If you’re in the market for life insurance, you have many options, but the most common choice is term life insurance.
It’s often the least expensive policy and it’s the easiest to get. It’s a temporary policy so there’s a lot you must understand about how it works. Here’s what you must know about it.
What is Term Life Insurance?
Term life insurance, as the name suggests, is a policy that’s good for a specific term. For example, if you take out a 10-year policy, it’s good for 10 years. If you’re alive after 10 years and 1 day, while that’s a good thing, your policy expires, and you have no insurance.
Term life insurance is good for young families or people with a lot of financial responsibilities that if they died suddenly could leave their families with a financial mess.
For example, if you are newly married with 2 kids, ages 1 and 2, you may want a policy large enough to pay off the mortgage if you died, to leave your family with money to live the life they’re used to, and enough money to fund your children’s college education.
If you’re older, married, and have no kids, you may want a policy that covers the mortgage and leaves your spouse with enough money to live the life he/she is used to while figuring out what to do next after your passing.
How Does it Work?
Term life insurance is the easiest to get. You complete an application (often online) and apply for the amount of coverage you want.
The insurance company will underwrite your application. This means they will look at factors such as your income, debt, medical history, family medical history, lifestyle, and hobbies. The insurance company needs to determine your risk factors. In other words, how soon might they need to pay out on you if you died?
If you’re approved, you have a policy for the entire term. The premiums don’t change, and you have the same death benefit for the entire term as long as you pay your premiums on time.
The downside is that when the policy expires, you’re left with no insurance. Some insurance companies allow you to renew the policy at a higher premium given your older age, but not all do.
Who is Eligible for Term Life Insurance?
The nice thing about term life insurance is that it’s easy to qualify for. You must pass a medical exam and undergo an interview with the insurance company to determine if you are a good candidate.
Typically, you must be in decent overall health, be younger than 60-years old, and show that you make income that you would need to replace should you die and your dependents not have the money you used to make.
You don’t have to be in perfect health either. There are different levels of premiums. Obviously the better your health the lower the premiums you’ll pay, but there are options for those not in perfect health too.
Pros and Cons of Term Life Insurance
Term life insurance has its pros and cons. There are definitely some good sides, but there are some downsides you should consider too.
- If you’re young and in good health, the premiums can be affordable
- As long as you pay your premiums on time, your beneficiaries will receive the full death benefit
- The death benefit isn’t taxable for your beneficiaries
- You can convert the policy to a whole life policy down the road
- It can cover your loss of income or pay off a large liability, such as a mortgage or paying for the kids’ college educations
- The policy is temporary and when it expires you are left with nothing, even if you can renew the premiums will be higher
- The policy has no cash value and when it expires you have nothing to show for it
- It can be hard to get approved if you have a serious health issue
How Much Does Term Life Insurance Cost?
Knowing how much term life insurance costs can help you determine if you can afford it. However, it depends on many factors such as your age, hobbies, occupation, health status, driving record, and whether you smoke or drink.
A $500,000 term life insurance policy for a 30-year-old woman costs an average of $200 a year and $250 for a male. This is the average rate for someone in perfect health and with no other risk factors such as smoking, drinking, a risky occupation, or any other risk factors.
If you smoke, drink, have a risky hobby or job, or have health conditions, your premiums will increase accordingly. In general, though, women pay less than men for life insurance because women have a longer life expectancy.
Who Should Get Term Life Insurance?
Term life insurance is good for anyone looking for temporary coverage. It’s good to get you through your child-rearing years or to see you through the end of a specific liability.
Many people take out term life insurance when they are younger, and then don’t renew it when it expires because they’ve had time to get established financially and save money for the unexpected and no longer need the insurance.
You don’t have to be married, have kids, or even be a specific age to get term life insurance, however, it’s much less expensive when you’re younger and it’s easier to get approved when you’re young and in good health.
Who Shouldn’t Get Term Life Insurance?
Term life insurance isn’t for everyone.
For starters, if you’re looking for a permanent policy, it’s not term life insurance. If you take out term life insurance hoping to have coverage for your lifetime, you’ll pay much higher premiums each time you renew, which can get quite unaffordable.
You also shouldn’t get term life insurance if you don’t have any beneficiaries to leave the money to. If you want a small policy to cover your final expenses, you can do that so no one has to fork over the money to pay for your wake and funeral, but don’t pay unnecessarily for insurance you don’t need.
How Much Term Life Insurance do you Need?
Everyone needs a different amount of life insurance which depends on your family size, their financial needs, and what you need to protect and/or pay off. Here are a couple of rules of thumb to try to decide what you need.
10 Times your Income
Many people take out a policy that is equal to 10 times their income. This ensure that if they died, their loved ones would have 10 times the income they lost, which should get them through a few years to figure out what to do next.
The problem with this method is it doesn’t take into consideration your family dynamics, any large liabilities, or any special considerations such as being a stay-at-home mom or dad, which has value too.
10 Times your Income Plus $100,000 for Each Child’s College Education
If you have young children and worry about their college education, you could buy a policy that’s worth 10 times your income plus $100,000 for each child. This may help your children still get the college education they want or help them get a start on their adult life if they don’t go to college.
The DIME Method
If you’d like something more specific, you can use the DIME method, which takes into consideration the following:
- Debts and liabilities
Add up your total debts and potential future liabilities, your annual income times the number of years you want it set aside for your family, the total amount of your mortgage, and any money you want to set aside for your child’s education.
There is no right or wrong way to determine how much life insurance you need. It depends on your financial situation, how much you want to leave for your loved ones, what assets you want to protect, and what premiums you can afford.
If you need affordable and temporary life insurance, term life insurance can be a good answer. Just remember it doesn’t last forever and the cost goes up when you want to renew when you’re older.