Term Life Insurance for Income Replacement | Tips & Advice

Last Updated: April 6, 2019

If you stopped coming home from work tomorrow, would your family still have money to pay the bills?

If so, you probably don’t need life insurance. However, if you’re like the majority of American families, the loss of a breadwinner’s income would be catastrophic.

Many family breadwinners purchase life insurance for this very reason; to provide a form of income replacement to their loved ones.

In this article, we’ll help you determine the amount of coverage you need to replace your income, decide if buying life insurance from your employer is your best option, and what how to secure coverage after your term ends.

Quick Article Guide:

1. Purchasing Life Insurance for Income Replacement
2. Why Purchase Term Insurance for Income Replacement?
3. Buying Life Insurance for a Non-Income Earning Spouse
4. What do You Do When a Term Life Insurance Policy Ends?
5. Should I Buy My Life Insurance Policy from Work or an Independent Agency?
6. When Employer-Provided Life Insurance is Your Best Option
7. We Can Help You Find the Best Coverage at the Lowest Rates

Purchasing Life Insurance for Income Replacement

Although talking about life insurance with your spouse isn’t the most desirable conversation, it’s probably one worth having. Have you ever thought about how your spouse would pay the mortgage, buy groceries, or make the car payments if you were to pass away? Term life insurance policies are commonly purchased for this reason.

Term life insurance is simple to understand, and it does not require an investment value. It provides a set amount of coverage, for a specific amount of time (usually 10, 15, 20, 25, or 30 years). If you die during the “term” of your policy, your “beneficiaries” (people you choose) will receive the full death benefit from your life insurance policy tax free.

A $500,000, 20-year term insurance policy will pay a $500,000 death benefit to the insured’s beneficiaries if the insured passes away during their 20-year term. During a policy’s term, the insurance company cannot increase the cost of the policy (premiums) or decrease the amount of coverage the policy provides (face amount), regardless of changes to the insured’s health.

Because of its affordability and simplicity, term life insurance is a perfect fit for income replacement protection. In other words, if you pass away, a term policy could provide your family with an income similar to what you would have earned if you were still alive.

To determine the amount of coverage you need to replace your income, multiply your annual take home pay by the number of years to plan to continue working until retirement.

For example, let’s assume your current take home pay is $60,000. You are 51 years old and you plan to retire in 12 years at age 63.

12 years x $60,000 per year = $720,000

Most of our clients choose a term that is long enough to bridge them until their anticipated retirement age. Once you reach retirement age, your spouse will be able to collect on your retirement benefits, savings, investments, Social Security, etc.

In the example above, for a 51-year old, we would recommend a 15-year term. A 15-year term will lock in your rates and coverage past your planned retirement age. At this point, you’ll have the option cancel your policy without penalties or obligations, or you can allow your policy to continue running until your term expires.

Many life insurance companies will also allow to convert a portion of your term policy into permanent coverage, or decrease your face amount and premiums if you become over-insured during your term.

If you need coverage for more than 10 years, we do not recommend buying a 10-year term and shopping for new coverage in a decade. In 10 years, the cost of a new policy will be close to double the cost of a 15-year policy today; if you’re lucky enough to remain in identical health. It’s better to pay a few dollars more a month now, and purchase a term that guaranteed until you’ll no longer need coverage.

Why Purchase Term Insurance for Income Replacement?

Why do financial advisers like Bob Brinker and Dave Ramsey recommend purchasing term life insurance, and avoiding any type of life insurance that is tied to an investment?

Term insurance is preferable to other forms of insurance for several reasons. Perhaps the greatest advantage that term life insurance offers to consumers is its affordability. Your life insurance should be affordable, not an expensive bill that is a struggle to pay each month. Term life insurance typically provides the largest amount of coverage for the lowest cost. But, Why is term insurance so inexpensive?

With term life insurance, you only pay for the cost of your life insurance policy. There is no “cash value” or required investing that can quadruple the monthly cost of your coverage. With that being said, it’s important to note that most “cash-accumulating” policies do not perform as well as expected. We’ve heard all of the horror stories over the years, yet many agents still encourage their clients to buy these terrible policies because they pay excellent commissions. Don’t take our word for it, John Jamieson accurately sums up these policies in his recent article, “Indexed Universal Life Insurance: A Rip-Off with a Fancy Name.

Follow the expert’s advice, buy term and invest the difference. Life insurance is a very poor investment vehicle and rarely performs as well as other investment opportunities. If you’re a novice investor, don’t risk tying up your savings. Buy an inexpensive term policy and make an extra mortgage payment each year, max out your 401K contributions, or put your money into a savings account. Keeping your insurance and your investments separated will allow you to retain more control of your hard-earned savings, and if your investments don’t go well, you won’t lose your life insurance.

Term life insurance policies are primarily designed as pure financial protection for the family’s income providers, people with mortgages and other financial obligations, or those with young families. In addition to replacement income, term life insurance policies are also used to provide for; children’s college tuition expenses, credit card debts, car loans, medical bills, student loans, and other various types of debt.

You can calculate how much life insurance you personally need by using our Free Life Insurance Calculator, or call to speak with one of our licensed agents. We’re here to help, and we have more than 50 years of collective experience and “insider’s knowledge” to share. Toll-Free: 855-902-6494.

Buying Life Insurance for My Non-Income Earning Spouse

We all know that it is important to insure the primary breadwinner’s income, but the reality is, both parents should be insured. If your stay-at-home spouse wasn’t around to help you with day to day responsibilities like child care, transportation, laundry services, household cleaning, meal preparation, and grocery shopping…Would you still have the time to hold down a full-time job? Would you have to hire a nanny, maid, or baby sitter? The amount of work that a stay at home parent contributes to the household is astonishing.

For this reason, many financial planners recommending purchasing coverage on both parents. We recommend purchasing a term length that exceeds the amount of years until time your youngest child would be off to college, or at least driving. Most life insurance companies will allow you to buy up to the same amount of coverage your income-earning spouse carries, and these policies can be very affordable. Please read our article, “Purchasing Coverage for a Non-Income Earning Spouse,” to learn more.

What Do You Do When A Term Life Insurance Policy Ends?

The best answer is; review your policy annually and don’t wait for it to expire. Most term life insurance policies have a “built-in safety” net, also known as, a policy “conversion” option. This benefit allows you to exchange your term policy for a permanent policy with a death benefit that is equivalent or smaller to your original policy’s face amount. Regardless of your current health, this valuable feature guarantees that you’ll be eligible for the same rate class as the day your policy was originally approved. No medical questions or exam required!

If you’ve had some health issues as you’ve aged this is something you need to pay attention to. There is a conversion age cut-off or deadline date in your policy, and the insurance company won’t be contacting you with a reminder. For most of us that have reached retirement age, converting a small amount of coverage prior to our policy’s expiration is ideal.

The amount of life insurance we need usually declines as we get older, but most of our clients tell us that they still want to carry a small amount of life insurance for their burial expenses. “Just enough” coverage to prevent their spouse from being forced to cash in their retirement savings for final expenses or medical bills that they may leave behind.

To learn more, read our article how to convert your term life insurance.

Real World Example:

We recently worked with a client named Barbara W. from Ohio. When we initially spoke to Barbara, she was frantic. Barbara had purchased a life insurance policy almost 20 years earlier, but her policy was about to expire, and she could not find an acceptable replacement.

Barbara had called a few insurance agencies before calling us, but due to her recent diagnosis of breast cancer, her only option was to purchase a “guaranteed approval” life insurance policy with a 2-year waiting period. Barbara had a lot of outstanding medical bills, and she wanted to leave enough money behind to her husband to settle them.

After speaking with Barbara, we learned about her existing policy which was about to expire. To best determine her available options, we asked Barbara to fax a copy of her policy to us for review. After taking a closer look at Barbara’s policy, we realized that her policy contained a “conversion option”.

Luckily, Barbara had never missed a payment, and we were able to convert her existing $500,000 term policy into a $50,000 permanent policy for roughly the same monthly cost. At the time, Barbara was actively undergoing chemo and radiation treatments, but the insurance company honored her original #1 best health rate class, “preferred best”, and saved her thousands of dollars over the cost of a new permanent policy. Most importantly, Barbara’s coverage did not lapse, and she did not have to endure a two-year waiting period to regain full coverage.

Many of our clients purchase low cost term policies to provide protection to their families through their working years and cancel their policies or let their policies expire when they’re ready to retire. Regardless of what you decide to do, we believe that having the option is important, and it can provide great peace of mind. There are also some “hybrid” policies on the market that provide low rates like term coverage, but will guarantee your coverage into your 90’s or beyond.

Should I Buy My Life Insurance Policy from My Work, or Through an Agency?

Some people still receive life insurance coverage through their work, and in some cases, it’s even paid by for by their employer. Unfortunately for most of us, the increasing cost of health insurance has caused many employers to stop subsidizing their employee’s cost of coverage, and others to eliminate their life insurance programs.

For our parents and their parents, “Group Life Insurance” or employer-paid life insurance used to be the cheapest form of life insurance around. It was usually free! However, with the average American changing jobs every five years, or less, there’s a good chance you’ll have gaps when you’re uninsured if you’re solely depending upon an employer for coverage.

Group policies also often have exclusions…reasons the policy may not be paid. In addition, your employer can cancel your company’s group life insurance plan at any time. Let’s look at several reasons why employer provided life insurance isn’t ideal, and some situations when it may be your best option.

1. Changing Jobs:
If you choose to leave your employer (or they leave you), your group life insurance will typically end at the company’s next annual “election period”. If your new employer provides group coverage, that’s great, but be aware of the waiting period. Most companies will not begin your coverage until you’ve been employed, full-time for at least 3 months. Depending on how long you’re in between jobs, this could be long gap. Most people won’t risk going a day without insurance to protect their home or automobile, we believe that life insurance is just as important.

In addition, it always best to lock in an affordable life insurance policy before you need it. Secure your coverage while your rates are lowest, and you’re young and healthy.

Let’s say that you began working for a company in your early thirties, and new management has done away with your position. Fast forward 20+ years; now you’re 57, 30 pounds overweight, borderline diabetic, and you no longer have life insurance coverage. Applying for a policy now will cost you four times more than if you had applied 10 years ago. Even if you are still in excellent health, your rates are likely twice as high (based on your age alone), and your options for coverage have become more limited.

2. Small Coverage Amounts:
In most cases, group life insurance coverage will only offer you up to three times your annual income. This may be sufficient if you only need enough coverage to pay for your funeral and burial costs, but if you need to provide a replacement income for your family for more than a couple of years, you’ll probably want to consider purchasing more coverage.

Financial experts recommend purchasing a term policy independent of your work to provide your family with the money they would need to replace your income. Ideally, enough coverage to bridge your family until they reach retirement age, or until all the major debts like the mortgage have been paid off. Remember, most companies will allow you to decrease your coverage in the future if needed.

If you’re not sure how much coverage you need, you can always speak with one of our agents by calling us toll free at: 855-902-6494, or services are free and there is no cost or obligation. If you’re not ready to speak with someone, you can also use our Free Term Life Calculator for an estimate of your coverage needs.

3. Changes to Coverage:
Your employer is not required to provide you with life insurance. In recent years, many companies have eliminated life insurance (or reducing the amount they contribute) to compensate for the increasing cost of health insurance. You company may offer life insurance today, but in the future, this might be a different story. If you lock in your coverage now while you’re young and healthy, you won’t have to worry about these potential changes.

I worked with a client last month who had relied on his labor union to provide life insurance coverage for the last 15 years. When he found out his new contract wouldn’t include the same coverage as before, he reluctantly decided it was finally time to look at other options. Luckily, we we’re able to find him comparable coverage, and we actually saved him a few dollars a month. The best part is, his rate is fixed until he’s 66 and ready to retire, so he’ll never need to shop for coverage again.

4. Cost of Coverage:
Group life insurance rates are determined by the “group”. What this means is that when an insurance company decides how much to charge you for your life insurance, they will evaluate the collective health of your company. As a result, young or healthy workers are usually subsidizing the costs for their older or less healthy co-workers.

For example: Let’s say Bob’s is an overweight smoker and Matthew is a healthy gym-rat. If Bob and Matthew are the same age, and they both purchase the same amount of coverage from work, Bob and Matthew pay the same premiums. When Matthew learns that he is overpaying for his insurance, he will wisely leave the group. This often causes the group rate to increase because the overall health of the group has decreased.

When Employer Provided Group Life Insurance is Your Best Deal

Not everyone can qualify for independent term life insurance. If you’ve had a recent diagnosis of cancer, are being treated for most cancers, are 200+ or more pounds overweight, have a history of recent substance abuse, or multiply DUI’s; you’re probably too high of a risk for most companies.

In these situations, employer provided or group insurance is probably your only option, and we recommend taking advantage. If it’s affordable, select the largest benefit your company will let you qualify for without completing a medical exam.

The good news is that most health conditions don’t preclude you from qualifying for affordable life insurance. At Term Life Advice, our expert agents can provide you with accurate quotes within minutes.

By working with more than 60 top-rated companies, we’re able to match our clients with the most affordable coverage options available. Every life insurance company has unique underwriting guidelines, and some companies are more lenient with specific health issues than others.

Whether you’re in excellent health, or if you have a few health issues we can help. As an example, we’ve saved diabetics, cigar smokers, and applicants taking blood thinners up to 73% on the cost of their life insurance coverage.

Bottom Line:
If your employer offers you free coverage, take advantage! Free coverage should never be passed up…but, we would never recommend relying solely on your employer for life insurance.

Instead, we recommend supplementing any coverage your employer provides with your own life insurance policy. This will provide you with additional flexibility if you decide to change careers/companies in the future, or if your employer decides to cancel their group coverage.

We Can Help You Find the Best Coverage and the Lowest Rates!

If you’re having trouble deciding which type of insurance is the best for your situation, or if you would like to get a better idea of how much life insurance would cost you, feel free to give us a call. Our shopping services are free, and our agents are licensed to sell life insurance in all 50 states. More importantly, we work with over 60 top-rated life insurance companies to make sure our clients always receive the best coverage and the lowest rates.

Every life insurance company has their own unique “underwriting guidelines” and pricing. By having access to each company’s unique guidelines and rates, we’re able to “shop the market” to find your best options for affordable coverage from a financially solid insurer. We specialize with applicants of all ages, regardless of their health and lifestyle.

Call us today at: 855-902-6494. In just a few minutes one of our experienced agents will be able to provide you with accurate rates from the best companies available. If you’re not ready to talk to an agent, you can also request an instant online quote below. Our free quote form will allow you to compare rates from dozens of leading insurers in less than a minute.

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