The Point of Life Insurance

Tate says his term life insurance policy will increase to $4,000 a year in 20 years. Is it increasing because it's the end of the policy or something else? Dave explains.

QUESTION: Tate on Facebook says his term life insurance policy will increase to $4,000 a year in 20 years. Is it increasing because it’s the end of the policy or something else? Dave explains.

ANSWER: You’ve got a 20-year, I guess, level term insurance policy. Twenty years from now, the policy technically expires, but they will let you renew it if you can’t get any other insurance, and you renew it at an unbelievably ridiculous rate that is based on the fact that they don’t want you to renew it. It’s also based on the fact that yes, you’re 20 years older, and life insurance is based on your likelihood of death. The older you are, statistically the more likely you are to die. It’s probability and statistics. Nothing to worry about there.

What I would do and what I have done over the years is the 20-year level term is cranking along, and I’m in the 15th year, and I’m looking at my insurance. I go, “Well, I need to add some. I’ve got this or that going on.” I have this business application for some term insurance, and I just go buy another 20-year level policy. When that one runs out, it just runs out.

The only time you would really run into a problem is if in the last year of the policy you still need insurance and you get diagnosed with a terminal illness or something. Then you’re going to be paying ridiculous amounts of premiums to keep the thing open.

The point of the 20-year level term policy is 20 years from now, the kids will be grown and gone. Twenty years from now, your house will be paid off because I tell you to never take more than a 15-year mortgage. Twenty years from now, you should have a tremendous amount of money in your retirement account if you invest like I teach you to invest. You’ll have $500,000 or $1 million in your retirement account. So the kids are grown and gone, everything’s paid off, and you’ve got $1 million. If you get a terminal illness and can’t get insurance, I think your spouse will probably be okay. That’s the point of it.

The further through your life you get, assuming you’re doing the stuff we teach, the less need for insurance you’re going to have as you go along.