Term life insurance...Everything you wanted to know
Disclaimer: I did not write this article, however the content mirrors most of my thoughts about the subject of term life insurance. In some parts I have added my comments.
What is term life insurance?
Term life insurance is a contract between you and an insurance company that lasts for a specific period of time, such as 10 years, 20 years or until you reach age 65. In exchange for your premium payments, the insurer pays a death benefit to your beneficiaries only if you die during the term of the contract.
This is a key difference between permanent life insurance and term. Whole life and other types of permanent life insurance last your entire life, as long as you keep paying the premiums. Term life insurance expires when the term ends. If you still need life insurance, you may be able to renew your policy, convert it to whole life insurance at a higher premium or buy another policy.
Another difference: Term life doesn’t have an investment option or build up cash value that you could someday borrow against. This is one reason term life is cheaper than whole life. With term life, you generally just pay for the potential death benefit; with whole life, higher premiums are needed to grow cash value.
Who should get term life insurance?
If no one depends on you financially and your death would not be a financial burden on your family, you may not need life insurance. But if someone you care about will need money if you die, term life insurance may be right for you.
Term life policies often last for 10, 20 or 30 years, but many insurers have terms available in 1- and 5-year increments. If you’re a breadwinner in your family, you can choose a term that matches the years your family will rely on your income, such as the remaining years you’ll have mortgage payments. If you’re a stay-at-home parent, you may want term life insurance to cover services you provide now without payment, such as child care. If you were gone, your family might need to pay someone to handle these tasks.
Your needs might change over time. If you expect that to happen, you can have more than one life insurance policy, giving you extra coverage at the stages of life when you need it most.
Ideally, by the time your coverage ends, you’ll no longer need life insurance. Your children will be grown, your mortgage will be paid off and you’ll have enough savings to be financially secure.
If you buy term life and then decide you need lifelong coverage after all, many policies will allow you to convert your term life policy to permanent insurance. Your premiums will go up, but you can stay insured without having to prove you’re still in good health. Some policies allow conversion at any time, while others permit it only in the first few years of coverage.
How much term life insurance do you need?
Figuring out exactly how much life insurance you need can be tricky. It depends on your expenses, your assets, your goals and a host of other factors.
Although there are calculators you can use online to determine a number, your life insurance agent is a valuable tool to help you with this, to make sure you get enough coverage, but not excessive coverage.
How much does term life insurance cost?
The cost of a term life insurance policy depends on a number of factors, including:
Age. Younger people qualify for lower premiums because they are less likely to die in the near-term.
Health. Many insurers require you to take a medical exam and answer health questions. Poor health can mean higher premiums.
Gender. Men typically die at younger ages than women, so men often pay more for life insurance.
Most term life insurance policies have level benefits and premiums, so the premiums stay the same throughout the term.
Note: Visit my "Free Quote" page to get this process started.
How to find the best term life insurance company
When you buy life insurance, you’re counting on a company to be there for your family many years in the future. For that reason, it’s important to choose a company you can trust. Here are some ways to compare companies and find the one that’s right for you.
You want a company that will be around decades from now, with enough money to pay claims. An insurer’s financial strength is one way to gauge whether it’s likely to meet that mark. You can check the financial strength rating of each term life insurance company you’re considering through a rating firm such as A.M. Best or through the National Association of Insurance Commissioners.
NerdWallet typically recommends considering insurers with ratings of A- or higher. Any company with an A.M. Best rating of B+ or higher has a “good” ability to meet its obligations, in A.M. Best’s opinion. Companies with ratings below that may not be quite as safe a bet and often have higher rates of complaints relative to their size.
All of the largest life insurance companies, for example, have solid financial strength ratings.
How to find the best term life insurance policy
Term life insurance isn’t as complicated as whole life, but choosing a policy isn’t always simple. You’ll have several decisions to make, and the best options for you may not be the same as the best choices for someone else. The ideal policy is one that fits your family’s unique needs.
Know the types of term life policies
Level-premium term life is one of the most common types of term life insurance and the best choice for many people. Your premiums are the same every year, and your beneficiaries will receive the guaranteed death benefit if you die during the term. According to the Insurance Information Institute, 20-year policies are the most popular. However, a different term may be best for you.
Renewable term life is just like the name implies: You can choose to renew after every term, but your premium could increase when you do. Your policy will spell out the possible cost increases. This type of policy is typically best for people who have a very short life insurance need. However, you’ll likely save money by locking in a rate with a level-premium policy.
Decreasing term life policies have a death benefit that decreases over time, typically with level premiums, although sometimes premiums are lower over time also. People may choose this type of policy if they want to cover a specific debt, like a mortgage, that they plan to pay off during the term.
Consider policy options (Riders)
While many term life policies are simple and unadorned, some companies offer extra features that might be worth considering. An insurer may include some of these options automatically, or you might need to pay extra to add them as “riders” to your policy. A rider, also known as an endorsement, is a policy amendment that typically lets you add options at additional cost. If these extra features are important to you, make sure to ask about them when you’re shopping for a policy.
Return of premium
This option may be appealing if you don’t like the idea of outliving your policy and getting nothing in return for paying years’ worth of premiums. With a return-of-premium rider, if you keep your policy until the end of its term, the insurer will refund the premiums you paid.
However, your premiums are likely to be considerably higher if you choose this option. The price can be 30% or more above the cost of a standard term life policy, according to Life Happens, a nonprofit that provides life insurance education.
Accelerated death benefit
If you become seriously ill, this option allows you to get part of the money from the death benefit while you’re still alive. According to the American Council of Life Insurers, you might qualify for early payout of 25% to 95% of the death benefit if you:
Are terminally ill and expected to die within 24 months.
Have a serious illness that may reduce your life span, such as acute heart disease, AIDS or the need for an organ transplant.
Are permanently confined to a nursing home or need long-term care because you can’t handle tasks like bathing, dressing or eating on your own.
The details can vary by policy, so before you buy, be sure to ask how you could qualify for accelerated death benefits and how much money you’d be eligible to receive.
Also keep in mind that if you use this option, the amount you withdraw will no longer be paid to your family when you’re gone. If you think you might use an accelerated death benefit, make sure to buy enough coverage that your family’s financial needs will still be met when you die.
Disability waiver of premium
With this option, you can skip paying premiums if you become disabled for a long time, generally six months or more. Your policy remains in force, even though you’re no longer required to make premium payments.
Accidental death benefit
This option typically doubles or triples the payout if you die due to an accident. But be aware that “accident” might not mean what you think.
Insurance companies may strictly define what types of accidental deaths qualify for the extra payout. In addition, there may be time limits. For example, if you’re injured in an accident and die of your injuries seven months later, your beneficiaries won’t get an extra payout if the rider covers only deaths within six months of an accident.
Understand the approval process
Before you buy coverage, an insurer will want to know how healthy you are. You’ll typically need to answer some health questions, and it’s important to be truthful. Companies can reject a life insurance claim if the application was inaccurate or incomplete.
A fully underwritten life insurance policy requires a life insurance medical exam. A paramedical professional typically takes blood and urine samples and checks factors like your weight, height and blood pressure.
You can also choose simplified-issue life insurance, which doesn’t require a medical exam. You’ll still answer health questions, and the insurer may pull data about you from other sources, such as your prescription drug history and driving record.
Note: Most of the term policy companies I represent offer simplified issue policies, and the rates are very competitive.
For some people, accelerated underwriting is another way to get life insurance without a medical exam. You answer health questions online or by phone, and the insurer uses outside data and sophisticated algorithms to evaluate your application. You might get rapid approval, with rates similar to those for a fully underwritten policy. However, if you’re in less-than-perfect health, the company may require a medical exam before deciding whether to approve your application.
Life insurance premiums typically stretch for years into the future, so it’s worth spending time now to lock in the best rate you can.
It’s easy to get life insurance quotes online for term policies. Before you buy a policy, make it a point to compare prices from several companies. Be sure to choose the same coverage amounts and options for each policy you compare.
You may discover that term life insurance rates vary widely. A few dollars a month might not seem like a big difference, but small savings will add up over time. Finding a good price on a top-notch policy can put you and your family financially ahead for decades.
Note: Prices do vary with term insurance...but not by much... in my experience. Coverage options and riders (living benefits) are more common than in the past and contribute to more sizable price differences. Reach out to me directly for more details or visit our "Free Quote" page to get started, with no pressure or obligation.
Author: Lisa Green
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