Term Life Insurance: Cost, Riders, and Living Benefits You Should Know
Did you buy a car in the USA? Do you need to take auto insurance before the car leaves the showroom? Think about why the insurance is mandated before the car hits the road. The government wants to protect other citizens and their property. In case of an accident, the insurance company pays for property damage and harm done to others.
Similarly, it is our responsibility to insure our life to protect our family in case something happens to us and we are no longer present in this world. The government is not going to mandate this.
In today’s article we will discuss two important topics on term life insurance:
- What does a term life insurance cost
- What are the basic riders it should have
What does a term life insurance cost
In term life insurance, the premium is decided by age, gender, and the length of the term (10 years, 20 years, 30 years, etc.). The coverage ends once the term is complete.
For example, if a 40-year-old male takes a $1M term insurance policy for 30 years, the coverage will last until age 70. If the health is in pretty good state, the cost is less than $4 a day. That is cheaper than a chai latte at Starbucks and cheaper than the premium we pay for car insurance.
What are the basic riders it should have
It is smart to make sure a term life insurance policy includes the accelerated death benefit rider, also called the living benefits rider. This covers chronic, critical, and terminal illnesses. It is called the living benefits rider because the insured can receive funds while still alive if certain conditions are met.
Critical Illness (lump sum): Major heart attack, coronary artery bypass, stroke, invasive cancer, blood cancers (leukemia, lymphoma, multiple myeloma), major organ transplant, end stage renal failure, paralysis, coma, severe burn.
Chronic Illness (lump sum or periodic): After a 90-day elimination period, certification that you cannot perform at least two ADLs (bathing, dressing, toileting, transferring, continence, eating) without substantial assistance for at least 90 consecutive days, or you have severe cognitive impairment requiring substantial supervision. Recertification may be required for payments extending beyond 12 months.
Terminal Illness (lump sum, partial or full): Physician certification that death is reasonably expected within 24 months. Includes a guaranteed minimum benefit based on either a payout percentage of the accelerated amount or cash value.
When a claim is made, the insurer calculates a discounted lump sum (or periodic payments for chronic illness) based on factors such as policy values, future charges, expected life expectancy, and an interest rate benchmark. Each rider has a minimum payout formula, but in some cases (for example, when life expectancy is not significantly affected for certain critical or chronic claims) the offer may be zero.
I have recently seen two cases where individuals received living benefits of $480,000 and $1.8M from their term insurance policies. The first was diagnosed with breast cancer, and the second underwent bypass surgery.
Final Thoughts
Term insurance is essential to secure your family. While you are paying to insure a $30,000 car, isn’t it smart to insure the most valuable asset of your family i.e., you and your spouse?
That’s a wrap for this week. Happy learning!
