Life insurance is boring, right? Well… yeah ok, you got me there. But it’s also really important; having insurance can literally mean the different between your family being ok, and them being on the street if you were to pass away unexpectedly. One of the most popular – and most useful – types of insurance policies out there is called Term Life Insurance. So what is it, and why should you care?

“Term Insurance,” Explained

Term life insurance is actually really easy to understand. It’s called “term” insurance because when you buy it, the insurance remains in place for a set amount of time – literally the term of the policy. If you die before that term ends, the policy pays out. If you don’t die, the policy expires and that’s that.

Simple stuff.

What does Term Insurance Cost?

The answer depends on a bunch of stuff – your age, gender, health, family history, and the length of the term you’re looking for, among other things. But for the sake of simplicity, let’s make some assumptions: say you’re a female, in good health, don’t smoke, are 40 years old, and you need $500,000 in coverage for a term of 30 years.

A quick search using one of any number of insurance premium estimator tools out there (I used this one from RBC) suggests that a $500,000 policy that’s good for 20 years for someone like that costs $35 per month; less than your phone bill. For a guy with the same set of other assumptions, you’d be looking at around $48 per month.

So why the discrimination based on gender?

Because women live longer than men, plain and simple. Men are statistically more likely to die younger, so we cost more to insure.

Why would you ever want insurance that expires?

 This is a perfectly fair question. You pay and pay and pay, and then at the end of it all, you have nothing to show for it. Why would anyone want that?

Simple: because it’s cheaper, and because if you’re investing the savings you got by buying that cheaper policy instead of that super-expensive one (more on that later), then by the time your insurance expires, you shouldn’t need it anymore because you have enough money invested that you’re self-insured.

Let’s go back to that 40-year-old man. Just for fun, let’s say he wanted Whole Life policy (meaning he’s insured until he dies, no matter what) instead of 20-year term. That same policy would now cost over $400 a month – more than eight times that of a 20-year policy. It’s $352 a month more!!

So what would it look like if you took the $352 you would have spent and invested it for 20 years at 8% a year instead?

Well, at the end of 20 years, you’d have $211,118 saved up. After 30 years, you’d have over $530,000 in the bank. And all because you went for the cheaper policy!

What kinds of term life insurance are out there?

There are actually a bunch of different kinds of term policies out there, and getting into all of them is beyond the scope of this post. Some of the more common terms, though, are 10-year term, 20-year term, and something called Term-to-100, or T-100 for short.

Term-to-100 is just that: a term policy that expires when you hit 100 years of age. Because you’re insured for much longer (and let’s face it, will probably die before you hit 100), this type of policy comes with way higher monthly premiums. If you’re investing and building your nest egg each month though, you shouldn’t need insurance for that long!

How much insurance do you need?

I talk about that in one of my old posts – click here to give that one a read. In short, a good rule of thumb is 25x the total amount of your annual expenses, including debt repayments. In other words, if your monthly expenses are $4,000 a month, and your annual expenses are $48,000, then you’d need about $1.2 million in insurance to cover that off.

If your significant other is working and can offset some of that with their income, your insurance needs can go down dramatically.

Wrapping it Up

Talking insurance may not be sexy, but it sure beats spinning the metaphorical roulette wheel and just blindly hoping that nothing happens to your significant other. In a future post, I’ll go into more detail about why Term insurance is almost always better than Whole Life insurance (and why so many insurance salespeople sell Whole Life anyway). Stay tuned!