What Exactly is Term Life Insurance?
Term life insurance is a tool to help you provide financial peace of mind for yourself and your family. Term insurance provides a sum of money to your beneficiaries if you should meet an unexpected demise.
Like all other types of life insurance, term insurance requires premium payments either in lump sum or over time. In exchange, an insurance company guarantees a certain amount of money will be paid to your family. Term is the least expensive, most simple form of life insurance, providing the most basic type of protection — and this is exactly what many families need.
Term insurance is not a product meant to have many bells and whistles attached. Some of the permanent life insurance policies come with additional investment components and other complex features. Term life, on the other hand, is designed to provide policyholders with affordable life insurance coverage that will pay off their mortgage, the kids’ college, cars and other debt obligations, and provide a supplement to the remaining spouse’s retirement income.
Once large debts are paid off, the kids have left home and retirement plans are fully funded, term insurance is no longer necessary. This concept is commonly called the theory of decreasing responsibility, and explains why term life insurance is structured into 10 to 30-year policy “terms.”
Why Should I Choose Term Life Insurance over Whole Life?
Whole life insurance is a variation that, unlike term insurance, does not expire. Term life insurance costs very little in comparison to whole life since the likelihood of the insurance company paying out on the policy is much lower.
Whole life policies must always pay out at some point. Many whole life policies include a cash value component, which works as a “forced savings plan” for the policyholder. The policyholder pays much higher premiums each month for this benefit, and the cash grows at a certain interest rate over time.
This rate is usually quite conservative, and many sources argue that your money is better spent buying term insurance and investing the rest of the money on your own in investments that earn higher interest. Since studies show term insurance policies have a payout likelihood of only two to three percent, this allows insurers to charge substantially less money for them than for whole life insurance.
Term Life Insurance — Some of the Benefits
As previously mentioned, one of the greatest benefits of term life insurance is the cost. Term life insurance provides the highest amount of life insurance coverage for your dollar. For a term insurance rate example, J.D. Power and Associates reports that a healthy 35-year old non-smoking male can buy $100,000 of term life insurance coverage for premiums as low as $8.50 each month. For a woman in the same health and age brackets, this coverage may be as low as $8.08 monthly.
Another benefit is that your beneficiaries receive the insurance money tax-free. This keeps things simple by letting you know exactly how much your policy pays out without worrying about future tax brackets or how big of a chunk of the proceeds would go towards tax payments.
Flexible terms allow you to customize your coverage and buy only what you need, so you can get the cheapest life insurance available. It is important to buy enough coverage though — this is not a place to skimp, especially since term is so inexpensive. Some companies have even started offering policies that provide coverage for 40 years rather than the usual 10 to 30-year term.
Customizing Your Term Life Policy
Even though term life insurance is straightforward, it still allows a good degree of customization to your specific needs through different types of term insurance as well as various riders that insurers can add on to the policy. Look for these option when you compare life insurance companies.
Policy Variations: Term life insurance policies are designed with different features to accommodate various lifestyle needs. Annual renewable term insurance is good for one year, with a guaranteed renewal. This allows people to renew their life insurance without undergoing a new medical exam. The premium may increase each year, especially as the insured approaches older age groups.
Policy Riders: Riders are amendments or attachments to your term insurance policy that add special features onto the coverage. For example, a “waiver of premium” rider allows you to keep your policy in force for a set amount of time if you cannot make the payments.
Additionally, if the policyholder becomes permanently disabled, the premiums will continue to be paid. Most insurance companies will offer a guaranteed renewal provision rider for any term life policy. This allows a renewal without medical testing, which helps in case of an unexpected illness. It also allows you to increase your policy’s face value amount with out new medical tests, in case a marriage, new baby or other event requires higher coverage levels.
A family income benefit rider is one of the more commonly purchased riders, and it allows the benefits to be paid out in a series of payments over a set number of years, providing your family with a steady stream of income.
An accelerated death benefit rider allows a policyholder to use his benefits while still alive, if he develops certain terminal health conditions, letting him take an advance on the proceeds of the term life insurance policy. This reduces the payout for his family, but can help cover important medical costs. This rider may come with the policy free of charge.
Blended Coverage: Blended coverage allows term life policies to provide some of the benefits of whole life or other types of permanent insurance. Some policies start as pure term insurance, with an option to convert the policy to permanent insurance.
Other policies take part of your monthly premium and use it to purchase permanent coverage, converting your policy over a period of time to the point where it becomes 100 percent permanent life insurance coverage. This helps keep coverage more affordable in younger years when the policyholder may not earn as much income.
How Should Term Policies be Compared against Each Other?
Shopping around is a necessary part of finding the best term life insurance for your needs. But how do you compare the policies? Many factors help determine whether a policy is really the best buy. Start by requesting a quote from several companies for exactly the same type of coverage, so you can compare apples-to-apples, as they say. Use the following as a guideline for life insurance comparison points:
- Company history: How long has the company been in business? What other products do they offer? You might save money by bundling different insurance types. Have any complaints been logged against them with the Better Business Bureau (BBB.org) and if so, did the company resolve them?
- Credit ratings: Each insurer should have ratings based on its financial stability and ability to pay out claims if a large number of policyholders were to request payouts. The insurer should be rated by at least one of the four major credit rating agencies: A.M. Best, Standard & Poor’s, Moody’s or Fitch Investors Service.
Many insurance companies list their ratings on their own websites. Additionally, many websites providing quotes will provide you with the companies’ credit ratings for comparison against each other.
- Payment structure and amount: For the exact same coverage details across companies, how much are the premiums for each company? Can you get any break on the premium for paying an annual lump sum? Can you get a discount for buying more coverage?
- Product type: When shopping around, also look at the rates for different products. The cost difference between a 20-or 30-year term life policy may be minimal compared to the additional amount of coverage provided. Additionally, some policies may come with different riders that enhance coverage for no additional cost.
- Health category: Based on your health, insurers place you in different groups of risk and insurability. These groups, or rate classes, are usually called “preferred,” “premium,” “preferred plus,” “standard” and other similar names. If you find a policy at the right price but the insurer puts you in a lower rate class, ask how to get in the higher rate class and see if you can cut your premiums.
Additionally, prepare for your medical test by avoiding alcohol and fatty foods for a week or so before your exam, cutting down on smoking, and getting lots of sleep and good hydration before your exam. These things can have surprisingly positive effects on your health markers, placing you in a higher, less expensive rate class.
Finding Cheap Term Insurance Rates
Term life insurance is the least expensive coverage available, but it’s still worth knowing how to get low rates because there is no reward for paying too much for your coverage. When doing a life insurance comparison, the following ways may help you save money and find the cheapest rates available for your term life insurance coverage.
- Work on your health. Losing weight can dramatically affect your rates, and even small amounts of exercise can make a difference in your heart rate, blood pressure, cholesterol and other health markers that insurers consider when pricing your coverage. Additionally, if you quit smoking, you may be rewarded with a higher rate class and substantially lower rates within just one to three years of non-smoking status.
- Buy more coverage. You already know life insurance is not the place to skimp. But some companies even offer special pricing on higher amounts of coverage, so it may actually save you money to buy a higher level of coverage.
- Pay your policy once a year, and avoid any charges from your insurer for monthly or quarterly payments.
- Buy when you are young and healthy to lock in a low rate.
- Choose an appropriate term to avoid overpaying. Those close to retirement may only need a 10-year policy, while new home buyers with a 30-year mortgage might want a 30-year term policy.
- Take advantage of differences in insurers’ pricing methods. What qualifies as risky for one life insurance company may not be as important to another, and the only way to take advantage of this fact and get cheap life insurance is to request term life insurance quotes from as many insurance companies as possible. We invite you to visit our online quoting system to discover and compare term life insurance rates for high quality coverage.