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Why is term life insurance more affordable?

You're considering life insurance as you do your estate planning. You want to make sure your kids are provided for if you pass away.

What you're finding is that term life insurance is cheaper than permanent life insurance on a monthly basis. While it makes sense that it'd be cheaper overall -- since the payments stop at a certain point -- why does it cost less each month?

The main reason is that the term itself limits the risk. A company offering a permanent policy knows that it has to pay out eventually unless you violate the agreement in some fashion -- for example, it may not pay out if your death is deemed a suicide. A company offering a term policy may never have to pay out.

For instance, perhaps you're 35 years old. You have two kids, the youngest of which is 8 years old. You want to make sure both kids are provided for until adulthood, so you look for a 10-year policy.

When that policy runs out, you're only going to be 45. While there is always the risk of dying in a car accident or in some other way, the risk is statistically far lower than if you were 70 years old and buying the same policy. It's also lower than a 20-year policy or a permanent policy. It provides you with the security you need for your kids, but both you and the insurance company are simply hoping you live through the next 10 years and never need to use it.

Be sure you understand how life insurance factors into your estate planning, the legal options you have and the limitations and benefits of different types of policies.

Source: FindLaw, "Life Insurance Options," accessed July 05, 2017

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