Protecting your family from a financial disaster is why most people buy life insurance. Perhaps you have a growing family. You understand all of the finances that go with that. Maybe you have a mortgage and a couple of car loans. What about a college fund for your children? Let’s not forget why most people get term life insurance — to replace their future income.
Think about how your partner, family or children would be affected if you happened to die suddenly. Buying a term life policy is the cheapest way to make sure their financial future is secure.
How Does Term Life Insurance Work?
Term life is a type of life insurance that’s straightforward and easy to understand. The process to get a policy can be broken down into a few parts:
- Select the term life coverage length (How long you want to be covered).
- Select the death benefit amount.
- Have an independent agent help you get multiple quotes from the best-rated companies.
- Apply with the company that will get you the best deal based on your specific situation and underwriting requirements.
- Get approved and pay for your policy.
Term Life Insurance Benefits
There are several advantages that term life insurance provides.
Price: A term life insurance policy is typically the most economical means to get a large amount of coverage. Permanent life insurance like whole life will be much more expensive. In other words, if you’re looking to buy a $500,000 life insurance policy, term life will be the least expensive type of coverage. Typically, the shorter the term life policy, the cheaper the price will be.
Flexibility: Most term life policies can be purchased in either 10, 20, or 30-year terms. There are even companies that offer lengths of 1, 5, 15, 25 and 40-year terms! For the majority of people, a term life policy will meet their needs and coverage goals.
Fixed Premium: Term life premiums are fixed. This means that when you pay your premium, it will be the same rate for the duration of the term. Let’s say you buy a 30-year term and the premium is $45 per month. You will pay the same monthly rate for the entire 30 years. Just know that when your term life premiums remain level for the selected term period, they will go up if you choose to continue your coverage past the level premium period.
Guaranteed Death Benefit: Your death benefit is guaranteed for the life of the term period. Your beneficiary will receive a death benefit if you die within your selected term. For example, you buy a 30-year term life policy. If you die anytime between the effective date (when the policy begins) and the 30th year (when the policy ends) — your beneficiary would receive the death benefit. If you outlive your term life policy, your coverage will expire and you will stop paying for your policy.
Conversion: Many term life companies allow you to convert your term life policy into one of their permanent life insurance policies. There are advantages and disadvantages when converting. The biggest disadvantage is that the permanent policy will be much more expensive compared to your term life premium. The biggest advantage is that you don’t have to medically qualify when you convert.
Here’s a common conversion situation that people often overlook: Let’s say you buy a $500,000 30-year term policy in your 20s. Fast forward a couple of decades and you get cancer. Your 30-year term is about to run out and you still need a $500,000 policy. You start to scramble and apply for a new policy but are denied by every company because of your cancer diagnosis. Instead of buying a new policy, you can simply convert your old term policy to a new permanent policy. You won’t have to undergo medical underwriting when you convert.
When To Buy Term Life Insurance
When should you buy a term life policy? When it comes to any life insurance product — the earlier the better! Your age is one of the most important factors when it comes to price. Someone in their 50s is going to pay much more compared to someone in their 20s and 30s for the same policy.
Let’s compare a $500,000 20-year term life policy. The sample rates below are based on a “Preferred Best” health rating for non-smoking males. This means that the rates below are the lowest possible rate for each age group. As you can see, rates increase significantly as you approach age 50.
- 20 Year Old: $18.53 per month
- 30 Year Old: $18.87 per month
- 40 Year Old: $29.17 per month
- 50 Year Old: $72.57 per month
When You Shouldn’t Get Term Life Insurance
For most people, term life will meet their coverage goals. However, there are some situations where a term life policy isn’t the best option. One of the most common situations is when you’ve retired and no longer need a large life insurance policy. Perhaps you’ve paid off your home, your kids have graduated from college, and you no longer have any major debts to cover.
Your financial situation can be quite different in 20 or 30 years. You’ll usually be better off financially and many of your debts will be reduced or paid off. Life insurance is all about mitigating risk. If those financial risks are no longer there, then a term life policy wouldn’t be needed.
A term life policy is a great option for anyone looking for coverage for a certain amount of time. These policies are usually for people looking to protect current and future income, paying off a mortgage and debts.
Your term life death benefit will pay your beneficiary when you die during the term and it’s usually paid tax-free. Term life is a great deal because it is cost-effective and flexible. If your term life policy happens to end and you still need a policy, you have the option to convert it into a permanent policy.
20 Year Old: $18.53 per month
30 Year Old: $18.87 per month
40 Year Old: $29.17 per month
50 Year Old: $72.57 per month