Term life insurance has become the most popular and sought after life insurance policy type for consumers since it was created.
It’s easy to understand, it offers great amounts of customization, and it boasts the best bang-for-your-buck of any type of life insurance policy on the market.
Term life didn’t always exist, and has only become available as the needs of consumers have changed over time. There are many carriers who offer term, and some of the best life insurance companies for term don’t even offer another type of product.
Is Term Life Insurance Right For You?
Let’s first go over the basics of why someone might need a term life policy. Everyone has different needs for life insurance, and term can only solve specific needs when compared to other kinds of life insurance. Here are a few of the most basic attributes of term insurance:
- Level Death Benefit
- Level Premiums
- Temporary Duration
- No Cash Value
- Rider Availability
- Conversion Opportunities
Because of these attributes, term doesn’t apply to every situation, mostly because of the limited time frame they can cover you and the lack of cash value growth. If you want to secure permanent life insurance, or if you have a reason to access cash later in policy years, a term product is not the right solution for you.
Level Death Benefit
One of the primary factors in determining if term is a good fit for you is gauging how long you’ll need have coverage in place for. As an example, many people protect themselves in the amount of their mortgage for as long as their mortgage is amortized.
In the beginning, it could pay off the home for dependents so they wouldn’t have to worry about moving, and as each year passes, the difference in the original and current principal is now extra funds for the family to use at their discretion.
Over the life of the policy, the death benefit will not go up or down. This has both advantages and disadvantages. It’s a good thing to know your coverage amount won’t decrease, but consider the value of the policy in 5, 10, 20 or even 30 years. The time value of money decreases due to inflation, and needs may increase or decrease as well.
You can increase coverage only by applying for coverage, and it will be based on your new age and most current health.
Knowing exactly what you’re going to pay for the life of the policy is attractive to most everyone, so long as you understand how your policy premiums will be modified when the policy expires. Premiums are only level for the duration you pick, and you may not continue coverage at this premium beyond that.
Premiums sky rocket after the term duration has ended, usually well beyond affordability, so renewing will likely not make sense.
One thing to keep in mind is what your premium payments will be when determining how long you’re going to lock in your rates. While it’s a good thing you get the peace of mind of no premium increases for a specified duration, you pay more for longer durations. In other words, all things being equal, a 20-year term will cost more than a 10-year term, and a 30-year term will be more than both of them.
The cheapest would be an annual renewable term, though they aren’t suitable for many.
Term insurance ends. It is not permanent. This distinction is what allows the premiums to be so small when compared to whole or universal life insurance products. Think of it this way: term is short for terminate.
One of the keys to choosing the right type of life insurance is matching the need with the policy, so if you are looking for a policy which will pay out regardless of how old you are when you pass, this is not it.
Term life insurance should only be used for needs which have a definite end, like debt obligations, replacement of income during working years, or financial assistance for minors, for example. Younger folks are much more likely to need term than seniors simply based on human capital alone, as well as likelihood of living so many more years.
No Cash Growth
Different life insurance types have different benefits, but cash value is not one of them for a term policy.
Premiums paid for term insurance strictly go towards offsetting risks related to death over a finite time period, riders added on to the policy, or any fees required. There are no other components, no dividends, and access to premiums paid unless the policy is a return of premium type.
Riders are like extra options when you buy a car. They are available, but they aren’t required, and most of the times need to be purchased at the time of original sale.
Riders essentially increase the benefits of what your term life policy can provide, some being free and some costing more. Not all riders from each carrier are the same, so make certain of what riders are available when you apply, and for how much.
One, for example, which is very popular, is the Waiver of Premium rider, as it would continue to make your premium payments for you should you become disabled for 6 months or longer, for as long as you’re disabled.
Conversion privileges allow someone to take their term policy and convert some or all of it to a different policy type, such as universal, variable universal, or whole life.
For a term policy to have this option, the issuing company needs to have a permanent product in which to convert to, so keep that in mind when applying to certain carriers who only offer term coverage at this time. Also, the conversion option usually has an expiration, such as 10 years into the policy, where you can convert without new proof of health.
In other words, you can convert regardless of any changes in your health, so long as you can maintain the new premiums which reflect the coverage type and your attained age.
How Much Does Term Life Cost?
A common question of consumers is about how much they can expect to pay, but it’s not as simple as looking at prices for products in retail.
There are a lot of factors which go into getting an accurate quote, and even then, the rate is not final until the policy has been underwritten and issued. Aside from underwriting, there are basic factors which go into how much a policy cost, some of which are in your control and others which aren’t. Here are some of those factors:
- Family History
- Driving Record
- Hazardous Activities
- Payment Method
Life insurance is all about statistics and the law of large numbers for the insurance company, and the lower risk you pose to them, the lower premium you’ll pay.
Accordingly, the younger you are the longer you’re expected to live, so you’re naturally a lower risk. The greater health risks you have, the more likely it is you won’t. These make you, in the eyes of the carrier, unique, and so the premium you can expect is a detailed account of all these factors put together.
Certain things are out of control, like age, family history and, to an extent, health. Even though you may be a perfect bill of health, if your immediate family has issues with heart disease, diabetes or cancer, you might lose any chance of a discounted rate before you even start.
Likewise, certain health concerns you may have had since the day you were born may yield you tougher difficulties in getting normal coverage.
Factors like occupation, hazardous activities and your driving record might seem a little odd to consider for someone’s life insurance policy, but each poses its own risk. If you wash windows on sky scrapers, you’re a little more of a risk than a clerk at a local grocery store.
In similar fashion, if you have a clean driving record versus someone who has a DUI and two speeding tickets in the last year, you pose much less of a threat to the carrier to pay an early claim.
All these things are only responsible for your rating, or health class.
Once this is established, the size policy, the duration you choose and the company you buy it from will be the final determining factors of what you’ll pay. You do have the option of paying your policy monthly, quarterly, semi-annually and annually, with annual being the cheapest awarding those who take it about 5-7% of a discount on price.
High Risk Term Policies
If you do have circumstances which make it harder to get life insurance, there are plenty of companies who underwrite higher risk term policies which you may want to consider. There are a couple different ways a policy might become high risk:
- Hazardous Activities
- Driving Infractions
- Health Conditions
As alluded to above, these types of things not only make it a little harder to get coverage by limiting the companies who will offer you the best life insurance rates, you’ll also likely pay higher premiums depending on the level of risk the insurer evaluates you at.
While each type is different, they all use the same scale from carrier to carrier when it comes to ratings. There are ‘tables’ added, or additional premium added on in percentage points of the base premium, and up to 10 tables could be added. Each table might represent 25%.
High Risk Occupations
A high risk occupation is one of the more common reasons an applicant may see a hike in rates, although it’s not as severe as something like health conditions. Jobs which require safety equipment use, highly specialized machinery, or some kind of possibility of injury or death may be susceptible.
Think deep water salvage hunters who are underwater sorting through sunken ships, pilots, police officers and firefighters, and sky scraper window washers. They’re not your typical office nine to five.
Occupational price increases are generally not with added tables, but rather flat extras. A flat extra is extra premium added on per thousand for a predetermined amount of time or until the occupation is no longer current. So, for example, if a person needed $100,000 in coverage and had an extra $1.50 flat fee added on, it’s $150 extra per year for the coverage.
Although it often represents something thrilling and exciting, hazardous activities also could mean higher life insurance costs. Like occupational hazards, these will be assessed flat extra fees.
People who enjoy things like scuba diving, sky diving, racing cars, recreational flying, helicopter skiing and other adrenaline-type activities are the ones who fall into this area of underwriting. You can be anything from a hang glider to a motorcycle rider and still get included, depending on factors like how often you do it, your level of expertise or training, and whether or not you use the protective gear, like helmets, where necessary.
Poor Driving Record
Yes, like it impacts your car insurance rates, it impacts your life insurance rates, also. While a simple moving violation here and there won’t do anything, the bigger events will.
A DUI/DWI can increase your rates, and multiple within a certain time frame could get you declined by some carriers. A speeding ticket isn’t a concern unless there are quite a few, and rolling through a stop sign isn’t going to make you high risk.
A rule of thumb with driving records and life insurance is to look at the number of counts in a time period, the severity, and whether or not alcohol or drugs was involved in the infraction. If you’ve had a license suspension or revocation, expect a possible premium increase.
Having any type of health impairment in the past could have an impact on rates, although not always. There are a few questions you can ask yourself right away to know whether or not you could possible fall into a high risk category due to health:
- Have been required to see a doctor or specialist, or been admitted to the hospital for any reason in the past 10 years?
- Have you required any surgery in the past 10 years?
- Have you been prescribed any medication in the past 10 years?
These 3 simple questions will probably catch 99% of those who will fall into the high risk profile determined by insurance companies. Now, just because you answered “Yes” to one of these questions doesn’t mean you are absolutely a high risk, it just means you probably have to answer additional questions as to why, when and what the final results were for anything that occurred.
Term Insurance Through Work: Things To Know
It’s not uncommon for us to have discussions in regards to applicants who already have, or are currently applying for, a term policy through their work. While this is okay, in some situations it’s not your best bet.
Life insurance through work, especially term, does have its limitations. Most term policies through work are on a simplified or even guaranteed issue basis, meaning there’s no medical and limited or no health questions to answer.
While this sounds great, consider your cost per thousand for your total death benefit need, as these kinds will cost the most per thousand when compared to fully underwritten policies through a private insurance company.
Something else to consider is the portability of the policy. If you leave, are terminated, or retire, can you keep you policy exactly as it is? In many cases, the answer is no. If you get a permanent type of policy through work, you are much more likely to have an option to take it with you and simply modify your payment from payroll deduction to self-pay.
If your employer is paying the premium, and it’s not payroll deducted, then you should always take as much coverage as you can get. There is no reason not to. Just consider covering the difference of your need and what you already have with supplemental, private insurance.
A Few Quick Tips To Save On Term Life
Look For Price Breaks
In life insurance, like shopping at bulk grocery chains, there are breaks in pricing for buying more coverage.
Typical price breaks are at $25,000, $50,000, $100,000, $250,000, $500,000 and $1,000,000. In a lot of cases, it is cheaper to round up to the nearest price break than purchase beneath it. For example, a $225,000 policy might really be more expensive than bumping up to $250,000 because there is more competition at that level.
Pay Annually If You Can
Most insurance companies will offer a small discount if you pay annually.
The percentage may only be 3-8%, but for larger premiums, this can add up quickly, especially over a 10 or 20-year policy. Some companies allow payment via credit cards, so picking up an additional few percentage points there, or even points, might be something to ask about when applying.
It’s okay to buy more than one insurance policy.
If your situation warrants it, it could save you premium in the long run to have policies for different amounts and durations. Laddering simply means taking advantage of the flexibility of different types or different lengths of life insurance policies to handle more than one affair. Having a 10-year policy to replace income to your family, with a separate 30-year policy to cover your mortgage is a great example.
Ask About Reconsiderations
If you don’t get the rating you intended, but don’t seem to have another option, you may have the ability to ask for a reconsideration from the issuer. What this means is, as much as annually, you can contact your life insurance provider with an update on your health and ask them to reconsider your premium.
This is great for people who lose weight but were rated due to their BMI, people who smoked when they applied but have since stopped, and for anyone who has a condition which has remissed, had a successful transplant, or any number of health related improvements.
Even if the carrier does not decrease your premium, there’s not harm in asking because it won’t ever increase; it can only go down or stay the same.