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.
Fabric, a Brooklyn, NY-based life insurance broker, said a big myth is that term life insurance is a waste of money. You don’t get term life dollars back if you outlive your policy, but life insurance should be seen as an investment that would mitigate the most critical risk to your family. Fabric compares it to home insurance, which people also don’t benefit from financially if they never file a claim.
Fabric said some term life policies start at just $11 per month for $100,000 coverage.
- Term life insurance is inexpensive, as low as $11 per month for a $100,000 benefit.
- Term life insurance policies work by paying a benefit to beneficiaries if the insured person dies during the policy term.
- Paid policy benefits may be used for any purpose. Often, funds cover funeral expenses, debts such as mortgages and provide relief from lost income.
- Age and smoking status have a significant impact on term life insurance rates.
- A medical exam may be required before a term life insurance policy is issued.
Why buy term life insurance?
Term 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 a term life insurance policy, your spouse may 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 buying life insurance is about gaining “peace of mind.”
Ellis stresses that life insurance covers your family against lost income by a primary wage earner.
Fabric said people choose life insurance for their loved ones’ financial security, including protecting their children’s financial future. When deciding on life insurance, think about who you’re covering and the most important financial goals. That will help you choose the right beneficiary and coverage amount.
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 term’s duration.
Keep in mind these key points about term life insurance:
- The calculations behind life insurance rates are all about life expectancy and risk. 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 your 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,” Ellis said.
If a policy lapses because of nonpayment, you’ll likely pay a higher cost for a new policy.
What does term life cover?
Your death benefit doesn’t have an assigned use when you buy a new policy. 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
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 that 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 no medical exam. Guaranteed issue doesn’t ask any health questions, while simplfied asks a few questions. You pay a much higher premium for the coverage than a standard term life policy with a medical exam. 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.
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.
Length: Often 10, 20 or 30 years.
Investment component: None
Pro: Often lower costs and higher death benefits than whole life.
Con: If you outlive your policy, there’s no death benefit.
Length: Until death.
Investment component: Premium is partially invested and builds cash value.
Pro: Guaranteed death benefit and the policy needs little to no oversight.
Con: Higher premiums with smaller death benefits than term life.
Length: Until death
Investment component: Premium is partially invested in asset classes that can be adjusted and will build cash value based on market movement.
Pro: Lowest price for permanent policy with guaranteed death benefit and you can adjust premiums and coverage level.
Con: Cash value isn’t guaranteed.
Length: Until death
Investment component: Premium is partially invested and can be managed. It builds cash value based on market movement.
Pro: Potential for greater gain and you can adjust premiums and coverage level.
Con: Cash value isn’t guaranteed.
Term life vs. permanent life
Whether term life or permanent life is better depends on your situation.
Here’s when a term policy might work for you:
- You want a lower premium and shorter commitment.
- You don’t expect many expenses after the end of the term.
- You don’t care about building cash value.
- You want a high death benefit during your high-earning years.
Here’s when a permanent life might be better:
- You want to make sure there’s a death benefit.
- You want a policy with cash value that you can tap into if needed.
- You want to add riders to the policy like accelerated death and long-term care coverage.
- You want a policy and then never think about it again.
Fabric said term life may make sense for people who only need to replace their income during a certain time period. That could be the length of your motgage or supporting your children’s college eduction.
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 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 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.
Here are the average annual term life insurance premiums for people in “Regular” health.
Average Annual Premiums for Term Life death benefit of $250,000
|Health profile and level term length||Age 30||Age 40||Age 50||Age 60|
|Female non-smoker 10-year term||$224||$307||$575||$1,190|
|Female non-smoker 20-year term||$316||$480||$961||$2,323|
|Female non-smoker 30-year term||$432||$697||$1,541||$7,300*|
|Female smoker 10-year term||$439||$693||$1,487||$3,088|
|Female smoker 20-year term||$672||$1,190||$2,393||$5,243|
|Female smoker 30-year term||$915||$1,655||$3,700||$13,030*|
|Male non-smoker 10-year term||$264||$359||$737||$1,722|
|Male non-smoker 20-year term||$370||$568||$1,231||$3,154|
|Male non-smoker 30-year term||$530||$877||$2,027||$7,300*|
|Male smoker 10-year term||$554||$865||$1,968||$4,423|
|Male smoker 20-year term||$828||$1,492||$3,179||$7,113|
|Male smoker 30-year term||$1,171||$2,155||$4,519||$13,030*|
*Limited quotes available. Data source: Compulife Quotation System as of December 2020.
As you can see, people in their 30s pay much less than older people and 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 lead to higher life insurance rates. Occasional cigar smokers may be able to get less expensive premiums than smokers.
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.
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.
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.