A term life insurance policy is the simplest, purest form of life insurance.
You pay a premium for a period of time – typically between 10 and 30 years. If you die during that time, a cash benefit is delivered to your family (or anyone else you name as your beneficiary).
How a term life insurance policy works
It’s a contract. At its most basic level, a term life policy is an agreement between the person who owns the policy (the owner, which doesn't always need to be the insured) and an insurance company: The owner agrees to pay a premium for a specific term (usually between 10 and 30 years); in return, the insurance company promises to pay a specific death benefit in cash to someone (a beneficiary) upon the death of someone else (the insured). That benefit is usually tax-free (unless the premiums are paid with pre-tax dollars).
There’s an application process.
You may have seen or heard ads that say things like, “A male non-smoker in his 30s can get a 20-year $500,000 term policy for under $30 a month.” Some people can get that much coverage for under $30 – but it’s not automatic. Before they give you a policy, the provider needs to assess how much of a risk you are to insure. This is called the “underwriting” process. They’ll typically ask for a medical exam to evaluate your health and want to know more about your occupation, lifestyle, and other things. Certain hobbies like scuba diving are deemed risky to your health, and that may raise rates. Likewise, dangerous occupational environments – for example, an oil rig – also may raise your rates.
You need to choose a term length.
One of the biggest questions is, “How long do I need coverage?” If you have children, a popular rule of thumb is to choose a term long enough to see them out of the house and through college. The longer your term, the more you’ll typically pay each month for a given coverage amount. Nevertheless, it usually pays to err on the side of getting a longer-term policy than a shorter one because you never know what the future holds, and it is generally easier to get insurance while you are younger and in good health.
Decide how much of a death benefit you want. You should consider getting enough coverage to care for your family’s needs if you’re not there to support them; use our offline calculator (see sidebar) to determine that amount. Whatever coverage amount you need will likely cost less than you thought: A recent survey found that 44 percent of millennials believe that life insurance is at least five times more expensive than the actual cost. *1
Name your beneficiaries. Who gets the benefit when you die? It doesn’t all have to go to one person. For example, you could give 50% to your spouse and divide the rest between your adult children. And while beneficiaries are typically family, they don’t have to be. You could choose to leave some or all of your benefits to a trust, a charitable organization, or even a friend.
The different types of term policies you can buy.
As you shop around and start talking to companies or insurance agents, you may hear about different kinds of term policies. They all provide a specific benefit over a specific term but may have very different bells and whistles and costs.
One more thing to look for in a term policy: Convertibility
Convertibility is a provision that lets you change your term insurance into a permanent whole life policy later on – without getting a new medical exam. It’s a feature offered by almost all major insurance companies that allow you to change your type of life insurance.
Why would you convert to a whole life policy from term? If you’ve had a serious health problem – for example, a heart attack – it may be very difficult to get another policy. Another reason: you’re attracted to the cash value component of a whole life policy. Or maybe you want permanent life-long coverage. A term policy may be your best choice now, but things can change.
Want to talk things over with someone before you buy term insurance? That’s a great idea. The advisors at Tacker Advisory Group will listen to your needs, tell you about the best ways to meet those needs within your budget and types of life insurance policies available, then will help you decide. Whichever way you decide to buy, consider doing it soon. Remember: the longer you wait to get life insurance, the more you’re likely to pay.
Use our offline calculator to determine a good starting point for the amount of life insurance you may need.
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Investment advisory services are made available through NFI Advisors, Inc., a Registered Investment Advisor.
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