The basics of term life insurance
Term life insurance is easy to understand:
- Choose the length of the policy, such as 10, 15, 20 or 30 years.
- Choose the amount of the policy, such as $100,000, $250,000, and so on.
- If you die while the policy is in force, your beneficiaries receive the face amount of the policy tax-free.
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 most popular life insurance choice.
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 can provide money for college and living expenses if you die before your children are fully grown.
If you outlive your policy term, the insurance terminates and you must buy another policy if you still want to carry life insurance. However, the annual premium for another policy could be quiet expensive because your older age and any health conditions are taken into account. That’s why it’s important to choose a suitable term length early in life.
Medical exams for term life insurance
When you apply for term life coverage, you’ll be asked a large set of questions about your personal health history and family health insurance. The insurance company will also probably require a medical exam. Don’t be surprised if you’re asked the same set of questions more than once – first by your agent, and then by the paramedical professional who conducts the exam.
The exam 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. Here are more details on life insurance medical exams.
Nicotine users will pay more for life insurance, although occasional cigar smokers may be able to get less expensive premiums. You don’t have to be a smoker to get what used to be called “smoker” rates. Anything that delivers nicotine into your system, from nicotine patches to e-cigarettes, will garner you higher life insurance rates.
Marijuana users also must disclose their drug use, but you’ll probably be caught anyway by the medical exam.
Types of term life insurance
The calculations behind life insurance rates are all about life expectancy. 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 the policy’s time period, say 20 years, your premium stays the same. Many term life 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 protection 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 term life insurance or "guaranteed issue" policy. These policies require only a few questions and 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 by insuring people without knowing their medical conditions. Guaranteed issue policies often have "graded" benefits that pay only a partial benefit if you die within the first several years of the policy. A life insurance agent 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 still could be less expensive.
If you don’t like answering a lot of questions and you want a small policy just to pay for your funeral, you might consider final expense insurance. You cannot be turned down for this type of policy, but here again you’ll pay more for that convenience.
Making the decision
Figuring out which term you should buy — 10 years, 20 years, 30 years or some other number — requires a review of your debts, financial needs, dependents' needs — and when all those responsibilities might change. When your dependents will reach financial independence? What are you major debts, such as mortgages or other loans, and when they must be paid off?
Free online calculators, such as Insure.com's Life Insurance Needs Estimator Tool, can help you pinpoint an adequate insurance amount. We also have customer satisfaction ratings of life insurance companies.
There are also riders you can add to your policy, which provide extra protection. Here are the nine most useful life insurance riders.
It's a good idea to review your life insurance needs carefully, both when you buy a policy and when there's a major life change. To stay on top of your life insurance needs:
- Hold a yearly meeting with your insurance agent to review your situation.
- Life insurance quotes vary considerably among insurers, so shop around.
- An insurance policy is a legal document, so read it carefully and make sure that you understand it.
- Answer all application questions accurately.
- Make sure your list of beneficiaries is up to date once you have the policy. And tell your beneficiaries about the insurance -- don;t pay for a policy that your heirs can never claim because they don't know about the policy or the name of the insurer.
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