Term life insurance is typically less expensive than a permanent whole life policy, but unlike permanent life insurance, term policies have no cash value, are not paid after the term expires, and are not they have another value than the death benefit. To keep things simple, most term policies are “level premium” – your monthly premium stays the same for the entire term of the policy.
Here are three key questions to answer before you get a policy:
- How does a term life policy work?
- What are the different types of term policies?
- How much term life insurance coverage do you need?
how a term life insurance policy works
It is a contract. At its most basic level, a term life policy is an agreement between the person who owns the policy (the owner) and an insurance company: the owner agrees to pay a premium for a specified term (usually between 10 and 30 years); In exchange, the insurance company agrees to pay a specific cash death benefit to someone (a beneficiary) in the event of the death of another person (the insured). that benefit is generally tax-free (unless premiums are paid with pre-tax dollars).
There is an application process. You may have seen or heard ads that say things like, “a 30-year-old non-smoker can get a 20-year, $500,000 term policy for less than $30 a month.” some people can get that much coverage for less than $30, but it’s not automatic. Before they give you a policy, the provider needs to assess how much risk he has to insure. this is called the “subscription” process. They will usually request a medical exam to assess your health and will want to know more about your occupation, lifestyle and other things. certain hobbies, like scuba diving, are considered health risks and that can increase rates. Similarly, dangerous work environments, such as an oil rig, can also increase your rates.
You must choose the length of the term. One of the most important questions to ask yourself is “how long do I need coverage?” If you have children, a popular rule of thumb is to choose a term long enough to see them leave the house and finish college. The longer your term, the more you’ll typically pay each month for a given amount of coverage. however, it’s usually worth erring on the side of getting a longer-term policy than a shorter one because you never know what the future holds, and it’s generally easier to get insurance while you’re younger. and is in good health.
Decide how much you want as a death benefit. you should consider getting enough coverage to take care of your family’s needs if you are not there to support them; in section 3 we’ll tell you a few different ways to figure out how much that is. Whatever amount of coverage you need, it’s likely to cost less than you thought: A recent survey found that 44% of millennials believe life insurance is at least five times more expensive than it actually costs .1
Name your beneficiaries. Who receives the benefit when you die? Not everything has to go to one person. for example, you could give 50% to your spouse and divide the rest among your adult children. and although the beneficiaries are usually relatives, they do not have to be. You can choose to leave some or all of your benefits to a trust, charity, or even a friend.
the different types of term policies you can buy
As you shop around and start talking to insurance companies or agents, you may hear about different types of term policies. they all provide a specific benefit for a specific period of time, but can have very different features and costs.
- level premium: also called the level term; this is the simplest and most common type of policy: your premium stays the same for the entire term.
- annual renewable term: also called annual renewable term. This policy covers you for one year at a time, with the option to renew without a medical exam during the term, but at a higher cost each year. Compared to a level term policy, your premiums will be slightly lower at first, but over a full 10, 20 or 30 year period you will pay more than you would with a level premium policy.
- Return of Premium: This type of term policy actually pays all or part of your premiums if you live to the end of the term. what’s the trick? your premiums could be 2 to 4 times higher than with a level term policy. Plus, if your financial status changes and you let the policy lapse, you may only get a portion of your premiums back, or none at all.
- Guaranteed Issue: These policies are easier to obtain because they don’t require a medical exam and only ask a few simple health questions at most. This also means that the insurance company has to assume that you are a risky prospect who has health problems, so your premiums may be much higher than they otherwise would be. Also, the policy may not pay a full death benefit for the first few years of coverage. If you have health issues but can handle them, it’s usually worth getting a conventional term life policy that’s underwritten (ie requires a medical exam).
- earn 10 times your salary: This is one of the simplest rules to follow and can provide a useful cushion for your family, but it doesn’t take all of your real expenses and needs into account .
- Get 10 times your salary, plus college expenses: Adding $100,000 – $150,000 for each child can help ensure they get more of the opportunities you want for them.
- Use the dime formula: tell me means debt, income, mortgage, and education. Add up your debt, mortgage, and college expenses, plus your salary times the number of years your family needs protection (for example, until the kids are out of the house), and that’s your coverage need.
- Some financial representatives calculate the amount you need using the philosophy of the value of human life, which is your lifetime earning potential: what you are earning now and what you expect to earn in the future. In its simplest form, the philosophy suggests that you multiply your income by a variable based on factors such as age, occupation, projected years of employment, current benefits, etc. As with each individual, the amount of insurance you should purchase depends on many factors, but a simple way to get that number is to multiply your salary by 30 if you are between the ages of 18 and 40. the calculation changes based on your age group, so refer to the table below for your age group.
- financial strength 6: First and foremost, you want to be sure that the company will be there when your family needs a payment years or decades down the line. road. The best way to do this is to look for companies with strong financial strength ratings. that includes a rating of at least “superior” (a+) from a.m. best (the number one rating agency in the insurance industry), a “very strong” (aa-) rating from standard & poor, or an “excellent” (aa1) from moody’s.
- A company that writes its own policies: Some companies act as middlemen who sell another insurer’s policies, and this can add costs to your premiums. You can also add an extra layer if you want to change your policy, or in the future when your family needs a payment.
- Guaranteed Term Renewal: If you become seriously ill near the end of your policy term, you’ll want to be able to renew without another medical exam. some companies offer this year after year, and while you can expect your rates to increase substantially, it may be worth it to your survivors.
one more thing to look for in a term policy: convertibility
Convertibility is a policy provision that allows you to change your term insurance to a permanent whole life policy at a later date, without having to undergo a new medical exam. is a feature offered by almost all major insurance companies that allows you to change your type of life insurance. Guardian, for example, allows you to convert level term insurance coverage at any time in the first five years to a permanent life policy, and even offers an optional extended conversion rider that allows you to do so during the life of the policy. 2
why would you switch to a term whole life policy? If you have had a serious health problem, for example a heart attack, it can be very difficult to get another policy. Another reason: The cash value component of a whole life policy appeals to you. Or maybe you want permanent coverage for life. a term policy may well be your best option right now, but things can change.
Look for an insurer that offers the option to switch from a term policy to a whole life policy without taking another medical exam, which would likely increase your cost. The chart below lists some of the important differences between a term life policy and whole life insurance, but if you’d like more information, talk to an insurance agent or financial representative.
how to determine how much you need and where to get it
If you have a young family, you will need many years of income to pay for food, housing, clothing, and education for your children into adulthood. If you’re not there to cover them, life insurance can help with those costs, but you need to make sure your policy’s death benefit is enough to do so. Here are some general rules people use to help determine how much they need:
Either of those methods is a good start, but it also makes sense to talk to an experienced professional who can guide you through the process of calculating your actual need.
where to get term life insurance
If your company offers group life insurance as part of your employee benefits package, that may be a great place to start. Because the company is buying for a large group of people, the premiums are typically lower than for an individual policy. Your employer may also subsidize a portion of the premiums or even provide coverage equal to your annual salary at little or no cost. on the other hand, the total amount of coverage you can get may be limited to, for example, three times your salary. and if you leave the company you could lose your coverage.
Even if you have some in-depth coverage from work, it may not be enough for your needs. The good news is that buying term life insurance is usually easy: Many companies, including Guardian, will give you an instant quote online.
Compare insurance rates from a couple of sources, and before making a decision, consider the company you’re buying from. you’re looking to have a long-term relationship with that company, so look for the following qualities.
Another way to compare insurance companies is to look at customer reviews online. While these may not tell you much about a company’s financial stability, they can tell you how easy they are to work with and whether claims service is an issue.
Would you like to talk to someone before you buy term insurance? it’s a great idea. Guardian can connect you with a financial representative who will listen to your needs, educate you on the best ways to meet those needs within your budget and the types of life insurance policies available, and then help you decide. Whichever way you decide to shop, consider doing so soon. Remember: The longer you wait to get life insurance, the more likely you are to pay.