Term life insurance guide
Term life insurance is simple and affordable way to cover yourself. Here is a guide for how to protect your family and get peace of mind.
Table of Contents
What is term life
Term life is the pure form of life insurance.
It does exactly what you would expect from life insurance – pay to your beneficiary the death benefit should you die unexpectedly. That way you have the peace of mind that your family is protected financially, and can move on with their life’s as smooth as possible.
There are more types of life insurance like Whole life and Universal life. Term life is the most common of all and you will pay a fraction of the cost compared to other types.
Who needs life insurance
Ask yourself who will suffer a financial harm should you pass away. For most people the answer will be a spouse and their kids.
Your family is relying on your income for many things like paying the mortgage, debt, school, college, etc. and you need to make sure that they can afford those obligations without your income in the picture anymore.
It will be wise for your spouse to buy a term life insurance as well, even if he or she is not working. Stay home parents may not producing income, but taking care of the family is money equivalent. Think about how much will cost you to hire a Nanny, Day cares, or even someone that can cook and clean if your spouse had a domestic roll in your home.
How term life works
Term means that the policy will be active for set amount of years you choose when buying the policy. When the term is expire, your policy will terminate. (Some plans can be renewed on an annual bases, and some can be converted to a permanent life insurance)
- You choose your term, usually between 10-35 years
- Your monthly premium is fixed throughout the term
How to choose your term: When thinking about life insurance as a financial instrument to replace your income, you need to account for those who are relying on you financially. So, you need a term that will bridge the gap from where you still have dependents, to the point where they are independent. For example: If your youngest kid is three yours old, it will make sense to purchase a 20 years term. By the time the policy is expired, your children’s will be 23 (or more) years old, and most likely will rely on their own income.
If you want to make sure your spouse is protected after your kids are grown up and outside of your household, consider a term that will last until age 65 at least, or permanent life insurance.
How to calculate death benefit
You choose the death benefit: Deciding how much life insurance you need may seems simple upfront. but in reality, you need to decide how much your life is worth and what would happen if your gone. This can through anyone into an emotional spin when critical thinking skills are required. So, we broke it down for you. Below you will find a list of very important things to consider.
- Your income: You need the policy to properly replace your income. We recommend 10 times your annual income. So if your make 50K per year, you should get a $500,000 term life insurance.
- Your mortgage: Align the term on the life insurance with your mortgage term and add to the benefit your remaining balance on your home.
- College tuition: If you are saving for your kids higher education. You should account for how much it will cost and keep in mind the rising cost of college and universities in the last few decades.
- Other debt: Consider debt you have that may be the Borden of your family or a co-signer if you die.
- Medical bills: Unfortunate, it is common to rack medical bills if you pass away from sickness and injuries. The death benefit should pay for those bills.
- Funeral costs: It is expensive to die, your family will have to pay $5,000-$15,000 for your funeral expenses (it depends if cremation or burial).
Term Vs. Whole
One of the most common debate in the life insurance industry. Which one should you get? well, we think that for most people term life will do just fine. But, your needs may suggest otherwise so here are the main features for both:
Term life insurance:
- Last for the term you choose.
- Much more affordable than whole.
- Your monthly payment is fixed.
- Pay the beneficiary the death benefit.
Whole life insurance (or permanent):
- Last your entire life as long as you keep pay your premium or age 120.
- Your monthly payment is fixed (Only on traditional whole policy there are other forms of permanent insurance life Universal life, which fixed premium may not be the case).
- About 10 times more expensive than term.
- A small portion of your premium goes to fund the life insurance, the rest will be elected into a savings account that may earn you interest, this account also known as “cash value” your earnings will be tax deferred and you can borrow against the money in the account.
- May not pay the beneficiary the death benefit, if you borrowed the money in the account and passed before paying it back.
As you may noted, Whole life has a lot more moving parts than term. And for most people, the goal is to protect their family when thinking about life insurance and term does the job.
How to get a quote
We like the word estimate much more than a quote, because that will describe more accurately what you are getting when viewing your quote.
The reason why is, you can’t buy term life insurance without go through medical underwriting. So the quote you will initially see, is based on very basic information you fill. But in reality, most people that did the process and got approved received an offer for a different amount than applied for (Most times higher, but if you are very healthy it can be lower).
You can get a quote from:
- Insurance brokers.
- Directly with insurance carriers.
- Web compensation sites. (Pay attention that many websites will not give you an online quotes, they just going to sell your information to others and you will be know as a “lead”. If you don’t want to talk to a thousand agents, than we suggest you talk to us, we keep your information safe and you will talk to one agent).
What is the difference between offer and a quote?
Quote is usually just an estimate base on very basic information you provide like age, state, general health, and few more components. It is not binding, means that if an agent or a company gave you a quote it doesn’t mean that you can can buy the policy simply by giving them your payment information.
You will have to get approved to the policy, and you may get approved for other price than what you applied for. At that point only you have an offer.
Below you’ll find more details of how to get accepted.
Ways to sign up
In order to buy life insurance you’ll have to apply with one company (or more, if you want more offers). There are few kinds of methods to apply and one may work for you better than the others.
- Application with medical exam: This is the traditional way to apply for term life insurance. You start the paperwork, answer medical questions and life style questions, and scheduled a medical exam that the results will be submitted to the insurance company. This process can take weeks until you get approved. But, you may consider that if your health is exceptionally good. It may get you lower price.
- No Medical exam: Some insurance company might be satisfied with your answers on the application and will decide to approve you based on that only and wave the medical exam. However, they may conduct a telethon interview before accepting your policy.
- Simplified issue policy: As the name suggest, it is simple way to get approved. You will have to fill the application and answer the medical and life style questions. The insurance company will pull your health, driving, criminal history and credit score records and will give you an instant decision. This process can take you as low as 15 minutes. But for this kind of convenience, you may have to pay a little more in premium.
- Guaranteed issue: If you are having very bad health issues, you may not be accepted to a term life policy. In this case you should look for a company that offers a guaranteed issue plan. On those types of policies, you won’t have to answer any medical questions or go through exam. But there is a caveat, your policy will be subject to waiting periods and your death benefit be lower (Hey, something is a lot better than nothing, right?).