Term Life Insurance Guide
A Consumer Guide to Life Insurance
Our term life insurance guide is intended to provide you with an overview of the different options you have for term life insurance.
Also, this consumer guide to life insurance provides information on key factors that will help you to choose the right policy and explain important things for you to consider about your term life insurance policy.
A Brief Summary of Term Insurance
Term life insurance is usually considered a short term solution (5-30 years) for one or more short term or fixed term needs. Such as, your mortgage, car loan or college funds for your children.
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Term insurance makes a lot of sense when you are young with a growing family, because the rates are low and the benefits are high.
- Term insurance is purchased for a specific number of years.
- Premiums are lower than Whole life insurance, especially in the early years of the policy.
- Premiums increase with age or at renewal of your policy depending on the type of term life insurance policy you choose.
- Term life insurance builds no cash value.
- Based on a study at Penn State University in 1993, less than 1% of term life policies ever pay a death benefit. People usually outlive or discontinue their policy.
- Most term life insurance policies cannot be renewed past the age of 75.
Why Do I Need Term Life Insurance?
Term life insurance offers you a way to provide cash for your family in the event you die. The money your beneficiaries receive from your life insurance policy can be used to pay for your burial costs and final expenses. It can pay off credit card debt, or a mortgage on your house. Or, it can pay the rent and living expenses for your family. Life insurance benefits can pay for college tuition, provide money for retirement, provide cash to pay your estate taxes, or provide a stream of income that can help your family maintain their lifestyle. Also, the death benefit paid from a life insurance policy is usually income tax-free.
How Much Life Insurance Do I Need?
There are many ways to determine how much life insurance you need. Here are a few:
The Rule of Thumb Method
Take 5 to 7 times your annual gross income and that would be the amount of life insurance coverage you should carry.
The Expense Calculation Method
Add up all your expected expenses should you die, including: expenses for your burial, an emergency cash fund, money to pay your current debts, mortgage, college tuition, and any replacement income needed for your family. Now, add these all together to determine your total life insurance needs.
The Income Replacement Method
Decide how much of your current annual gross income your family would need for them to maintain their present lifestyle and standard of living. The average is 70% of your current annual income. What you want to do is purchase enough life insurance so that the proceeds, if invested at an after-tax rate of return of 8%, would generate enough income for your family.
Let’s use an example to show you how this works:
If you earn $30,000, then your life insurance policy should provide $21,000 of annual income for your family. $30,000 times 70% equals $21,000 of annual income. Now, if your family invests the proceeds of your life insurance policy, they need to receive $21,000 annual income from that investment. $21,000 divided by 8% (rate of return) equals $262,500 of life insurance protection.
Term Life Insurance Calculator
You could use our easy term life insurance calculator to quickly determine the right amount of protection for your family. You just fill in a few numbers related to your current financial situation and needs, and the computer gives you an instant, accurate estimate of your life insurance needs.
What is Term Life Insurance?
Term life insurance provides your family with financial protection over a specific number of years. The policy pays a death benefit to your beneficiary only if you (the insured) dies during the time or period the policy is in effect. If the policy ends or expires and you are still alive, there is no payment made to your beneficiary. The term of period of the policy can vary from one policy to the next. The range of years for a policy can be from one year to 30 years for your coverage. Policy terms generally run for 1, 5, 10, 15, 20 or 30 years.
At the end of your policy term, your life insurance company may require you to provide proof that you are still insurable, if you want to purchase another term insurance policy. This means you may have to take a medical examination to qualify for a new policy. Annual renewable term insurance usually continues without having to qualify for coverage again. However, the premiums usually increase each year.
How is Permanent or Whole Life Insurance (Cash Value) Different from Term Life Insurance?
Permanent life insurance provides you with protection that lasts your entire life. As long as you pay your life insurance premiums, your life insurance death benefit will remain in effect. Also, most whole life insurance policies build cash value within the policy. This money can grow tax-deferred. It may be used to take a loan from your policy. This money goes to your beneficiary, in addition to the death benefit. Term life insurance does not build any cash value within the policy. Term insurance is "pure life insurance protection".
Whole life insurance policies are used to keep coverage in force for a long period of time. They are meant to insure you for your entire life. If you only need protection for a short period of time – 5, 10 or 20 years, then term insurance may be the best solution for your needs. You get the maximum amount of protection at the most affordable rates.
Are There Different Kinds of Term Life Insurance Available?
There are several different types of term life insurance policies available. Term life insurance is generally used to provide the maximum amount of protection for a specific number of years at the lowest premium. Life insurance companies offer several types of term policies to meet your personal needs including:
Level Term Life Insurance
Level term life insurance offers you a death benefit that remains the same throughout the term of your policy. This type of policy is usually purchased for a period of 5, 10, 20 or 30 years. Usually, the annual premium remains the same throughout the entire period of your policy. Annual premiums for level term coverage will probably be higher at first than premiums for annual renewable term. However, the annual premium will stay the same for level term coverage for the entire period of the policy. But, annual renewable term insurance premiums will increase each year.
Decreasing Term Life Insurance
Decreasing term life insurance is usually used to help pay off the mortgage. The premium for this type of policy stays the same over the period of the policy, but the death benefit decreases each year until your life insurance policy expires.
An example of decreasing term insurance: Let’s say you buy a $150,000 – 30 year decreasing term life insurance policy so your family can use the death benefit to pay off the mortgage on your house or condominium if you should die. The life insurance death benefit will decrease each year along with the amount you still owe on your mortgage. After 30 years your life insurance coverage will end. In the event of your death during the policy term, the death benefit should be able to pay off the remaining amount on your mortgage.
Do I Need to Take A Medical Exam to Buy a Life Insurance Policy?
Many life insurance companies require you to take a medical exam to qualify for coverage. It depends on the amount of life insurance you are requesting, your age, and the insurance company.
However, there is a life insurance company that offers you Instant Issue term life insurance with no medical exam required, just answer a few health questions. If you like your quote, you can apply online and get approved for your life insurance policy within minutes, if you qualify.
This type of life insurance is offered through a life insurance company which is rated "A-" (Excellent) by A.M. Best Company for financial strength.
If you need coverage today, or just don’t want to take a medical exam or blood tests, this is the solution for you. It’s the quickest, easiest term life insurance policy available online.
Where Can I Find Affordable Term Life Insurance Rates?
There are many websites that offer you quick and easy life insurance quotes. But, the important point is to find one that has been doing it for years, that provides excellent service, and offers you quotes from highly-rated life insurance companies.
Term Life Insurance Quotes
Points to Consider in Choosing a Term Life Insurance Policy
- Compare the Costs. Get multiple quotes to compare the lowest rates available.
- Compare Similar Policies. Make sure the quotes are for the same type of policy, for example, level term life insurance where your rates are level each year for s specific number of years.
- Guaranteed Periods – Make sure your rate is guaranteed to remain the same for as long as you need the coverage.
- Insurance Carrier Rating – A.M. Best provides financial ratings of insurance companies. Make sure you review the rating (your quotes usually will show the rating) for your life insurance company. This will give you an idea of their financial strength. Make sure you choose a company that is financially sound and can pay their life insurance claims.
How to Save Money on Your Term Life Insurance Policy
- Compare Term Life Insurance Quotes online from several sources to find the best rates from quality life insurers.
- Payment of Premiums – If you can afford it, choose to pay your premiums on an annual basis. This is usually less expensive than if you pay you monthly or quarterly.
- Compare Higher Levels of Coverage – If you need $165,000 of coverage, compare quotes for $200,000 of coverage, too. Sometimes, the next higher level of coverage may not cost you much more in premium each year.
- Policy Fees – Ask if there are any policy fees that are included in your term insurance policy. Some insurers may add an additional fee of $45 to $90 on the policies they issue.
- Make sure you are comparing quotes on the Same Type of Term Life Insurance Policy – Level Term, Annual Renewable Term, or Decreasing Term.
What Are Conversion Privileges?
Many life insurance companies offer you a conversion privilege with your term life insurance policy. This means you can exchange or convert your term insurance policy for a whole life insurance policy with the same death benefit amount of your term insurance policy. Usually, you won’t have to take a medical examination or answer any medical questions to qualify for the new policy. However, the longer you wait to exchange or convert your term policy to a whole life policy, the higher your life insurance premiums will be on your new whole life policy. Each company may apply different restrictions on the conversion privilege they offer to you.
What are the Advantages of Term Life Insurance?
- Very low cost compared to whole life insurance
- Large amount of protection can be purchased at affordable rates.
- Option to choose from many different terms or periods of coverage – 1, 5, 10, 15, 20 or 30 years.
- Best choice for temporary protection needs, such as your mortgage, college tuition, or a car loan.
What are the Disadvantages of Term Life Insurance?
- Premiums increase each renewal as you get older.
- Term insurance does not build cash value.
- Coverage ends when your policy term expires, and premiums may be too expensive to purchase a new term policy when your current policy expires.
Keep This Point in Mind
Commissions paid to insurance agents on term insurance policies are much lower than commissions paid on whole life or permanent policies. So there is a definite incentive for insurance agents to sell you permanent life insurance, instead of term insurance. They make more money from you by selling you whole life insurance policies. Remember to keep this in mind. Don’t let a pushy life insurance agent sell you a policy you don’t need, or don’t want. Always choose a policy that fits your needs, and your budget.
Term Life Insurance Quotes
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