Did you know that you could layer term life insurance?
Term life insurance offers some of the most affordable policies in the marketplace. Depending on your age, health, and gender, you can see monthly premium rates in the $10 and $18 dollars range in policies with a 10-year term and $300,000 death benefit. But what if you wanted to purchase term life insurance in order for your family to pay off your new, 30-year mortgage should you pass away? Well, you could purchase a 30-year, $300,000 policy for around $30 dollars per month but you would save considerable money if you ‘layered’ 3 separate term life policies. Let’s explain why you would want to layer term life insurance policies.
A quick explanation of term life insurance
Key definitions:
- Coverage
- Also referred to as the ‘death benefit’, this is the amount of money that will be payable to the beneficiaries upon the death of the policyholder.
- Term
- A term life policy is set for a specific number of years. For example, in a 10-year term policy, the policyholder will be covered for 10 years. If they do not pass away during that time, the policy is finished at the end of 10 years.
- Policyholder
- The person covered under the policy.
Term life insurance provides the policyholder a set amount of coverage (in the case above, that would be $300,000) that will pay out, tax-free, to their beneficiaries should they pass away during the course of the term (policies are flexible and can be found in 5, 10, 15, 20, and 30-year terms). Term life insurance policies have no cash value by themselves and should the policyholder outlive their term, the policy will end.
How term life insurance can be used to protect your mortgage
Your home is one of the largest, most important purchases you will make in your lifetime. Your family depends on a roof over their head. If something were to happen to you, your family would lose the income that you provided to pay for the mortgage. It’s a disaster on top of a disaster for a family to lose a loved one and find themselves unable to pay for their home.
Term life insurance is a perfect fit to solve this potential crisis. Due to the fact that most mortgages are in the 30-year, 15-year, and 5-year time frame it is easy to match a term policy to cover your mortgage and help your family pay off the house should you die unexpectedly.
For example:
Let’s say you purchase a $300,000 dollar house on a 30-year mortgage. In order to ensure that your family can stay in the house after you’re gone, you could purchase a 30-year term policy with a $300,000 death benefit. This way, if something happens to you before you are done paying the mortgage, your family will have $300,000 dollars to pay off the house.
How much would a 30-year, $300,000 dollar term life policy cost?
Depending on your health, age, gender, and other factors, a 30-year-old man in perfect health would pay around $20 dollars per month for a 30-year, $300,000 term policy. Someone in average health could look to pay between $25 and $32 dollars per month in premiums.
How layering multiple term policies saves you money
There are 2 inefficiencies in the example of buying a 30-year, $300,000 dollar policy to cover your mortgage:
- It does not take into account that if you were to pass away in the 20th year of your mortgage, a large portion of your home would already be paid off. This means that you are paying for more coverage than you need.
- It does not consider that a 30-year term life policy is considerably more expensive than a 10-year term life policy.
The answer: Layer multiple term policies
Seeing as you will owe less and less on your house as time passes, you only need to cover the entire $300,000 dollars in the beginning of your mortgage. We propose a more economical approach. Instead of purchasing one 30-year policy for $300,000, you could purchase one 10-year policy for $100,000, one 20-year policy for $100,000, and one 30-year policy for $100,000. Let’s break that down.
- Years 1-10
- Your 3 term life policies have you covered for $300,000 dollars.
- If you pass away in years 1-10, the house will be completely paid off
- Years 11-20
- You stop paying premiums on your now expired 10-year, $100,000 dollar policy.
- Your remaining 2 policies have you covered for these 10 years for $200,000 dollars
- Years 21-30
- You stop paying premium on your now expired 20-year, $100,000 policy.
- Your remaining 1 policy has you covered for these 10-years for $100,000 dollars.
How much money will that save me?
Let’s assume that you are a 35-year-old male in decent health. Your yearly total premium cost for a 30-year, $300,000 dollar policy is $336.00 dollars/year (this assumes a $28 dollar monthly premium bill).
Total cost for 30-year, $300,000 policy if you outlive the term: $10,080 dollars
Now let’s look at the price for 3 layered term policies.
- 10-year, $100,000 policy
- Total cost of monthly premiums for 10 years: $1,440.00
- 20-year, $100,000 policy
- Total cost of monthly premiums for 20 years: $2,016.00
- 30-year, $100,000 policy
- Total cost of monthly premiums for 30 years: $2,736.00
Total cost for 3, layered term life policies if you outlive the 30 years: $6,192
In this scenario, if you outlive your mortgage and your 30-year term, you will have saved $3,888 dollars! That is money that you could have invested in a mutual fund, spent an extravagant family vacation, or made needed repairs and upgrades to your home. This is the power of term layering!
My Life Insurance Specialist wants to help you save money without sacrificing protection
We hope you see now how term layering can be extremely beneficial to your family’s finances. If you would like to ensure that your family will be able to pay off your home in the event something should happen to you, feel free to contact us and we can talk about how you can save with term layering.
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