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The basics of term life insurance
Term life insurance is easy to understand. It provides insurance protection for a specific period of time, such as 10, 15, 20 or 30 years. If you die within the time the policy is in force, your beneficiaries receive the face amount of the policy tax-free. If you outlive your policy term, the insurance terminates and you must buy another policy if you still want to carry life insurance. You can also buy term life insurance that covers you until you reach a certain age, usually 65 or 70.
Touted for its "pure life insurance protection," term life insurance includes none of the cash value features found in whole life policies. Because of its low cost among life insurance types, term life continues to be the product of choice by most Americans, according to the Life and Health Insurance Foundation for Education.
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Generally, you purchase life insurance to replace your income if you die, so your loved ones can pay debts and living costs. For example, if you and your spouse own a home and you were to die tomorrow, your spouse would have to pay the mortgage on his or her own. If you had a term life insurance policy, your spouse could receive enough money from the policy's death benefit to pay off the mortgage.
Term insurance doesn't just cover specific debts, however. If you have children, term insurance is low cost life insurance that can provide money for college and living expenses if you die before your children are fully grown.
MetLife offers these pros and cons of term life insurance:
Pros:
- Affordable.
- Good for someone who has a mortgage or wants coverage for future college expenses.
- Can be used as a supplemental insurance policy to your permanent life insurance, especially if you are planning to have a family.
Cons:
- No cash value.
- If your term expires, the cost increases exponentially to retain the policy.
Medical exam is usually required
Term vs. permanent life insurance: The cash value debateA permanent life insurance policy covers you for your whole life, no matter when you die. It also includes a "cash value" account that builds up value over time as it accrues interest or investment gains. Variable universal life insurance (VUL), a form of permanent life insurance, is popular because it offers a cash value account that may build up with interest based on the performance of the stocks, bonds or other investments. Some financial planners advocate VUL policies because they force you to save money in the cash value component. Others recommend you buy term insurance for the cheaper premium and then invest the difference in mutual funds or other investments. VUL also allows you to change your death benefit and subsequent premium payments over time. Cash value in life insurance should not be considered a traditional investment because any partial withdrawals or loans will reduce your death benefit. Also, if you withdraw your cash value in an amount exceeding the premiums you have paid into the policy, you will face a tax bill. In addition, every year you own the policy, more of your premium goes to pay for the cost of insuring you and less goes toward the cash value. |
When you apply for term life coverage, the insurance company will probably require a medical exam before issuing a policy. The examination covers your height, weight, blood pressure, medical history and blood and urine testing. With the blood and urine tests, the insurer looks for specific medical problems and the presence of nicotine. Positive results could affect your premium, or even your ability to buy a policy.
Smokers will pay more for life insurance, although cigar smokers can get less expensive premiums than those using cigarettes. Occasional cigar smokers can get nonsmoker life insurance quotes from many companies. If you smoke marijuana but not cigarettes, you still must admit to being a smoker on the policy application. Insurers don't generally differentiate between different types of smoke inhalation. (Marijuana users must also disclose their drug use.)
Different flavors of term life
As you age, the likelihood you will die increases. That's why life insurance costs more as you get older. You can lock in low premiums by buying for a "level premium" policy. That means for a specific time period, say 20 years, your premium rate stays the same. Many term policies give you the option to renew your coverage at the end of the term without undergoing another medical exam, although your premiums will rise for annually after the level term period — often substantially.
A less popular policy is "annual renewable term." This gives you coverage for one year with the option of renewing it each year for a specified duration, such as 20 years. With this policy, your rates go up every year you renew and are calculated based on the probability of your dying within the next year.
If you’d like to have term life insurance in place to provide for beneficiaries yet you’re confident you’ll outlive the policy, you could consider "return of premium" term life insurance. Under this type of policy, if no death benefit has been paid by the end of your insurance term, you receive all your premiums back. It pays to shop around for a policy like this, but on the low end you can expect to pay 50 percent more in premiums than comparable traditional term life insurance.
If you have trouble finding life insurance because of illness or a troubled medical history, you can turn to a "simplified issue" or "guaranteed issue" policy, sometimes also called "quick issue." These policies require no medical exam, but you pay a much higher premium in exchange for the guaranteed coverage. That's because the insurance company takes on more risk in insuring people without knowing their medical conditions. Guaranteed issue policies can require waiting periods before coverage kicks in, or "graded" coverage that pays only a partial benefit if you die within the first several years of the policy. A life insurance broker can search the marketplace for a guaranteed issue policy that meets your needs, but even if you have a spotty medical history, an underwritten policy like term life could still be less expensive.
How long a term?
Figuring out which term you should buy — 10 years, 20 years, 30 years or some other number — requires a major review of your debts, financial needs, dependents' needs — and when all those might change. Jack Dolan of the American Council of Life Insurers suggests you ask yourself, "When will my dependents reach financial independence?" Also look at major debts, such as mortgages or other loans, and when those are due to be paid off.
Online calculators, such as Insure.com's Life Insurance Needs Estimator Tool, can help you pinpoint an adequate insurance amount.
Guenther Ruch, former administrator of the regulation and enforcement division at the Wisconsin Insurance Commissioner’s Office, says it's a good idea to review your life insurance needs carefully, both when you buy the policy and when there's major a life change.
"You may not have the coverage you need. You may have more than you need," Ruch says.
Ruch has the following recommendations for anyone buying life insurance, or anyone who already has coverage:
- Schedule a routine "check-up" with your insurance agent at least once a year.
- Shop around when you're in the market for a new policy. Life insurance quotes vary considerably among insurers.
- Remember, an insurance policy is a legal document. Read it carefully and make sure you understand it.
- Answer all the questions on the application accurately.
"Perhaps you want to leave assets for your heirs, or for charity, or you need the death benefit for business-planning purposes. These are all areas where life insurance can play a role, but it's really designed for financial protection," Dolan says.
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