A life insurance policy doesn’t have to be for the rest of your life.
For a variety of reasons, you may choose to buy coverage for a limited period of time, with comparatively low premiums. Term life insurance has no savings or investment components and doesn’t accumulate cash value over time.
If you decide that a term life policy is the best option for you, be sure to do your homework before you sign on the dotted line.
“A lot of consumers rush into a decision without adequate investigation or asking the right questions,” says Jerry Carnahan, CEO of Farmers new world life Insurance Co.
Insure.com’s life insurance basics article offers an overview of life product choices. Here are five questions to ask when considering a term life policy:
1. Is the insurance company stable?
The whole point of buying life insurance is to make sure your family is taken care of when you’re gone, so make sure your insurer has more staying power than you do.
“Generally speaking, life insurance companies are in excellent financial health, but you should still check out their rating,” says Whit Cornman, spokesperson for the American Council of Life Insurers. He recommends looking up the company’s rating from A.M. Best, Fitch Ratings, Moody’s Investors Services and Standard & Poor’s.
Insure.com offers free insurance company ratings from Standard & Poor’s.
2. Does it allow you to convert the policy?
Assuming you outlive your term life policy, your life insurance needs might not evaporate when the term is up. That’s why it’s crucial to know exactly what sort of options you have for converting to a permanent type of policy near the end of the term, without needing another medical exam.
“The primary reason you want convertibility is to lock in insurability,” says Carnahan. “Otherwise, you could buy a 10-year term, and at the end you’re not insurable.”
Be sure to read the fine print on the conversion option, however.
“There can be time limitations,” warns Brian Ashe, past chairman of the Life and Health Insurance Foundation for Education (LIFE). “It may be that you can only convert until age 65 or 70, or that the only time you can convert is during that first 10 to 15 years.”
3. Are you getting the advertised rate?
One of the best reasons to buy term life coverage is to take advantage of the low rates that come with good health at a relatively young age. But even if you’re relatively healthy for your age, the rates promoted in ads may be based on an applicant with exceptional health.
“To get the consumers’ interest, the lowest potential price may be quoted, and that’s the super-preferred rate,” explains Ashe. “I’m not saying you have to be a decathlete, but the super-preferred or ‘elite’ rate is significantly limited in its availability.”
Here’s more on life insurance underwriting categories.
4. Exactly how much income are you replacing?
Consider what your family’s income needs will be over the course of your term life insurance policy.“You’ll want to look at ongoing expenses [such as] a mortgage, rent or tuition,” says Cornman. “Do an estimation of the total income that needs to be replaced to meet the family’s needs — immediate expenses like medical bills or funeral costs, as well as long-term goals like saving for college.”
Ashe adds that when considering what amount to buy, keep in mind that death benefits don’t go as far as they used to. That’s because interest rates on savings and investments, which your survivors may use to turn insurance benefits into an income stream, have fallen in recent years.
“It’s not going to produce as much income as it did five years ago, let alone grow,” he says.
Finally, Carnahan says the length of term policy you need depends on your long-term income outlook.
“If I’m working 20 more years and then after that I’ve got retirement benefits and Social Security, then maybe a 20-year term is good for me,” he says.
5. What other benefits do you want?
Gene Lunman, senior vice president of retail life products at MetLife, notes that extra riders are more common on whole life policies than on term life. He points out that some companies offer term policies with a disability waiver of premium option that will pay your premiums if you get sick or become disabled.
Lunman notes that some term life products offer a “return of premium” option that allows you to get your premium expenditure back at the end of the term. Such an option significantly raises the premiums you’ll pay, however. In that case, Lunman says you might be better off just getting a whole life policy.