Deciding on a term life insurance policy that meets your needs can be confusing. Term life insurance provides financial protection for a specific period, usually 5-30 years. It is a cheaper option than buying life insurance which is in force throughout your life. The premium you pay on a term life policy depends on its features, your risk category and the coverage you want.
Why buy a term life insurance policy?
Insurance buys you peace of mind. By buying in a term life insurance policy, you seek to provide a safety net for your family in the event of your death. A term life policy helps to maintain the present living standard of your family, take care of your mortgage and kids’ college education and any one-time expenses. It can also include a provision for funeral costs and estate taxes. Once arranged, you must keep the policy current by paying the premiums when they are due. In the event of your death during the term of the policy, the proceeds are paid out to your designated beneficiary.
If you remain healthy during the term of the policy, there will be no need to cancel the policy. The term life policy will expire at the end of its term after providing a buffer for those critical years.
A whole life insurance policy on the other hand carries a higher premium. It is kept in force throughout your life and is structured differently. A whole life policy has a cash component that is not available in a term life policy. The returns from such a policy depend on the number of years it is held and what securities it is invested in. A term life policy holder can get a better return by investing the difference between the premiums in a 401(k) plan or other investment account.
What features do you want included in your policy?
A term life policy can include additional features to help make it attractive and affordable. These include an option to convert to a whole life policy at the end of its term or to decrease premiums as your mortgage gets paid down.
What is your risk profile?
A term life policy is often cited as a good investment when you get married or start a family. Typically, if you are under 50 years of age, a non-smoker and in good health, insurance companies would consider you a lower risk and quote a preferred rate. To assess your risk, some insurance companies may ask about your age, gender, occupation, risky hobbies, use of tobacco, drugs or alcohol, use of prescription medication and history of illnesses. Whether or not you need a medical test depends on your insurer and amount of coverage you are applying for. Some companies request this. Others may charge a higher premium to cover unknown risks. Purchasing a term life policy after you are 50 or 60 of age is possible. The older you are when you purchase a policy, the higher the premium will be.
How much insurance do you need?
We would typically ask questions to assess how much insurance you need and how long do you need coverage for. For example, in the event of your death, how much is needed to meet funeral expenses? Do you have any uninsured debt? How much net annual income would your spouse need as replacement income and for how many years would this be needed? If you have kids, how much is needed to meet their college expenses? When do you expect to need these funds? Are there any one-time expenses planned such as a wedding or home improvement? These questions are aimed at finding out the amount and timing of your financial obligations.
We would will also want to know how much assets you have that can be readily converted to cash in an emergency to meet some of your obligations.
In conclusion, a term life insurance policy provides financial protection for a specific period. The premium you pay depends on the features of your policy, your risk profile and the coverage sought.