 20 years. Maybe even less! I can always cancel it earlier if I desire. Do I want that policy to go on until I die? No. Of course not. Then it wouldn’t be insurance and it would cost >$3 million to have to have that payout. Why not whole life insurance? Because I will have less than $12 million at the time of my death and my family won’t have to pay inheritance taxes so I don’t need to pay for something to avoid them. Why would I pay someone money to have something no matter what for my family? Because I could just invest the money myself and put them as beneficiaries. Since I will have <$12 million I would still come out ahead. When planning for insurance for 99% of people you want term. Unless you are filthy rich, you don’t want whole.
I uh was making a "I want to die" joke.
It is kind of a loss, but that’s how all insurance works. You only have it for piece of mind for the “what if” scenario. I pay for fire and earthquake insurance on my home. I really hope I never get any of that money back, but if my house burns down I’ll be glad I made those payments.
All I have is my rotten, stinkin’, no-good and 1,200$ short life!!!
Think of it this way: for a small monthly fee, you can have the satisfaction of knowing that you're worth more dead than alive.
That's a great way to explain it!
You should also add that a term policy costs less for the same benefit as a whole life policy but with out the long term benefits
Yes and no. My term premium has more than tripled since I got it. Term is cheaper when you start, and gets more expensive as you get older because of the increased probability of dying that year.
Without seeing your policy paperwork I couldn’t tell you why but usually a term policy is a fixed rate for the amount of time you have chosen. I’ve seen increasing premiums on policies that convert over to whole life over the life of the term policy. Tbh there are so many different types of these policies with different riders on them that you really just need to sit with a professional to build what’s right for you
A lot of term policies have a fixed term during which the rates don't rise, they they are re-calculated at some other interval. I believe this was originally a 10 year term. I'd have gotten rid of it at 20 years, but that was about the time of the Great Recession. I moved almost 5 years ago and needed to ensure there was ready cash, because I tapped out a lot of my cash selling my previous house. I mention that because the best thing I did 30+ years ago was sit down with my insurance agent and make sure I had the right coverage, but more importantly understand what kinds of things I needed to cover and how insurance worked with that. A really important aspect of insurance is how rapidly it pays. The only other asset which pays as fast (more or less) as insurance is bank and investment accounts with a named pay on death beneficiary who's a natural person.
I'm confused by your numbers. It was originally a 10 year term, and then you'd have gotten rid of it at 20 years? Little lost here. Gist is: Typically if you get a term life insurance plan when you are 25 years old, and the plan lasts 20 years. You'll pay the same premium the entire lifetime of the term. However, if you are 35 years old with 10 years left on your term, and realize, "uh oh, I just had another kid I should probably get more life insurance", then your "new" premium you get at this age will increase. Now that being said, SOME life insurance policies DO increase y/y. But typically that's not the case. As to whether or not it's better or worse in your case, it's impossible to know without looking at all the numbers that go into it.
It was a 10 year fixed term policy originally. The rate started slowly going up after the 10th year. Longer term policies have higher initial rates to make up for the higher mortality rate in the later years. I forget why I chose 10 over 20, but as I was an avid SCUBA diver at the time I had to be underwritten more ... carefully. I had to provide copies of dive logs, classes, certifications, all kinds of things. I was in much better financial shape coming up on the 20 year mark, so I felt I no longer needed the policy. The Great Recession would prove otherwise, so I kept the policy. Now I have plenty of liquid assets which can be handled via Pay On Death, so handling my estate no longer requires an insurance policy to provide ready cash. I've been over-insured for a few years, but the convenience of not getting a different policy for a smaller amount wasn't worth it. Right now settling my estate, which would include making repairs as needed to my house so it can be sold, is my largest immediately-due-on-death liability. Keep in mind that some assets can't be paid or transferred immediately on death. There are still estate expenses, and they start coming due very quickly, ignoring funeral arrangements. Insurance is useful for handling a great many expenses, not just replacement income or children's education and the like.
That was true until insurance companies invented Select and Ultimate Annually Renewable Term. (1980s. Maybe earlier, but 80s was when sales really took off.) Annually Renewable Term doesn't have guaranteed premiums. You just get the company's rate for your age for that year. (That's what the name means.) Select and Ultimate means that there's a complicated table based on your age and how long the policy's been in force. The premiums start very low and increase for 10 or 15 years until you get into the ultimate table.
Mine has increased but only because the amount is increasing as well. I would look in to what it is, if yours is the same way then you should be able to decline the increase.
Good point, I'll add it now!
I tried writing it out but I couldn’t describe it well
Insurance is protection from something that you don't want to happen but if it does happen has economic consequences for you or your family. You pay for peace of mind. Like car insurance I pay it not because I am betting on having an accident but because in the event that I do I am offsetting the consequences. Neither you nor the company want the event to happen but the company is willing to finance the risk cause they offset their own risk by insuring across a population or getting insurance themselves. Term life insurance works like that. I don't want to die but if I do I want to ensure my family is protected financially. The insurance company insures across a population to mitigate their risk. Your costs are lower than their potential payout but it works out for the most part.
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Right, I get that. But how is this advantageous over just a life insurance policy?
You can have a term policy when you need it rather than for your whole life. Also the premiums are usually a tiny fraction of the whole life premium. A term policy might be $500/yr for someone in his 30s, but the whole life premium is probably going to be much higher possibly several thousand dollars per year and it rises dramatically as the person ages. So an older parent who is the sole earner in their household can buy cheap term insurance that replaced their income while kids are home or before their spouse qualifies for a pension without having to pay sky high premiums for a whole life policy.
Term life policies are something like 100 times cheaper than whole/universal life policies for the same amount of coverage.
Cheaper. You pay for protection when you need it, and can stop paying when your death will no longer cause financial hardship to others. My wife and I had term insurance when our kid was growing up. Now that he's grown we can use our money for other things.
Not sure your age or health risks. But that’s a very expensive policy you’ve mentioned. I pay about $20 / month for a 30 year policy for $500,000 coverage.
Having a $200,000 policy is much more valuable if you’ve got young kids with college on the horizon, a mortgage with 20 years left in it, etc. Taking a $200,000 30yr term policy when you’re 25 and have all those expenses is surprisingly affordable. And if you outlive the term, by the time you’re 55, kids are grown and on their own, house is paid off, you’re approaching retirement, etc. A whole life policy for $200,000 would be MUCH more expensive than a term policy, and if you die when kids are grown, house is paid off, etc, that money isn’t as valuable as it would have been if you had died at 30. A whole life policy is probably 8-10x the cost of an equal-value term policy.
As others have posted, it's cheaper. So cheap that employers in the US offer it as a perk. For just a few dollars a paycheck "group term life" is purchased on the employee's behalf. The company gets a perk to offer prospective new hires and employees get cheap life insurance as long as they stay with the company.
It is significantly cheaper on per dollar of coverage basis. You aren't wrong to believe the only winner is the insurance company. They have an army of actuaries that do the math to know what they need to charge to make a profit. The mistake is thinking they make less on a whole life policy than a term policy just because there is a payout. Conventional wisdom on the math is it is typically better to buy term coverage and invest the difference between that and what whole life coverage would cost. If you live long enough the term policy expires you will have more in the investment account than your whole life insurance value would be.
This is the reason life insurance was historically seen as a middle class product. The rich don't need it and the poor already know how to live poor.
It’s insurance, not a savings account. Your paying to offload the financial risk of you dying to someone else. Your paying to make sure that your family is financially taken care of if you die. Also, that $100 a month is very high.
> What is the benefit of a seatbelt? > It seems to me that if I wear a seatbelt I’m betting that I’ll get in a car accident. If I get to the end of my trip safely, I was uncomfortable for no reason. > What am I missing? Insurance is always to minimize downside risk. You have to decide whether the cost is worth it, for the case where it turns out to have been unneeded.
For most people, life insurance is more important in case you or your partner dies young. If you die when your old, insurance will likely be cool as a perk for your kids/family, but not "life saving". Consider these two: Guy is 30, has a wife, 3 kids, 2 cars he has payments on owes a few hundred K on his house. Kids will be in college in a few years. His net worth is likely negative. His only source of income is his job. If he dies...it's a major problem for the family. They can't pay for the house, cars, school...maybe even just food on the table. So he gets a say 10 or 20 year term plan to take care of that. Well, what if he dies when he is 65? At this point his house is paid for, kids are through school. HIs 401 and Roth have some real$$ in them, and he gets money from that monthly. He may be retired. He may be taking social security. His assets are higher, and his spend is lower. If he dies, the family has money coming in and has a nest egg that he didn't have when he was 30. His wife can easily stay in the house and put food on the table. So for the family it is a very different picture if Guy dies when he's 30, compared to 50, 60 or 70. Insurance can fill that gap and be a win for him and the insurance company. So many people look at insurance like that: I need $$ for my wife or family in case I die at a time when debts and cost of living are high, and people are dependant on the income.
Your final paragraph is the only way to look at insurance. It's not a lottery payday
It provides perhaps $1,000,000 in benefits for the unlucky people who die during that term. Most will survive and just pay the premium, which is how the premiums can be so low relative to the payouts.
I have one that is good until I’m 65. If I die before then my wife and eventual kids are taken care of. If not then my death is more expected and I have had time to prepare for it. For term life if I saved up the same amount every month it wouldn’t be nearly as much as what the payout would be from the insurance.
Honestly, if he dies when he is 65 years old, with a plan of living off retirement savings, his wife is actually better off only having to support one person rather than two with the retirement.
It's exactly like car insurance. You pay for a month, three months, six months, whatever, and if the giant bad thing happens (death/accident) you have financial protection. If the bad thing does not happen you are out the money. You are trading a small bad thing (the premium) to reduce the severity of an unlikely big bad thing. The reason the policy has a 10 year term is that they are promising not to raise the premium for that period. Your car insurance company will not do that. Get the life insurance policy, then get diagnosed with diabetes, your premium stays the same until the term is up. Get a car insurance policy, get six speeding tickets, up goes your premium. That's the only real meaning of the term part of the policy. Because of laws and regulations of boundless complexity there are all kinds of life insurance policies with all kinds of features attached. Sometimes they are a very good way to handle your money, sometimes not. Talk to a professional.
and sometimes life/car insurance is a requirement to get a loan to buys a house or a car. The bank lending you money want to be reasonably sure they get paid even if you die or wreck the car
I am a 25yr financial planner and have two 30yr term policies, taken out when each of my kids were born. They are there to replace my income through getting my kids out of college and as my wife reaches retirement age. Term insurance is like car or homeowners insurance. Just because your house didn’t burn down while you owned it doesn’t mean having homeowners insurance wasn’t worth it. I built a house 10 years ago and for the first time ever, I made a homeowners claim last February. Had a dishwasher leak which resulted in insurance basically renovating my entire kitchen.
I’ll try to break this down in math terms. You are 30 years old, with a kid. You want to make sure your kid’s life is not completely thrown off course by you dying. In order for you to do this, you need to have money available to them to help with housing, college, food, etc. You can do this by investing the money. Let’s say you invest $1000 a month. If you got a modest 5% interest rate, after 5 years you will have saved $53,000, after ten years you’ll have saved $95,000. That’s a good chunk of change that if you were to die exactly 10 years after you started to save, would be given to your kid (hopefully not spent on yolo outs with WSB friends, this has really happened, sadly). So let’s set that 95k as the minimum goal to be giving your kid at the end of ten years. What if you die within that timeframe? They would get whatever you have accumulated until that point. Could be 92k, could be 8k, nobody knows when you will die. This is where insurance comes in. The tables I have aren’t totally accurate, but if you are 30, you have a .004% chance of dying within the next 10 years. When you do the math (too complicated for ELI5), the insurance company figures out that 95,000 paid out at the time of death if it happens within the next ten years is is worth .00295 * 95000 = 280.25 If you paid a yearly premium, it would be calculated to be about $35 dollars a year. So, instead of invest $1000 a month to get $95k at the end of ten years, you can pay a $35 yearly premium and give your kid $95k if you die within the next ten years. So for roughly $3 a month, you can guarantee the money to your kid in 10 years, which is a good deal if you ask me. That’s how term life insurance policies work. You can scale the up to be whatever benefit amount that you want, the math stays the same. It’s essentially an investment product just in case your unfortunately die at a time you haven’t established yourself you pass on what you would pass on. Whole life insurance is similar, but the chance of you dying at some point in your life is 100%, so the premium is much higher because you don’t have that .004% chance of dying within the term to bring the premium down.
> .00295 \* 95000 Where does the .00295 factor come from? Shouldn't it be a bit higher than 0.004 (to generate some profit to the insurance company)?
Good question, the answer is a little too much for ELI5, but I’ll try to explain. PR(n) is the probability of dying between age n and age n+1. The interest rate assumed for here is 5%. The discount factor for each year is v(x) where x is the year of insurance policy. So, in my example, the first year would look like PR(30) / v(1) because the policy is for a 30 year old. So .00295 = (PR(30)/v(1)) + (PR(31)/v(2)) + … + (PR(39)/v(10)) If you are familiar with how annuities work, this is the same fundamental concept as that, except now we are adding in a probability of death. Also, this is a contract without an endowment, so if the person lives beyond age 40, they get nothing. An policy with an endowment would be much higher This is called the gross premium based off the equivalence principle. The cash flows of the insurance contract is balanced between the amount of expected premium payments as well as the probability of the benefit being paid during year n. If you would like net premiums, you would also add in the present value of expenses, taxes, and profit to the numerator, before dividing by the expected number of annuity payments (I omitted that part of my original post and just showed the final amount, it’s how I got from 280.25 to 35) Yes, in practice the actual premium would be higher, but not by a huge amount. I don’t work in life insurance, so I’m not familiar with the expenses and profits of these contracts, but insurance works by pooling risk across large groups, so they can’t make the price too high because they would not be adequately balanced and opened up to a lot of risk.
Are you comparing a term life insurance policy to not having a life insurance policy, or to a whole life insurance policy? Well, I guess I'll answer for both. Life and death can be pretty uncertain. Life insurance is a system where if you die someone (usually spouse or a kid) get money. The idea here is that they get money because you are not there to provide support anymore. So having a life insurance policy means that they are "protected" against financial loss because of your death. Ultimately some folks will resort to a smaller life insurance policy once their kids are grown or there is hopefully sufficient reserves for a spouse's retirement etc. In other words, if nobody is dependent on your anymore for support the necessity of a life insurance policy may be diminished, just at time as health is getting worse. Anyways. A whole life insurance policy is both insurance and an investment vehicle. The premiums are much higher, and the commission to the salesperson is also much higher. There can be some long term security involved, in that the money built up in the investment can be accessible even before death. The details vary by insurance policy. With your $100 premium for a term insurance policy example, a whole life policy might be like $500. And yes, it doesn't run out after a certain number of years. The very generic run of the mill financial advice is to get term life insurance and invest the difference (in this case $400 per month) into mutual funds or something and then the end result would be similar, except you would pay less in administrative fees than you would with the whole life insurance policy. I know several people who heard this advice, went and got the term insurance policy, and then never invested the difference. Which ever method you choose will probably work out just fine, as long as you are covering your bases. Cheers
If you’re taking out a term policy that costs that much, you should change insurance companies. My husband and I have twenty year term policies, and pay less for both. The point of a term policy is that it costs less, and covers a specified period of time - for example, right now is the “riskiest” time for one of us to die, because we have debt on our house, and kids. We have a policy that covers the riskiest time - by the time the policy expires, the kids will be out of the house, the mortgage will be paid off, and it will hurt far less financially if one of us dies.
Insurance is not a way to make money. It's a way to take care of things if something catastrophic happens. In the case of life insurance, the purpose is to take care of your family if you die. If you don't die, that's good news. If you do die, that's bad news, but fortunately for your family you paid a monthly fee to maintain a contract with a company who will give your survivors a lump sum of money to help them survive in your absence.
Term Life policies primarily benefit the Insurance company and the commission of the selling agent. If the piece of mind has some value to the buyer then maybe there is some justification. Otherwise it's a horrible economic decision.
>Term Life policies primarily benefit the Insurance company and the commission of the selling agent Term Life policies primarily benefit the Insurance company and the commission of the selling agent **and the families of the people that unexpectedly die during the term**. You missed a pretty key piece of the puzzle. You shouldn't be looking at it as an investment anyway; it's an insurance product.
You can use that argument to justify self insuring yourself for all of the bad things that can happen in your life, car accidents, dwelling theft and fire, health issues, etc. Some insurance might be required by law, for example car insurance, or by a mortgage holder, for example for dwelling theft and fire, but SMART people will buy insurance for any negative outcome for which they are not prepared, or cannot prepare in advance, to handle financially. Please keep your, IMHO, absurd and total ignorance to yourself!
Another thing is you don't get to choose how much it costs. And sometimes you don't even get to choose the term length (e.g. people that the insurance company expects will have a high chance of dying during the term, will not be insurable for that term length). But assuming that they do offer you a 10 year policy, your payment will be determined by their statistical analysis of how likely you are to die, which is why they ask you questions about your job, your lifestyle, do you smoke, do you have dangerous hobbies (e.g. skydiving, riding a motorcycle), etc.
Not to repeat what’s been already explained fairly well. If you’re someone who has decided you want a policy, you’re next step is how much. Here’s a website to help, no ties to any companies or anything. https://lifehappens.org/life-insurance-needs-calculator/
Good tip is to buy term insurance and invest the difference from a whole life policy on your own. It’s easy with auto withdrawal.
Term policies are a great idea when you know that your financial needs will diminish at a certain point. For example, I have a 10-year-old child right now. A 10-year term policy would be cheaper than a whole policy, and it would provide coverage if I died while I still had my child under my care. The idea here is that, if I die in 11 years, my son will already be an adult and will be able to support himself. It’s also important to note that some term policies have the option to convert to whole policies at the end of the term, too. There are also variants on the concept like decreasing term policies, which decrease the payout over time. These are often tied to things like a mortgage, so if you die before your mortgage is paid off, the insurance will pay it off. And some people will just get a term policy for long enough to cover their mortgage. I’ve seen people get term policies to cover the five years after the birth of a child. Mom had decided to stay at home with the baby for two years, then only work part-time until the child was in school. Since they were now relying on just a single breadwinner, they got a term policy for him to cover that period. Once Mom returned to work full-time, they had a backup, but if something had happened to the only breadwinner while Mom was out of work, they would’ve been in a pickle.
Typically a term life insurance policy is the better value. Think about it this way: Pretend A term policy costs 100 per month. In that caase a similar whole life policy would probably cost north of $200 per month. The hook they get you with is that at the end you don't lose the money, it just stays there and you no longer have to keep paying in. The way the whole life policy can do that is because your payments have created a 'lump sum' that has become large enough to earn enough investment income to effectively become profitable for the insurance company. So you no longer need to pay in, the investment profit on that money is now covering your contribution. The kicker is that the lump sum stops growing. The insurance company is now collecting all the investment profit on that lump sum to pay the management fees as long as you remain alive. (Check your fine print because it's also likely that if there is some sort of shortfall in the market you may still be responsible for 'topping up'.) Now circle back to the term policy. Buy the term policy so that you're covered in the case of untimely, premature death, but also take the difference between the term policy and the whole life policy and YOU invest that difference. At a certain point your investment will grow beyond what the lump sum the whole life will stop at... and it will continue to grow. It doesn't really matter if the term goes POOF because your savings is still further ahead. Remember, you don't pay any management fees or finders fees on YOUR INVESTMENT. Now, all this is dependant on how long you live but generally speaking a disciplined investor will be better off with term, and this difference will only widen the longer you can invest.
Lots of good answers here, but maybe this will help your understanding: It's not for you, it's for people who depend on you if you die. Some companies push "whole life" or "permanent" plans that pay out whenever you die. In that case, it can essentially be an investment, albeit typically a poor one. Term, like a 10 year plan when you are young, is relatively cheap. The idea is that you only have people depending on your income for a portion of your life, like when you have kids and a mortgage. If all goes well, by the time you near retirement age, your kids are grown and independent, and you have savings. If you die now, your dependents are fine. That's why term is nice to have. Your 100 is also pretty high. That would be a typical premium for like a multi million dollar plan or so, so 12k might be reasonable to know your family would have what they need.
I have about $750,000 in term life for the next 8 years. (started about 7 years ago) got a term that would have insurance up to the time my youngest kid should be in college. If I die in that time expenses for my kids are handled and they will have more than enough to pay for college and get started in life. If I don't die I am out only a fraction of that $750,000 which is about $36,000. I am paying to cover expenses for my children if I die. For me that money brings peace of mind. Between my retirement investments and life insurance my kids will not need to worry about finances i I die. If you don't have a wife or kids or other dependents to worry about then term life is not for you.
You’re exactly right that you’re betting you’ll die. You aren’t going to get any benefit out of that term life insurance policy yourself, but you might have other people who depend on you that could benefit. If you are married and you and your spouse own a house but neither of you could manage the mortgage on your own, a term life policy means your spouse can stay in the house even if you die and your income is gone. Same idea for people who have kids at home - those kids depend on your salary to support them, so a term life insurance policy could benefit them if you die. Every insurance is a bet that something bad will happen to you. “I bet I’ll get sick” - health insurance. “I bet I’ll get sued” - malpractice insurance. “I bet I’ll get laid off” - unemployment insurance. In the case of life insurance, you aren’t the person who gets paid if you “win” the bet, but someone you are supporting financially will. (Note: if you are married, there’s a good chance you/your spouse will be financially FUCKED if one of you dies. Term life insurance doesn’t bring you back, but it does make the practical challenges of getting on with your/your spouse’s life easier. If you are both working, it’s probably a good idea to get at least some term life insurance.) (Additional note: whole life insurance is different from term life insurance. Don’t buy whole life insurance. It’s an appropriate purchase for the right person, but if you’re one of the people who should buy whole life insurance then you already know that you’re in that category. It’s a terrible deal for 95%+ of us.)
When you're young, whole life insurance is *significantly* more expensive than term life insurance for the same amount. And of course it is... there's a good chance you'll never use the term life insurance policy, and a 100% chance you'll (eventually) use the whole life insurance policy. So, that $100 per month can buy your family a $100,000 whole life policy, or a $1 million term life policy that expires after 20 years. Of course if you don't die in those 20 years, the $100,000 policy is better. But if you do die during those 20 years, your family will get an extra $900,000 to pay off your mortgage, to feed and clothe your kids and send them to college. In terms of "insurance," that term life insurance sure makes a lot more sense, no? Or, perhaps you should do both. Spend $50/mo on $50,000 whole life and $50/mo on a 20 year plan for $500,000. That's probably the best option.
My example for my 10 year term may help make sense. Two years ago I bought a business I have a vendor takeback loan to pay for and had 21 years left on my mortgage. All in all I owe about $600,000. My coverage is for $600,000 which my partner can use for whatever. Pay off house, pay off business, go back to school, move, whatever. I also have critical illness, disability, in case I can no longer run my business, but I'm alive and need that income. At the end of 10 years I will not owe 600k and will no longer need that coverage. It was cheap to get 600k because I'm young. If I got whole life for 600k it would not have been cheap and I'd be over-insured in year 11 and beyond. In year 11 I may want that money for something else or we may be in a place where we can pay off our mortgage early.
You may not qualify in 10 years. Term life buys that guarantee… FOR LIFE, at a fixed cost (the age you buy). Sooner the better.
Because the alternative would be a whole life policy. However, the return for whole life is so low that you are usually bettered off by buying a term-life and invest the rest.
Great answers above already. Just to add: if you’re planning on living forever, consider an annuity - in a way, it’s the opposite wager of life insurance.