A great question indeed! People usually buy term insurance to cover the needs of their families after their demise. But suddenly, many questions start buzzing in our minds. First of all, who will get the payout, what does term life insurance cover, and how much should be the coverage, etc. So, in this article, we will cover all these questions and more. We promise by the end, you will be an expert yourself and will have answers to all your questions.
So, let us first address the first question, who will receive the death benefit?
Who Will Receive The Death Benefit?
Well, it’s simple; whoever you make your beneficiary will receive the death benefit. You can declare one or more people as your beneficiary. He or she can be anyone you hold dear; your spouse, children, brother or sister, or even an NGO.
But do remember to mention a beneficiary. Also, keep changing your beneficiary with time and as significant events happen in your life. For example, update your beneficiary after the child’s birth, divorce, marriage, or other significant events. This update will help in a swift and fast payout to your beneficiary. Otherwise, the payout may get delayed, and the whole point of the term life insurance may go wasted.
What Does Term Life Insurance Cover?
You can use term Life Insurance to cover any kind of expenses starting from funeral or burial to college tuition fees, etc.
Let us see a few heads you might want to cover through your life insurance policy.
#1: End-Of-Life Expenses
End-of-life expenses may seem trivial. But do you know that these expenses may pile up to $10,000 on average? Yes, even a decent farewell can cost your family that much.
Your loved ones would not like to compromise on these end-of-life expenses. But don’t you think it can be a bit hard on them? The grief plus the expenses both together can result in a tough time for your loved ones.
Thus, covering the end-of-life expenses like funeral or burial, etc., is a good idea. This way, life insurance can take a few worries off their mind.
#2: Basic Daily Expenses
Whatever happens, life doesn’t stop, and nor do the essential daily expenses. Daily expenses can be groceries, utility bills, car insurance, car EMI, mortgage or rent, school fees, etc. The expenses have no end.
For many of us, making both ends meet is possible with both partners earning. Imagine what would happen if you are not there to support your partner. How would he or she handle the payments after you?
Many of us understand and prepare for this problem beforehand. We try to build an emergency fund. This fund cushions us in times of emergency. But don’t you think it will be better if you had term insurance death benefit to help you out? Term life insurance can provide better help, and you can save your emergency fund for something else.
The death benefit can serve you longer, and your family can get some time to get out of the grief and start their life once again.
#3: Pay Off A Mortgage
The third and major answer to what term life insurance covers is a mortgage. A mortgage can be a significant overhead for your partner once you are not there to help him or her.
Apart from that, a house is also crucial financial security for your family. Your family surely cannot afford to lose that.
But mortgage payments can be huge. It might become difficult for your partner to pay for them once you are not there.
Another scenario can be that you die old, and your mortgage is transferred to your children. You wouldn’t want them to pay for a mortgage you took. Thus, it is always a good idea to keep your death benefit big enough to support the mortgage payments.
This way, you can de-burden your family’s shoulders from a big expenditure instead provide security at the same time.
#4: Burden Of Cosigned Debts
A mortgage may not be the only debt you may be having. Many other obligations may still be around a student loan, car loan, personal loan, etc. And if you have them cosigned it with somebody another, it becomes a grave matter. Even if you die, your cosigner will still have to pay the loan. This cosigned loan can be a major overhead for them. They might not have planned for it and can disbalance their budgets.
Thus, if you cover these cosigned debts too within your term life insurance cover, it can be a major help for those who matter once you are gone. This way, you can also help them maintain their credit scores if they cannot pay the installments on time.
#5: Child Care Expenses
Kids are huge responsibilities. Even you won’t want that you leave your kids bereft of facilities, especially when you can attend to them even after your demise. Enough term life insurance coverage can give your children everything that you want them to have even after you are gone.
For example, they will need schooling or college, extracurricular expenses, clothes, other lifestyle expenses, etc. The lump-sum amount of the death benefit can help them pay for current and future expenses.
If you are the sole bread earner of your family, you must indeed look into this aspect. But even if you are a stay-at-home parent, you must still think in this direction. A stay-at-home parent helps save the cost of daycare, a housekeeper, etc. After their demise, we must be prepared to undertake those costs. Thus, even stay-at-home parents must also consider going for life insurance.
Lastly, if your child has special needs, you will need higher coverage. He may need a wheelchair or medical requirements that will require money. It will already be tough for them to deal with the loss. Thus, financial security can be massive support for them.
#6: Accelerated Death Benefit Rider—For When You Are Still Alive
Confused, what is an accelerated death benefit rider? So, it is a facility most term life insurance policies provide. What happens is, if you are suffering from a terminal illness, you can access a part of your death benefit for paying the expenses during this time.
Let’s say you are bedridden due to a car crash and will be so for a considerable time or any other terminal illness happens. But medical and other expenses don’t cease, and you need help since you cannot work during this time. Thus, the accidental death benefit rider comes to your aid. You can use some amount of your death benefit and carry out your expenses.
But a drawback here is that this will deduct the used portion of money from the final death benefit. Thus, your beneficiary will receive a lesser amount of money.
#7: It’s all about a legacy
The last point to what term life insurance cover is leaving a legacy. It’s not always about the essentials. You may be having dreams for your family that, if you live, you want to make come true. Like you want your child to graduate from XYZ college, and you wish to arrange an extravaganza for your child’s marriage. It can be anything. But if you plan accordingly, you can make them come true even after your death.
You can set your term life insurance coverage such that it covers all your dreams. For example, you can add your child’s college tuition fees to your policy coverage. And the best part is that you can get coverage extensive enough to cover both the current and long-term expenses of your family.
So, these were the most critical heads that answer what term life insurance covers. But this text will be incomplete if we do not calculate the right amount of coverage required for you. So, let’s see that next.
How to Calculate the Right Amount of Coverage For You?
Life insurance death benefits can be one of your last gifts to your loved ones. So, choose your coverage wisely. It can be of great help. So, let’s see how much can be enough. There are a few rules to guide you through the process:
#1: 10x Your Salary
This is the most basic method of coverage calculation. If you get ten times your salary, it can take care of your family’s basic needs for a while. But this does not take into account all the expenses. Expenses like college tuition fees, etc., are not accommodated in it.
Therefore, the need for the next method.
#2: 10x Your Salary Plus College Expenses
This method covers more than your basic needs. It also takes into account your children’s college. If you add $100,000 – $150,000 per child, you can have much more comprehensive coverage. You can ensure this way you can help fulfill their dreams even when you are gone. Term life insurance can help you carry out your responsibilities even when you are not there.
#3: Use The DIME Formula
DIME is the ultimate coverage calculation formula. DIME stands for Debt, Income, Mortgage, and Education. It is calculated by adding your mortgage, other debts, education costs, and finally, your income till your children are self-dependent.
#4: Human Life Value Philosophy
This method is a bit different. It directs you to calculate the full amount of income you will earn in your remaining life span. That is your current income and the income in the future. This calculation depends on your age, the number of remaining years of service, occupation, current benefits, etc.
There is no exact method to conclude. But the vague idea is to multiply your current income by 30 if your age lies between 18 and 40. This multiplication factor is different for every age group:
|Age||Max Life Insurance|
|18-40||30 times income|
|41-50||20 times income|
|51-60||15 times income|
|61-65||Ten times income|
|66-70||1-time net worth|
|71-75||½ times the net worth|
All of these methods can work depending on your needs and requirements. But since this is a critical matter, do consider talking to a professional agent.
Which Life Insurance Policy Is The Best For You?
Here we are talking about two major life insurance policies—Term Life Insurance and Permanent Whole Life Insurance. Both have their positives and negatives. Let us understand why you should consider each of them.
Term life insurance covers you for a pre-specified term. If you die within that term period, your family gets the death benefit. But the period of term insurance lasts from 5 to 30 years. What about the rest of the years of your life? The answer to the rest of the years of your life is permanent whole life insurance. The highlight of Whole LI is that it lasts until the premiums are paid. It does not have a set term.
Since there is a facility, there will be a cost too. Whole life insurance policies are generally 6x-10x more costly than term life insurance.
Term life insurance is desirable as it is very affordable and gives good coverage. On the other hand, the whole life insurance may seem unnecessary at the time. But it will once you are old.
Other advantages of whole life insurance are the ability to withdraw cash value during the policy’s life. Also, you can take loans against your Whole Life Insurance policy.
Thus once your term insurance term is approaching an end, you may be looking to convert it into Permanent Whole LI. And for the same reason, most insurance carriers allow you to convert your Term Insurance into Whole Life Insurance. And that too, without any medical exam. Thus, if you suffered from, say, cancer, a new policy may be difficult. But you can easily update this one.
Concluding, we will like to say that a life insurance policy can be that much-required cushion for your family during a time of distress. And like we said before, it will be your last gift to your family. So, choose your cover wisely.
So, that was all in our guide about what term life insurance covers. We hope it was informative and you got the answers to your questions. But if some of the questions still buzz, drop them down in the comments section. We will be glad to answer.