Term life insurance: What you need to know
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Whether you're a new parent, a working spouse, or even an empty nester, life insurance could play a crucial role in your family's financial well-being if the unthinkable happens. Term life insurance is one way to get your family covered without spending a fortune.
People often think life insurance is too expensive or they can't afford it because of other financial priorities, such as paying off debt or saving for retirement. However, depending on your age and the amount of coverage you need, term life insurance could cost you less than $1 a day.
"Consistently consumers have told our researchers they believe they can't afford life insurance, but when we dug deeper, our research showed that many overestimate the cost by as much as 300 percent," says Robert Kerzner, LIMRA's president and chief executive officer.
According to LIMRA's 2016 "Trends in Life Insurance Ownership" study and LIMRA's 2017 Insurance Barometer Study:
- 30 percent of households don't have life insurance
- 20 percent of households with children under age 18 don't have life insurance
- 43 percent of families without life insurance say they would be in immediate financial trouble if a primary wage earner died
- If these sound like you, term life insurance could be a low-cost option to get coverage. Let's walk through term life and see if it's right for you.
What is term life insurance?
Term life insurance covers you for a set period, such as 10, 15, 20 or 30 years, and will pay your loved ones the face value of your policy if you die during that time.
So if you purchase a 20-year term, $250,000 life insurance policy, and you die five years later, your beneficiaries would receive the $250,000. The benefit ends after 20 years.
Life insurance is cheaper when you're younger, so if you purchase it when you're in your 20s, your premiums will be much lower than if you wait until you're in your 40s.
That's one of the reasons it's important to figure out in advance how long you'll need the coverage. You'll end up paying higher rates if you decide to renew later because your age is a key factor in setting rates.
Plus, you'll likely have to go for a medical exam or answer questions about your health. If you're in poor health, your rates will be even higher, or you may find that you might not qualify for a term life insurance policy.
You may have life insurance through your job or an organization. However, you may find these plans don't cover your needs. In that case, you'll need to supplement your policy with individual coverage. Also, you'll lose that group life insurance benefit if you leave your job.
One reason some people may shy away from term life is that you pay premiums, but don't get any of that money back if you outlive the policy. There is an option in that case. Return-of-premium term life policies repay you the amount you paid in for coverage. However, those plans cost much more than regular term life policies.
Another consideration is convertibility, which allows you to convert your term life policy to permanent life insurance without having to answer questions about your health. Some term policies let you make the switch within the first few years after you've obtained coverage. Other policies allow you to make the change at almost any time that you have the policy.
Medical exams for term life insurance
A medical exam may be required when applying for a standard term life insurance policy. The exam will cover your height, weight, medical history, smoking habits and include a blood and urine test. These tests will look for specific medical problems. The results of the tests may hinder you from getting approved for the insurance, or increase your rates, depending on the outcome. (See "How to ace your medical insurance exam.")
If that worries you, there is a term life insurance policy that doesn't require a medical exam. Guaranteed issue term life insurance coverage, also known as "quick issue" or "simplified issue," is ideal if you have difficulty finding life insurance due to a medical condition or illness. You pay a higher premium because no medical exam is required.
The insurance company views this as risky, so you pay more. The insurer may also have a waiting period before coverage takes effect, and may charge a yearly fee.
How much term life insurance do you need?
A good starting point if you want to determine how much coverage you'll need and how much you might pay is the life insurance calculator on LifeHappens.org. The website of the nonprofit organization Life Happens educates the public on life, disability and long-term care insurance.
When deciding on how much life insurance you need, think about:
- Funeral costs
- How much it will cost to replace your income
- The services that you provide your family, such as child care
- Your outstanding debts, such as mortgages, credit card bills and loans
- Long-term financial commitments, such as paying for your child's college
- Once you figure out what your family might need financially, you can start figuring out if you need extras or riders on your policy.
Term life extras and riders
Term life policies can include extra features or riders. For example, your policy may include an accelerated death benefit. This type of rider lets people who are terminally ill, have a chronic illness or in long-term care tap into life insurance, while still leaving your loved ones with the remaining life insurance benefits.
You also may receive a disability waiver of premium, which grants you a waiver on paying your premiums if you're disabled for at least six months.
And some policies offer double or triple the payout if the death is an accident.
There are many options on term life insurance policies, but you'll want to consider whether the riders are worth it.
Shop around for term life insurance
You want to get quotes from multiple life insurance companies, so you get the best rate. Make sure you get the same policy from each insurer. That way you compare the same policies from each company.
You should also check each insurer's financial stability ratings. You want to make sure the insurance company is reliable and that your family will get what they're owed in case you die.
Once you confirm the company's standing and you're received multiple quotes, you can decide which term life insurance policy is right for you and your family.