There are times when you have to think about and do things you’d rather skip. Does buying life insurance fall into this category for you? Buying life insurance can be daunting and overwhelming. There are so many decisions. How much life insurance do I need? Should I get term life insurance or whole life? What’s the difference exactly between the two?
Then you have to think about paying for it. So, a task that already feels kind of daunting requires real research and thought. If you think it’s time to look into life insurance, read on. Learn what you need to know about how to buy term life insurance and finding the best term life insurance providers for you.
What Is Term Life Insurance?
Term life insurance is one type of life insurance. The word term is key to understanding how term life insurance works. When you purchase term life insurance, you have two major decisions to make. How much money do you want in death benefits? How long do you want the coverage to last?
So, after doing some calculating (more on this later), you decide to purchase $200,000 in life insurance. You also choose to buy a 30-year term. This means that as long as you continue to pay your premiums during this time if you were to die, your beneficiaries would receive the death benefit of $200,000.
The thing to understand about term life insurance is that it tends to be less expensive than whole life insurance because it has an expiration date, or a term when the guarantee expires. If you get to the end of the term and are still living, then the insurance expires with no benefits. There are a few exceptions to this, more on that later.
How Is Term Life Insurance Different Than Whole Life Insurance?
When purchasing life insurance, one of the first things to do is to decide between term life and whole life insurance. There several differences between term life and full life insurance.
The first difference has to do with that word term, while term life insurance does have an expiration date. Whole life insurance does not expire. When you buy whole life insurance, as long as you pay the premiums, you have it until you die, and the benefits of death are paid out. Remember, for term insurance, the insurance expires at the end of the term.
Because there is no expiration date, and the insurance company knows that they will need to pay out benefits at some point, the cost of this type of insurance tends to be more costly. The other difference is that whole life insurance can work as an investment fund and grow over time. Again, this is why the premiums are higher because it grows. This means the policy does have a cash value, unlike term insurance.
There are a few policy add-ons to consider regarding cash-value and term insurance. More on this later.
Who Should You Get Term Life Insurance?
First, let’s consider who should get life insurance. If you have any debt or bills or adult responsibilities, it’s smart to get life insurance. It protects your loved ones from your duties and debts should you die. Who should get term insurance, and why?
You should get term life insurance if you are the breadwinner and your income pays the mortgage payment and buys the groceries, then you want enough life insurance to cover those expenses for your family. On the flip side, let’s say you stay home with the kids. You also want life insurance, so the care you give can be hired out.
Ultimately, if you were gone, would your family be financially stable without what you contribute? The life insurance benefits should provide financial security. The insurance allows the people who depend on you to pay bills, hire help, and survive without your continued contributions to the family.
Why Term Insurance?
As you consider the best term life insurance for your needs, you might wonder why term over the whole life. Term insurance tends to be less expensive, which is often a desirable consideration. Often people will purchase term insurance and keep it for during the time they have significant financial responsibilities. Maybe you have 25 years left to pay on your mortgage. Perhaps you have young children.
If you have school-aged kids, say 5 and 7, and a mortgage to pay on for another 23 years. You might look ahead and think about term life insurance for the period when those kids and mortgages remain under your financial responsibilities. Life insurance is not intended to be a retirement investment. So, in the above scenario, maybe you buy a 25-year term of life insurance. Then you know your mortgage is paid off, and your kids are likely to be past college and should be financially supporting themselves.
You may feel like once you have your house paid off and are not supporting kids, you might not need life insurance anymore. This is assuming you have saved properly and invested for retirement, so you know a spouse would still be okay without life insurance.
How Do You Decide How Much Life Insurance to Get?
There are a few different philosophies on how to figure out how much life insurance you need. Since you don’t know when you will die or how long your family will need assets, it can be tricky to guess how much you need. Of course, you start by looking at your income.
An older rule suggested taking your income and multiplying by 10. So, if you make $70,000 a year, you want to get $700,000 in life insurance. This doesn’t factor in investments, expenses, or how many kids you have. Another suggestion is to take your income, multiply by 10, then add $100,000 for each child you have. This would ensure you have college expenses close to covered should you die before they are out of college.
Another suggestion is to follow the DIME rule. Consider your debt, income, mortgage, and education needs. In this calculation, you look at the following:
Add up all your liabilities and anticipated funeral expenses, excluding mortgage.
Here you estimate how much revenue your family will need and for how long. For most people getting term life insurance, they consider the age of their youngest child and until they would be out of college.
How much money would be needed to pay off your mortgage?
Here you want to calculate your anticipated financial needs to get your kids through college. To be more precise, you can get your total and subtract your current investments and savings, although it never hurts to have some extra.
Cost And Cost Factors For Term Life Insurance
You can’t think about term life insurance without considering how to get the best term life insurance rates. The one-piece of good news about term life insurance rates is that once they are established for you, the price remains the same for the life (or term) of the policy. Most insurance companies allow you the flexibility to pay monthly, quarterly, or all at once yearly.
The cost of term life insurance depends on you. Insurance companies consider you as an individual when setting the rates. They will look first at whether you are male or female. Males tend to die younger, so the prices are higher for men than women. The insurance company will consider your health. Many ask you to undergo a health screening. They will want to know if you have any health conditions that might cause premature death.
Finally, they will consider your age. So, buying life insurance at age 30 when you are in better health will cost less than when you are older.
How To Choose A Life Insurance Company
Many insurance companies in the marketplace offer both term life insurance and whole life insurance. Before you start shopping for the best company, you want to have done some homework about your individual needs. Then you can begin to shop for the different brands to select one that offers the best options and the best rates too.
These companies have some of the largest market share in writing life insurance policies:
- Northwestern Mutual
- New York Life Insurance Company
- Lincoln Financial Group
- John Hancock
- State Farm
It makes sense to start your research with a company that writes many policies. As you research your insurance company, you want to make sure they have a firm financial standing. You want to know you are handing off your premiums to a company that will be able to pay the death benefits down the road. You also want to do a little homework on the insurance company’s customer service. Find an insurance agent who will help guide you through the process.
Types Of Term Life Insurance
You’ve already considered many of the facets of term life insurance. While generally, term life insurance is less complicated than whole life, there are a few types to consider.
Level-Premium Term Life Insurance
Level-premium term life is the most common type of term insurance. This simply means that the premium remains the same for the entire term of the coverage. If you die during the term of the insurance, the pre-established death benefits will be paid out. People like this option because it’s the most economical, and then you can plan and know what the premiums will be through the life term of the insurance.
Renewable Term Life
You probably already thought it, what happens if I’m still alive and my term insurance expires? Some term policies allow you to renew them when the term expires. Often people who opt for shorter times will pay more for the renewable option. If you anticipate wanting to renew, ask your insurer about this option upfront. They should be able to quote your rates. You should be prepared that your premium is likely to increase if you do a renewal.
Decreasing Term Life
Decreasing term life works as the name suggests. The death benefit drops over the term of the insurance. You might opt for this option when you know certain debts will be paid off during the policy’s life.
For example, maybe you only have 10 years left to pay off your mortgage. But you will still have kids in college for an additional ten years after you pay off the mortgage. You might opt for a decreasing benefit since your beneficiaries would need less once the mortgage is paid off.
Term life insurance is generally pretty straightforward. Yet, there are some policy options to consider. Some policies come with these options, while others would require you to have a rider added to your policy to take advantage of the features below. Again, have you wondered what happens if I outlive my term life insurance? Some policies allow for a rider called a return of premium. This means that if you outlive your term life insurance, your premiums can be returned to you. While this might sound lucrative, be prepared to pay more for the premiums.
Another option to consider asking about is the accelerated death benefits. The accelerated death benefits can be paid out if you become terminally ill and are expected to die within a short period. Often a percentage of the benefit is paid. The benefit to this rider is to cover some illness and end of life expenses.
Deciding On Term Life Insurance For Your Family
While nobody wants to imagine the end of their life, it can be comforting to know that if you are unable to care for your family, the death benefits from the life insurance you purchased will help care for them. Use this information to find the best term life insurance for you and your family.