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If your family relies on your income, life insurance is an important part of planning for your family’s future. It’s grim to think about. No one likes to plan for their death, but a little discomfort now can save your family a world of financial stress should the worst happen.

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Why buy term life insurance?

In general, life insurance is purchased 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 have the right term life insurance policy, your spouse will receive enough money from the policy's death benefit to pay off – or at least keep up with – the mortgage.

Because of its low cost, compared to other types of life insurance, term life is a popular life insurance choice. 

Cameron Ellis, an assistant professor in the Department of Risk, Insurance, & Healthcare Management at the Fox School of Business at Temple University, notes that what's vital to understand is that buying insurance, especially life insurance, isn't about getting a payment later. 

"You should never feel like you've 'wasted money' on your insurance, what you are really buying is peace of mind and you get that regardless of if you end up needing the insurance or not," Ellis explains.

Ellis stresses that life insurance covers your family against lost income by a primary wage earner. "If your beneficiaries/dependents would be financially stable without your income, you don't need to buy much in the way of life insurance," Ellis adds. 

 

How does term life insurance work?

When you buy a term life policy, an insurance company promises that it will pay your beneficiaries a set amount if you die during the policy’s term. In exchange, you pay a monthly premium to the company for the duration of that term.

Keep in mind these key points about 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.
  • If you outlive your policy term, the insurance ends and you must buy another policy if you still want to carry life insurance. However, the annual premium for another policy could be quite expensive because you're older and an insurer will take into account health conditions. That’s why it’s important to choose a suitable term length early in life.
  • You would need to buy an additional term life policy at an extra charge if you find a term life policy isn't sufficient.

Ellis emphasizes that people getting a term life policy should understand that these policies often stretch over decades, "Make sure you will be able to afford your premiums for the length of the policy you are buying."  If a policy lapses because of nonpayment, you'll likely pay a higher cost for a new policy. 

    What does term life cover?

    The death benefit amount you choose at the start of your policy doesn't have an assigned use. Typically, these funds are used to cover funeral expenses, debts, mortgage or replace lost income of the insured party; however, the death benefit can be used by beneficiaries in any way they choose.

    Choose your beneficiaries carefully. There is no legal requirement for them to spend it on the items that you planned. You can also choose multiple beneficiaries, allowing you to split up the money between family members the way you want. Any requirement for how the money should be spent, such as paying off the mortgage or college tuition for children, should be specified in a will.  

    Types of term life insurance

    Common uses for life insurance benefit

    There are several kinds of term life insurance:

    • Level premium - 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. However, your premiums may rise annually after the level term period – often substantially.
    • 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.
    • Return of premium - "Return of premium” term life insurance pays you back your premiums if you outlive your term life policy. You can expect to pay at least 50% more on premiums for these policies, so make sure you shop around.  
    • Guaranteed issue or simplified issue term Generally used if you have an illness or a troubled medical history, these policies require only a few questions and no medical exam. However, 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.
    • Final Expense - If you don’t like answering a lot of questions and want a small policy just to pay for your funeral, you might consider final expense insurance. This coverage typically pays a lower benefit than conventional term life insurance. You can't be turned down for this type of policy, but here again you’ll pay more for that convenience.

    Understanding different kinds of life insurance

    There are several types of life insurance depending on your needs. Here's how term life compares to three types of permanent life policies. 

    Policy typeTerm LifeWhole LifeUniversal LifeVariable Universal Life
    Term length10, 20 or 30 yearsUntil deathUntil deathUntil death
    FlexibilityNoNoMay adjust premiums and coverage level.May adjust premiums and coverage level.
    Investment portion, which can be withdrawn, borrowed against or added to death benefitNo investment portion.Premium is partially invested in set assets and will build cash value.Premium is partially invested in asset classes that can be adjusted and will build cash value based on market movement.Premium is partially invested and can be managed. Will build cash value based on market movement.
    ProLow-cost premiums with a high amount of coverage.Low maintenance. Safe and conservative.Lowest price for permanent policy with guaranteed death benefit.Potential for greater gains.
    ConAfter term is complete and no death benefit has been paid, rates for buying a new policy increase substantially.Higher premium.Cash value isn't guaranteed.Cash value isn't guaranteed.

    Term life vs. permanent life

    Whether term life or permanent life is better depends on your situation. Looking at the table below, ask yourself if you…

    Term LifePermanent Life
    Want a lower premiumCan afford a higher premium
    Want a shorter commitmentWant no expiration date
    Won't have many expenses at the end of termWant money left to beneficiaries
    Don't care about building cash valueWant to build cash value
    Want a high amount of coverageWant a relatively conservative investment account

    Ellis recommends that most people buy a term life policy and invest the difference between the cost of that coverage versus the price of permanent or whole life. 

    "There can be some tax advantages to whole life, but the risk of lapsing is too high to warrant it.  Even if you have no worries about paying the premiums for 30-plus years, there are many other reasons people lapse such as divorce that [can be] hard to anticipate. Most people should buy term life insurance while they are working and then annuitize most of their wealth once they retire," Ellis said. 

    Choosing the right term life policy

    Figuring out which term length you should buy (usually 10, 20 or 30 years) requires a review of your debts, financial needs, dependents' needs – and when all those responsibilities might change. When will your dependents reach financial independence? What are your major debts, such as mortgages or other loans? When must they be paid off? 

    It's a good idea to review your life insurance needs carefully, both when you buy a policy and when you experience a major life change. To stay on top of your life insurance needs, you should:

    • Review your circumstances. Think about your situation yearly. If you already have a policy, read your life insurance policy to make sure it still provides appropriate coverage.
    • Shop around. Life insurance quotes vary considerably among insurers. Do your homework.
    • Sweat the fine print. An insurance policy is a legal document. Read it carefully and make sure that you understand it before signing anything.
    • Be truthful. Answer all application questions accurately. Insurance fraud is a serious crime and companies treat it as such. You don't want to die and then have the insurer deny your loved ones a death benefit because you lied on your application. 
    • Maintain your list of beneficiaries. Don’t wait to change them when it’s necessary. 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.

    How much can I expect to pay for term life?

    The price of your policy will vary depending on your age and other risk factors, but you should never assume that a policy is out of reach because of cost. Eighty percent of consumers misjudge the cost of term life insurance, according to LIMRA.

    Find your health profile and desired term length in the chart below to get an idea of your annual premium cost. These quotes are for people classified as the "Regular" health category. 

    Average Annual Premiums for Term Life death benefit of $250,000

    Health profile and level term lengthAge 30Age 40Age 50Age 60
    Female non-smoker 10-year term$228$312$588$1,213
    Female non-smoker 20-year term$302$464$954$2,349
    Female non-smoker 30-year term$426$691$1,570$7,300*
    Female smoker 10-year term$449$705$1,508$3,155
    Female smoker 20-year term$606$1,084$2,371$5,265
    Female smoker 30-year term$913$1,656$3,740$13,030*
    Male non-smoker 10-year term$269$368$757$1,758
    Male non-smoker 20-year term$353$547$1,220$3,181
    Male non-smoker 30-year term$518$857$2,056$7,300*
    Male smoker 10-year term$567$886$2,019$4,543
    Male smoker 20-year term$757$1,375$3,170$7,223
    Male smoker 30-year term$1,169$2,141$4,542$13,030*

    *Limited quotes available. Data source: Compulife Quotation System as of Dec. 2019.


    As you can see, people in their 30s pay much less than older people. Ellis advises that it's a good idea to get life insurance as soon as someone else depends on your income. 

    "This could be when you and someone else sign a lease together or purchase a car/home. Or it could be whenever you have children. If one spouse is 'stay at home,' I would still recommend they purchase some life insurance. Even though there is no lost income, replacing the lost childcare and domestic duties can be very expensive. Once your dependents are financially stable, you should drop your life insurance except for perhaps a small amount to pay for a funeral," Ellis adds. 

     

    Smoking costs you

    As you can see, the rates for smoking more than doubles the cost of the annual premium. You might not be able to stop aging, but you can definitely stop smoking. After five years, you can likely qualify for non-smoker rates.

    You don’t have to be a smoker to get smoking rates. Anything that delivers nicotine into your system, from nicotine patches to e-cigarettes, will garner you higher life insurance rates. Occasional cigar smokers may be able to get less expensive premiums.

    Doubling the coverage doesn’t double your rate

    Costs can rise fast when you take care of a family, pay a mortgage, plan for college and all of the other factors involved in your finances. You don’t want to skimp on the amount of coverage you need.

    “Young parents with mortgages should really bump up their term amounts while the coverage is so affordable,” says Penny Gusner, senior consumer analyst for Insure.com. “It’s a time in life when you have a significant amount of living expenses and debt. Raising your term amount when you are young and healthy is affordable and a good idea, since the rates will increase substantially as you age.”

    Medical exams for term life insurance

    When you apply for term life coverage, you’ll be asked 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.

    Some new insurers are offering instant-approval policies where a medical exam is not required but still offer high policy limits.  Also, some well-known life insurance providers are offering same-day approval policies, such as MetLife's Rapid Term policy that provides you up to $500,000 for a term of 10, 15, 20, 25 or 30 years, with no medical exam.

    Marijuana users also must disclose their drug use, but those who fail to mention this will likely be caught anyway by the medical exam.

    Choosing the right term life policy requires a small investment of time, but the benefits can be priceless. The first reason for this is obvious: The right policy will help care for your beneficiaries in case you die. But the second reason, which will benefit you even if you outlive your life insurance policy, is the peace of mind that comes with knowing that you and your loved ones are covered. 

    How to shop for term life insurance

    1.    Use the life insurance calculator to discover how much coverage you should have. A life insurance calculator takes into account your funeral costs, mortgage, income, debt, education to give you a clear estimate of the ideal amount of life insurance coverage.

    2.    Choosing a life insurance company. Insure.com maintains a list of the best life insurance companies based on customer reviews, making choosing a reputable insurer easier.

    3.    Choosing the length of the policy. Common terms include five, 10, 15, 20 and 30 years. 

    4.    Choosing the amount of the policy. This is the sum your beneficiaries will receive in the event of your death. The amount you choose should depend on a number of factors, including your income, debts and the number of people who depend on you financially. Many policies amounts range from $100,000 to $250,000, but higher and lower amounts are also common.

    5.    Medical examination. The exam typically covers your height, weight, blood pressure, medical history and blood and urine testing. 

    6.    Initiation of policy. Once your policy is in place, maintaining it is a matter of paying your monthly premiums. From there, if you die while the policy is in force, your beneficiaries receive the face amount of the policy tax-free.

    See Insure.com's Best Life Insurance Companies