I am sometimes accused of being anti-term insurance, usually because I speak out against its misuse. But being against the misuse of something is not the same as being against it in general. Take alcohol for an example. While most rational people would agree that there is nothing wrong with a glass of wine with dinner or a beer at a barbeque, they would also agree that the use of alcohol as depicted in Mad Men, while maybe historically accurate, is nonetheless inappropriate. So used appropriately, term insurance is indeed an invaluable financial tool.
In my opinion, the most appropriate use of term insurance is when the need is so great that it can’t be met with whole life because the cash flow isn’t available. This is often the case with young couples, but can certainly extend well into middle age and beyond, if not properly addressed.
Let’s take a look at a family that is living on $5,000 a month, with little after-tax savings. It doesn’t matter if both of them work or only one of them works, because the survivor is still going to need about $5,000/month. I go into more detail here and here, but basically, the survivor would need between one and one and a half millions dollars to generate the $5,000/month.
While the ultimate premiums would obviously depend on age, gender and health, the premiums for a healthy 30 year old male (female) would be approximately between $800 and $1,200/month ($700 and $1,100) for whole life and $25 and $35/month ($20 and $30) for term.
It should be obvious that while it would be nearly impossible for our fictional couple to fund the entire need with whole life, it could pretty easily be funded with term insurance. And that is precisely the primary advantage of term insurance: to properly fund a need that would otherwise be left unfunded.
Another advantage of term insurance is its conversion feature. Most term policies contain a provision that contractually allows for the conversion to a whole life policy without evidence of insurability. This provision can be invaluable to someone who was healthy when the term policy was procured but now suffers from some affliction that would otherwise prevent the obtainment of a standard policy. In the past, most term policies could be converted until age 65, but recently many companies are limiting the conversion provision, some to as little as 10 years.
While term insurance has its advantages, using it to fund long term needs is not one of them. If that is a current necessity due to cash flow, make sure that you convert chunks of it as cash flow permits (the entire policy need not be converted at the same time). Most term insurance ends at age 80, so you could find yourself with no insurance at precisely the time a claim becomes likely.