like thousands of other Americans
every day, you're running a term
insurance quote online. Based on
your age, area, and other key
demographic information, a list of life
insurance rates appear on the screen.
Since it's term life they're relatively
inexpensive so you consider increasing
the amount or extending the duration.
The numbers jump up quite a bit.
You're looking for that gut sense as to
what feels more do-able. Stop
right there! Before you answer
that question, let's first analyze the
powerful effect that time has on that
life insurance quote and your future
ability to pay for it.
definition, term life contracts will
generally require that you pay the
period over a period of time...and quite
possibly, a long period of time.
15, 20, 30 year term periods are pretty
standard depending on your particular
needs. Even 15 years is a long way
from now. Go back 15 years ago and
picture where you were. Yes...it's
that length of time we're discussing.
Funny things happen over such long
stretches of a person's life and we're
not talking about the widening of
certain dimensions or a graying up
above. Money changes over that
length of time as well. What
exactly does that mean? Well,
thanks to a nasty little term called
inflation, your dollar is losing value
each and every year (or at least during
average, the value that a dollar has or
essentially, what a dollar is able to
buy is reduced with time. The
average is probably around 3-4%
annually. So that dollar is really
worth about 97 cents 12 months from now.
That may not sound like a big deal but
multiply that by thousands or hundreds
of thousands of dollars or better yet,
multiply that percentage by 5, 10 or
even 15 years. You can see how the
impact can really add up over time.
How does this affect our term life
insurance rates and needs? Term
life insurance is quite different from
most other products you buy in that the
rate you pay is generally fixed.
It doesn't change over the period of
time...even long periods of time.
It might as well be the only product
that behaves this way. When's the
last time your cable bill was flat for
years. Even food prices go
up over time. This fixed price
function of term life insurance is
unique and it adds some interesting
kinks to the decision on how much term
life insurance to purchase.
First, never purchase more term life
than you can afford. It defeats
the purpose to "over-insure" and cancel
the policy later on. That being
said, keep in mind that inflation will
be de-valuing not only the benefit you
expect to receive but the premium you
expect to pay. Let's take a look
at both sides. First, the benefit.
Let's say you make $50K annually now and
you want to adequately cover the next 10
years in terms of income replacement.
You come up with $500K. You're
making decision based on today's value
of money and today's financial needs.
Let's go out to the end of the term, 10
years from now. Assuming an
annually inflation rate of 4%
(hopefully), that's a 40% decrease in
the real purchasing value of that $500K
benefit if it's needed in the last year.
Really, that benefit will feel like
$300K does today. The longer the
period, the more pronounced this
decrease in value. In some
respects, it might still work out since
you figure that you were able to earn
the other 9 years if you don't trigger
benefits until the 10th but it's
important to keep this inflationary
effect in mind.
let's look at the other side of the
arrangement. In the above example,
let's say the $500K benefit cost you $50
monthly. Maybe $1M term life
benefit would cost you $85/monthly.
On one hand, that's $35 more per month.
Now, let's go out 10 years from now.
That $50 premium will really feel like
$30 in today's money (due to inflation).
That $85 will fee about like the
original $50. Inflation can work
on both fronts and in the case of
premium, it's in our favor. When
you're running your term insurance
quote, especially for longer periods of
time, make sure to keep in mind the
power of inflation both for and against
us in the decision.