Term Life Insurance for a Healthy Family Future
Death unfortunately is an inevitable part of life and not something that can be avoided. Many people don’t want to think about death but being prepared with life insurance can be an important way to take care of those who will still depend on you.
What Is Term Life Insurance?
Term life insurance is a contract between the insurance accompany and you that will last for a certain time period, such as 10 or 20 years. In exchange for you paying the premiums, the insurer will pay a death benefit to the beneficiaries you have listed if you die during the term specified in the contract.
Types of Term Life Insurance
There are many different types of term life insurance and the best options depend on your own circumstances.
Level Term Policies
With these policies, both the premium and death benefit are fixed. You still get coverage for a specified period that ranges from 10 to 20 years. Since actuaries need to account for the increasing cost of insurance over the lifetime of the policy, the premium can be higher when compared to other types of term insurance.
Yearly Renewal Term Policies
These policies don’t have a specific term but you can renew them each year without having to prove any evidence of insurability. The premiums do change year to year. Usually, as you get older the premiums will go up. Even though there is no specified term, the premiums can become too expensive as you get older, which means this type of policy isn’t too popular.
Decreasing Term Policies
These types of policies have a death benefit that declines every year according to a schedule. You pay a level and fixed premium for the duration of the policy. The decreasing term policies are usually used with a mortgage to match coverage with declining principal on a home loan.
Return of Premium Life Insurance
This is a type of life insurance that will return the premiums paid if the insured party survives the term.
Who Benefits the Most from Term Life insurance?
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There are many people who can benefit from having term life insurance but there are also people who may not benefit at all from having life insurance. If no one depends on you financially and your death isn’t going to be a financial burden then you may not need to invest in life insurance. If someone does rely on you then term life insurance can be the right choice.
Term policies will usually last for a certain amount of years. This makes it easy as the breadwinner to choose a term that matches the years that your family members rely on your income, such as the number of years you have until the mortgage is paid off. It’s not just breadwinners that need life insurance. If you are a stay-at-home parent then term life insurance can help your family with new expenses, such as childcare. If you were gone then your family members would need to pay someone else to handle the tasks you once did.
Life insurance needs can change over time. It’s possible to have more than one life insurance policy to give you some extra coverage during certain stages of life. The idea is that you have enough coverage that when your coverage ends, you will no longer need life insurance. For example, your mortgage may be paid off or your children are grown or you have enough savings to be financially secure.
If you do purchase term life insurance and then decide that you will need longer-term coverage, most policies will allow you to covert to a permanent option. Premiums do go up in this case but you are able to stay on the insurance and you don’t have to prove you are in good health. Some policies will allow you to convert at any time, while others will only let you have this option within a certain time period.
It’s a common myth that if you are older, you have missed the window of opportunity to get life insurance because you didn’t sign up when you were young. While it’s true the premiums will be cheaper when you are younger, it doesn't mean that qualifying for a policy will be any easier. If there are people that depend on you, look into life insurance.
Difference between Term Life Insurance and Other Life Policies
There are key differences between term life insurance and other types of permanent life insurance. Permanent and whole life insurance will last for your entire life as long as you keep paying premiums. However, term life insurance expires when your term ends. If you still want life insurance when your term expires then you might be able to renew your policy or convert to a permanent life insurance policy at a higher premium.
Another big difference between term life insurance and other types of life insurance is that term life insurance doesn’t build up cash value that you are able to borrow against or have an investment option. This is a main reason why term life insurance is a cheaper option. With term life insurance, your premiums are generally just going for the potential death benefit. With permanent or whole life insurance, higher premiums are needed to grow cash value.
How Much Term Life Insurance Do You Need?
A large part of choosing how much term life insurance you need will be determining how much money your dependents need. Choosing the face value of your policy will depend on different factors.
Your Debt
You will want to have your debts paid off in full, including your mortgage, credit cards, car loans, and other loans, so your family doesn’t have to deal with this debt. Not only do you need to add up your debt, but then you also can’t forget interest. You should stake out a little more than just the total of your debts for interest and other charges.
Income Replacement
Another big factor is to replace your income. If you are the sole provider then you need a policy payout that has enough to replace your income, as well as a little extra to protect against inflation. If you don’t trust your beneficiaries and dependents to invest then you can also appoint a financial expert and charge his or her cost as part of the death benefits. There are also many insurance estimators that can help you determine how much insurance you will need. Using a term life insurance calculator can help you get a start but you may also want to consult with a financial advisor.
Insuring Others
There may be other people in your life that are important and you may be curious if you should also be insuring them. As a general rule, you should be insuring people whose death would mean a financial loss to you. While the death of a child can be absolutely emotionally devastating, it won’t cause a financial loss. However, the death of a spouse that earns income will create a financial loss, as well as an emotional one. This also goes for business partners where you have a financial relationship and one where you have shared responsibility. You may want to consider insuring these people since this person’s death can have an impact on your own financial situation.
Other Calculations
Many insurance companies will tell you that a reasonable amount of coverage is six to 10 times your annual salary. You can also calculate the amount of insurance you need by multiplying your annual salary by the years you have left until retirement. Another method to calculate how much life insurance you should have is with the standard of living method. This method is based on the amount of money your beneficiaries need to maintain their standard of living if you die. You then take this amount and multiply it by 20. This is so that survivors are able to take 5% withdrawal from the death benefit each year, which would be the equivalent of standard of living amount and still invest the death benefit principal and earn some more money.
How Much Does Term Life Insurance Cost?
The cost of term life insurance will depend on many different factors.
Age: If you are younger then you may qualify for lower premiums since you are less likely to die in the near future.
Health: Many insurers will require that you take a medical exam and answer some health questions. If you aren’t healthy, this can mean higher premiums. By understanding how insurance works, you can save yourself a bunch of money.
Gender: Men tend to die at a younger age than women so men will usually have to pay more for life insurance.
Term policies have level premiums and benefits so the premiums will stay the same throughout the term.
How to Find the Best Term Life Insurance Policy
Term life insurance may not be as complicated as other types of policies but choosing a policy may not be that simple. You have several decisions and you need to find one that suits your unique needs.
Know the different types of policies. It helps to be aware of the different types of policies so that you can find the best fit. The most common is level premium term life but you may find that decreasing term life is a better fit for your needs.
Consider the different policy options. Many term life policies are simple but some companies do have some extra features you may want to consider. An insurer can include some of these options automatically but you may also need to pay extra for them to be riders. A rider is a policy amendment that lets you add options at an extra cost. If these features are important to you then you should ask to make sure you are getting them when shopping for a policy.
Different Rider Options for Term Life Insurance
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The option may be the right one for you if you don’t like the idea of outliving the policy and then still getting nothing in return after paying premiums for years. With this rider, if you keep the policy until the end of the term then the insurer refunds you premiums you paid. If you do pick this option then premiums are going to be much higher. The price can be about 30% more.
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If you become seriously ill during your term then you have the option to allow you to get some of the money from the death benefit while you are still alive. You may qualify for an early payout for a few reasons. If you are terminally ill and you expect to die within 24 months, have a serious illness that can reduce your life span, such as AIDS, or acute heart disease, or are permanently confined to a nursing home since you can't handle tasks such as eating on your own, dressing, or bathing, you may qualify. Details can vary by policy so you should know what qualifies for accelerated death benefits and how much money you would get. When you do use this option, the amount you get early will no longer be paid to your beneficiaries when you are gone. If you think you may use this then you may want to get extra coverage for your family’s needs when you do die.
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If you get this option then you can avoid paying premiums if you become disabled for a long time, such as for six months or more. Your policy still remains in effect even though you aren’t making the premium payments.
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If you pick this option then it will typically double or triple your payout if you die from an accident. However, it’s important to note that accident may not exactly mean what you think it does. Insurance companies may have strict definitions of what types of accidental deaths will allow you to get the extra payout. There can also be time limits. For example, if you do have an accident and suffer injuries that end up killing you eight months later, then your beneficiaries don’t get the extra payout if it specifies that death must be within six months of the accident.
Another thing to consider when buying coverage is the approval process. Before you are able to get insurance, the insurance company will want to make sure you are healthy. You will usually need to answer some health questions and it’s important that you are honest.
Companies can reject a claim if your application was incomplete or inaccurate. In order to have a fully underwritten life insurance policy, you will need to have a medical exam. A professional will take your urine and blood samples and check different factors, such as your blood pressure, weight, and height. You can also pick simplified issue life insurance. This doesn’t require that you have a medical exam but you do still need to answer some health questions.
The insurance company may get data for you from other sources, such as your driving record and prescription drug history. Even if you do have some health issues, it’s usually cheaper to go with a fully underwritten policy.
Another option is accelerated underwriting if you are looking to skip the medical exam. You answer questions by phone or online and the insurer uses sophisticated algorithms and outside data to look at your application. You may get fast approval and still have rates that are similar to a fully underwritten policy. If your health isn’t that great then you may still need to get a medical exam before the company approves your application.
You will be paying your premiums for years to come so you should spend some time comparing prices and policies from several companies. When comparing policies, be sure that you are choosing the same coverage amounts and options for each policy you are comparing. You may find that term life insurance rates vary widely. Even though a few dollars may not seem like a big difference, small savings can add up over time. By finding the right policy, you can put your family financially ahead for years.
Working with an Insurance Company for Term Life Insurance
With a life insurance policy, you are going to count on the insurance company you choose to be there for years into the future. This is why it’s necessary to choose a company that you can trust. Check the insurance company’s financial strength to see whether or not they will be around in decades with enough money to pay your claim. You can check with the National Association of Insurance Commissions. You also want to check the company’s reputation for customer service. You want a company that gives you great customer service from the time you start shopping until you file for a claim. Look up whether or not other customers are happy on the NAIC website.
Conclusion
Term life insurance can be a good option if you need to have life insurance but don’t want to pay a lot for it. Term policies can be a lot more affordable, especially if you only need to have life insurance for a short time. When shopping around for term life insurance, there are different types to consider and different add-ons to your policy in order to customize it to your nee.