The Ultimate Guide to Choosing a Term Life Insurance Policy
The Best Term Life Insurance Guide:
- Learn why term life insurance is the best option for most people
- Figure out your ideal term
- Decide how much coverage you need
- Shop around for the best life insurance rates
- Buy the ideal policy for your needs and plan on paying premiums for the long haul
What defines term insurance?
If you’ve shopped for life insurance before, you know that there are many phrases that get used by brokers and agents: universal, whole life, cash value — there are lots of them. What is term life insurance, though? A term life insurance policy is one that covers a certain amount of years – often 10, 20 or 30. Once that agreement is signed, you pay the company issuing the policy a small amount – the premium – on a regular basis. If you die before the end of that term and your premiums are paid up, the beneficiary of your policy receives the value of your policy. If the term ends and you’re still alive, both you and the company walk away.
Why is term the best life insurance policy type for most people?
One of the biggest reasons for getting a simple term life insurance policy over anything else is cost. Term insurance is less expensive than whole life, universal or any of the other types of life insurance out there. These other types are typically term insurance with some additional perks added — often a savings component — but you can usually do better saving on your own.
So who is term life insurance good for? Here are some examples.
- A couple in their early 30s with two preschool-aged children. They want to be sure that if anything happens to them, their children will be taken care of.
- A 40-year-old man who wants to know that his wife, who doesn’t work outside the home, can pay the bills if he were to die.
- A 25-year-old woman who cares for her elderly father and hopes that if she were to die, he would be cared for in a compassionate manner.
The common denominator? All these people want to be sure that someone they care about is financially secure if they were not there to take care of them. This is why term life insurance is sometimes called a “peace of mind” product. As a policyholder, you’ll be gone when the payout happens, but it’s worth paying your premiums to know that your loved ones will manage without you.
What are the factors that affect life insurance cost?
The amount you pay for your premium will vary depending on a number of factors, including:
- Your age: the younger you are, the lower your premiums will be, since it’s less likely that the company will have to pay out during the term of the policy.
- Gender: statistically, women live longer than men, so the premium for a woman may be slightly lower than that for a man of the same age and background.
- Your smoking habits: since smokers have a higher mortality rate, your costs will rise if you smoke.
- Your general health: your insurer likes to work with people who are healthy and who have no underlying conditions, since they are less likely to die and require a payout. In fact, if you do have a significant health issue, some insurers may decline to cover you.
- Your family’s health: You’ll need to give your potential insurer information about your family’s health when you apply. If there is a strong family history for a certain disease, such as diabetes or cancer, especially if it’s hereditary, your rates will be higher.
- Your occupation and hobbies: if you have a high-risk job, such as fire fighting, or if you engage in high-risk hobbies, such as sky diving, your premiums could be higher.
- The details of the policy: a policy with a $100,000 payout will be cheaper than a policy with a $500,000 payout, since the insurer stands to lose more money in the latter.
“Peace of Mind” Product
A key thing to remember is that life insurance is a “peace of mind” product. It’s not something you are ever going to have to tap into. If you’re purchasing the policy for peace of mind, it should completely cover the things that you’re worried about.
That’s an important factor to keep in mind when you’re determining the specifics of the policy you need.
How Long Should My Term Be?
Should I get a ten year policy? A twenty year? A thirty year? It’s not an easy question.
Generally, the longer the term of the policy, the higher the premiums are going to be. That makes sense if you think about it – the longer the term of the policy, the more likely the insurance company is going to have to pay out.
The real question you need to ask yourself is why do you need this policy? What situation are you protecting yourself against?
Many people buy term life insurance policies to make sure that their children are financially protected through their childhood. Others might buy a policy simply to protect their spouse until retirement.
You should sit down and ask yourself at what point that reason is no longer relevant. When will your kids grow up and move out? When will you hit retirement age?
Those types of questions will point you straight at the policy term you should be looking for. Need one for the next fifteen to eighteen years? Get a twenty year policy. Need one for twenty five years? Get a thirty year policy. Are things going to be fine in eight years or so? Get a ten year policy.
How Much Term Life Insurance Should I Get?
During the process of figuring out the term of the policy, you’re also going to get a sense of what exactly you’re insuring against. You’ll know how long you need that policy for and what kinds of expenses you’re hoping to cover.
The next question to ask yourself is how much money that adds up to. My recommendation is that, if you know how long you’re going to need protection, you should have enough insurance to replace your take-home income for that entire period. If you have a baby at home and you want to make sure they’re good through high school, you should calculate how much your take-home pay would be through that whole period, for example.
It’s important to remember that this is just a handy “back of the envelope” calculation. You should also take into account your full financial picture before diving in, because a family in a lot of debt would need more insurance than a family in a strong financial position.
The best route is to contact a fee-only financial advisor, one that does not have a vested interest in selling you a product, and have them go over your finances with you and help you figure out the right amount for your situation. Don’t use a commission-based financial advisor for this, as they’ll be primarily interested in selling you a policy.
A final piece to chew on: the younger you are, the cheaper your premiums will be, so if you’re a new parent at age 25 and are buying insurance to protect your child, the rates will be pretty low, even if the total amount is high, because your risk of dying before 50 or 55 is really low.
So, you’ve decided on a term policy and you have a good idea of what kind of term you want. What now?
The first step is to shop around for the best price. The easiest way to do that is to use a life insurance broker such as AccuQuote, FindMyInsurance, or LifeInsure. All of these services make it easy to compare rates among different insurers once you’ve filled out some basic questions about yourself.
However, you don’t want to strictly go for the lowest rate. You are going to want to use a stable insurance provider that’s going to still be in business in fifteen years.
The easiest way to check out the stability of an insurance company is to check out their financial strength rating at an independent rating agency. For example, you can stop at TheStreet and look for the financial strength rating of each insurer you’re considering. You’re going to want to make sure that any insurer you’re seriously considering has a strong rating.
Another step you can take to minimize your risk is to “insure your insurance.”
Each state has a guaranty association that life insurance providers in that state must be a member of. This is a simple regulatory measure that ensures that companies don’t just sell policies and vanish into thin air, and that policies that are sold in your state have some security to them.
In each state, this guaranty association insures the policies that are sold by the members of that association. What that means for you is that your term life insurance policy is guaranteed up to a certain amount, even if your provider goes out of business.
That amount varies from state to state. You’ll want to look up that amount by going to Google and searching for your state plus the term “life insurance guaranty association”. The website you find will indicate the amount that your policy is insured for.
If the amount you calculated earlier is greater than the guaranteed amount in your state, you should buy two separate policies from two different companies. That way, you have two fully guaranteed policies instead of one partially guaranteed policy.
This will likely cost you a higher total premium than one policy but, as I mentioned above, life insurance is a “peace of mind” product and this will ensure your peace of mind.
The Path Forward
Once you have selected your policy, your life insurance bill should become one of your most important bills each time you receive one. Make sure this bill gets paid. If you don’t pay it, then you’re no longer insured and, since you’d be older at that point, getting a new policy would be substantially more expensive.
If you find that changes in your situation changes the amount of insurance you think you’ll need, you can always shop around for another policy. If that happens, you can easily terminate the old one by contacting the insurance company and dropping that old policy. If a life change happens to you, this can end up being a significant money saver.
Owning term life insurance has provided significant peace of mind for me when thinking of the future of my young children. Hopefully, it can provide similar peace of mind for you as well.
If I am on a budget should I consider term life insurance?
Possibly. Term life insurance is generally the most cost-effective type of insurance you can purchase. If you feel that you need life insurance — to care for your dependents, to leave behind a burial fund or to be able to benefit a favorite charity — then term life insurance is the best option for you if you’re on a budget.
Keep in mind that it is often helpful to get quotes from several companies before you choose your insurer. Don’t assume that the first quote you get is going to be as low as it goes. Each company uses its own formula to determine premium costs, and you may find lower rates by asking for premium quotes from several companies.
How have life insurance companies responded to COVID-19?
Like many industries, the life insurance industry has responded to COVID-19 by making donations to hospitals and doing what they can to support front line workers. Some companies, such as MassMutual, are offering no-cost life insurance policies to some healthcare workers and first responders. If you fit that demographic, it would be worth your while to check with that company and others to see what’s available.
The pandemic has, of course, led to difficult challenges for life insurance providers. Most existing policies would cover you if you die from COVID-19, so if you had a pre-existing policy, nothing in that is changed by the disease.
If you’ve been laid off or furloughed because of the pandemic, and you already have a life insurance policy, note that many insurers are offering a delay in premium deadlines. Call your agent to find out if this is true of your policy.
In the short term, with many states still in quarantine, some companies are removing the requirement for a medical exam or allowing applicants to delay the exam until further notice. Longer-term, as we learn more about the virus and its long-term effects, it may become a consideration for you if you apply for a policy in the future.