Dave Says: The Point of Life Insurance

The point of life insurance

Dear Dave,

I have a 20-year level term life insurance policy. I noticed the other day that the cost would increase to $4,000 per year at the end of the term. Is that because it’s the end of the policy coverage or something else?

Tate

Dear Tate,

Technically, the policy will expire at the end of the term. But most companies that sell term life insurance will let you renew it if you can’t get any other insurance, at a ridiculously high rate. But let’s face it, 20 years down the road your probability of death has also increased. The older you are, statistically speaking, the more likely you are to die.

If it were me, and I’m near the end of that policy, I’d go buy another 20-year level term policy and let the old one run out. The only time you might run into trouble with a policy like that is if you were in the last year of coverage, and were diagnosed with a terminal illness. Then you’re really going to be paying through the nose to keep your coverage intact.

But the real point of a 20-year level term policy is to ensure that your family is taken care of while the kids are at home and your mortgage is covered if you die prematurely. If you follow my plan, you’ll have $500,000 to $1 million your retirement account when the policy runs out and the kids are gone. Plus, you’ll have taken a 15-year mortgage, and your house will be paid off too. If something happens then, your spouse will be okay financially.

The further along in life you get, assuming you do the stuff I teach, the less need you’ll have for life insurance!

—Dave